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VITA/TCE - 2007 FACILITATOR'S TRAINING GUIDE -

Community
Network
...It’s Your Resource

Visit the Community Network on IRS.gov where


Facilitator’s Training Guide
you’ll find Web pages created specifically for
IRS partners and volunteers. These pages are
Volunteer Tax Return Preparation Programs
your one-stop resource to help you serve
taxpayers in your community.
Tax Year 2007 Courses
On IRS.gov, search keyword
Community Network, where you’ll find: For Use in Preparing Tax Year 2007 Returns

x Training Materials
x Asset Building Strategies
x Volunteer Opportunity Information
x Partner Opportunity Information
x Tips on helping taxpayers in these categories:
- Disabled
- Military
- Low-income

Publication P4555 (Rev. 2007)


- Older Americans
- Employees
- Students
- Limited English Proficiency
- Native Americans
- Rural Areas
Visit www.irs.gov
for the most up-to-date
Publication 4555 (2007) tax products and
Catalog Number 50820G
information.

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Technical Updates
Tax law changes implemented after this product was published may cause various forms,
tables, and worksheets to change. The supplemental changes (if any) are normally available in
mid-December on www.irs.gov (keyword: Community Network).
Technical updates are also conveyed in Volunteer Quality Alerts during the filing season on
www.irs.gov. Also, consult your course facilitator and/or site coordinator.

Provide America’s taxpayers


top quality service by helping
them understand and meet
www.irs.gov
their tax responsibilities and
Enter keyword: "volunteer training" or "link and learn"
by applying the tax law with
integrity and fairness to all.
IRS The benefits...
Department of the Treasury
Internal Revenue Service
www.irs.gov Work at your own pace.

Access it anytime, anywhere, 24/7... it's on the Internet!


TaxWise® is a copyrighted software program owned by Universal Tax Systems, Inc.® (UTS). All
screen shots that appear throughout the official Volunteer Income Tax Assistance (VITA) and Tax Complete your volunteer certification online.
Counseling for the Elderly (TCE) training materials are used with the permission of UTS. The
screen shots used in this publication—or any other screen shots from TaxWise or its affiliated
programs—may not be extracted, copied, or distributed without written approval from the IRS Share your opinion...
SPEC Office of Education and Product Development.
Check out the course and send your comments to
Confidentiality Statement partner@irs.gov.
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.

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Page Topics

1 Notes to Facilitators
2 Teaching Methods
2 Facilitator Prerequisites and Classroom Set-Up
3 Training Resources from the IRS
4 Proof Copies of Forms and Tables

4 Courses and Content


5 Exhibit 1 – Content and Courses
6 Exhibit 2 – Income Lessons (by Form 1040 Entries)
7 Testing and Certification
8 Student and Facilitator Evaluations

9 Appendix A - Basic Curriculum Presentation Times


10 Appendix B - Advanced Curriculum Presentation Times
11 Appendix C - VITA/TCE Class Numbers for Evaluations
12 Appendix D - Military VITA Class Numbers for Evaluations

Lesson Plans
Lesson 1— Course Introduction
Lesson 2—Screening and Interviewing
Lesson 3—Filing Basics
Lesson 4—Filing Status
Lesson 5—Personal Exemptions
Lesson 6—Dependency Exemptions
Lesson 7—Military – Unique Filing Status and Exemption Situations
Lesson 8—Income – Wages, Interest, Etc
Lesson 9—Income – Business Income or Loss
Lesson 10—Income – Capital Gains or Loss
Lesson 11—Income – Retirement Income
Lesson 12—Income – Rental Income and Expenses
Lesson 13—Income – Unemployment Compensation
Lesson 14—Income – Social Security Benefits
Lesson 15—Income – Other Income
Lesson 16—Income – Military Income
Lesson 17—Adjustments to Income
Lesson 18—Military Moving Expenses
Lesson 19—Standard Deduction and Tax Computation
Lesson 20—Itemized Deductions
Lesson 21—Military Employee Business Expenses
Lesson 22—Business Travel Expenses
Lesson 23—Credit for Child and Dependent Care Expenses
Lesson 24—Education Credits
Lesson 25—Child Tax Credit
Lesson 26—Miscellaneous Credits
Lesson 27—Other Taxes
Lesson 28—Foreign Tax Credit
Lesson 29—Payments
Lesson 30—Earned Income Credit (EIC)
Lesson 31—Refund / Amount of Tax Owed
Lesson 32—Quality Review of Tax Return
Lesson 33—Concluding the Interview
Lesson 34—Military Finishing and Filing the Return
Lesson 35—Amended Returns
Welcome to the Tax Year 2007 Volunteer Income Tax Assistance (VITA)/Tax
Counseling for the Elderly (TCE) volunteer preparer training program. By following the
process-based training approach presented in this publication, your students will:

x Acquire hands-on experience and a true understanding of the tax preparation


process;
x Learn how to use the technical reference materials and quality tools available at the
site;
x Acquire an understanding of tax law and how to apply it in various tax situations; and
x Gain an understanding of the quality review process.

The objectives presented in each of the lessons are to be accomplished through


extensive role plays and demonstrations. Those students who fully grasp the process
and acquire the knowledge and skills necessary to provide top quality service will
require less assistance when preparing actual returns. The Site Coordinator and the
volunteer preparer will have more time to interact with taxpayers to accomplish a
cornerstone of the VITA/TCE Program – “an accurate return - each and every time.”

Breathe life into the course you teach by sharing your experiences and insights. We
appreciate your participation in this year’s training program and welcome your feedback
about this guide and the other products used in the program. You may follow the
directions in the Director’s cover letter or the evaluation procedures in this publication to
submit comments.

While every class is unique, we strive for consistency in the training that is presented to
volunteer return preparers. The guide contains suggested lesson plans and class
schedules for teaching the five VITA/TCE courses — Basic, Intermediate, Advanced,
Military and International.

The courses can be presented in from 16 to 40 hours depending on the student’s tax
law expertise and skill levels. Suggested presentation times for each lesson are
presented in Appendix A, Basic Course and Appendix B, Advanced Course.
Presentation times for the Intermediate, Military and International courses can be
created by deleting or adding the topics appropriate for each course.

Notes to Facilitators – Page 1 of 12


As you prepare to present this material, remember that it is very important that
volunteers assist only with those returns, supporting schedules, and forms for which
they have received training and are certified. The Site Coordinator and/or sponsor
should agree on the course that best serves the needs of the students and taxpayers.

The five VITA/TCE courses may be taught using the following delivery methods:
1. Classroom instruction combining lecture, role-playing and general discussions with
completing the problems and exercises in the student text and Publication 678-W,
using tax preparation software or paper products.
®
We recommend wrapping up each topic by demonstrating the use of TaxWise or
illustrating the entry on the return or quality forms. You may find the chart in
Publication 678-W (pages 6 and 7) and the Vanessa Franklin return in Appendix A of
Publication 4491 helpful when teaching the different topics.

2. Link & Learn Taxes (L&LT) classroom instruction which entails lecture and
discussion in combination with this interactive e-learning application on
www.irs.gov. If TaxWise is available, we recommend that you incorporate it in this
training method.

3. Self-Study instruction allowing students (using the Publication 4491, and/or L&LT)
to independently complete their course with your guidance.

In order to successfully convey the information in this guide, we recommend the


following prerequisites for each facilitator:
x Two hours of preparation time for every hour of instruction
x Certification in the course being taught
®
x Basic computer skills and TaxWise software knowledge
x Access to the Internet and e-mail

Classroom Set-Up
®
Classes should be 20 students or less. Classes that incorporate TaxWise e-filing
software should ideally have:
x A computer for each student
x A facilitator station with computer and projector
x Table space for documents
x Storage disks or CDs for students to save their work
x One assistant per five students (ideally)
®
Note: If computers are not available, refer students to the TaxWise screenshots in Publication 4012.

Notes to Facilitators – Page 2 of 12


Training Resources from the IRS
This publication (Publication 4555) contains specific guidance and suggested class
schedules for presenting the information in the Process Based Training Student Guide
(Publication 4491). It also contains administrative information for your students.
The text in the first column of each lesson plan contains specific content you should
share during training. The text in the second column contains notes, tips and other
pointers for presenting the information.
Your local IRS-SPEC relationship manager is available to assist you in planning your
training and obtaining the products you need. In addition to this guide, you and your
students will need (at a minimum):
1. Publication 4491, Process Based Training Student Guide which follows the
sequence of the Form 1040. Each lesson contains an overview of the tax law
topics with referrals to resource material, tax-related exercises and problems and
an ongoing taxpayer scenario for Vanessa Franklin. Mrs. Franklin’s complete
return and highlights of tax law changes are in Appendix A and B.
2. Publication 678-W, Comprehensive Problems and Practice Exercises allows the
students more extensive role plays and practice in completing returns using all
phases of the return preparation process. Instructions for using Publication 678-W
are included in the publication. The comprehensive problem for your course should
be reviewed and discussed in class (at a minimum).

3. Publication 4012, Volunteer Resource Guide assists the students (both in class
and at the site) in “asking the right questions” in order to prepare an accurate return.
Publication 4012 contains interview questions and tips, along with charts, decision
trees, and graphics that convey tax law, credit eligibility rules and information, and
tax return preparation software guidance. Vanessa Franklin’s tax information is
featured in the some of the TaxWise screenshots.

Note: Students should take their copies of Publication 4012 to their tax preparation site.

4. Form 6744, Test/Retest is open book and available to the students as part of their
training kit. The test/retest covers all five courses and can be taken and/or scored
on Link & Learn Taxes (L&LT). L&LT is the e-learning training tool for the VITA/TCE
program. It includes all courses and the test for each course. In addition to
acknowledging correct answers, L&LT contains a reference tool for researching
incorrect answers.

If your students do not test and certify using L&LT you will also need the Test/Retest
Answers (Publication 4189).

Other highly recommended products for your training class include Publication 17,
Federal Income Tax Guide for Individuals and state tax materials. If paper/manual
return preparation is taught, you will find it helpful to supplement the training material
with the Form 1040 Instructions.

Notes to Facilitators – Page 3 of 12


For the most up-to-date tax products and information visit 1040 Central on
www.irs.gov. Forms, schedules and worksheets referred to in this material were
current as of the “draft/proof” date shown on each product. Please make sure the
products required to complete the comprehensive problems and practical exercises for
the course you’re teaching are available to your students.

Drafts of blank copies of the products and the Tax and Earned Income Credit Tables
can be found in Publication 678-W. The Test/Retest (Form 6744) also contains blank
forms. When using products from other sources, including www.irs.gov, make sure
you are aware of any content and processing changes before sharing them with your
students.

Exhibits 1 and 2 on the next two pages depict the content of each of the five VITA/TCE
courses and the lessons that cover the content.

Exhibit 1 - Summary:

1. The Basic course covers income from wages, interest and dividends, and tax credits
for individuals and couples.
2. The Intermediate course covers all the tax topics in the Basic course and additional
income topics, including alimony, social security income, itemized deductions,
adjustments to income, and some pension issues for individuals and families with no
stock or sale of home considerations.
3. The Advanced course covers all the tax topics in the Basic and Intermediate
courses including additional pension topics. Also covered are stock sales and sale of
home issues for individuals and families.
4. The Military course is generally the Advanced course with special emphasis on tax
issues impacting armed services personnel and their families, i.e., combat pay,
moving expenses, etc.
5. The International course is generally the Advanced course with special emphasis
on international tax law for U.S. residents living outside the United States
(nonmilitary), especially those served by U.S. embassies and consulates.

Notes to Facilitators – Page 4 of 12


Exhibit 1: Content and Courses
Content Course
Lesson 1—Course Introduction All courses
Lesson 2—Screening and Interviewing All courses
Lesson 3—Filing Basics All courses
Lesson 4—Filing Status All courses
Lesson 5—Personal Exemptions All courses
Lesson 6—Dependency Exemptions All courses
Lesson 7—Military – Unique Filing Status and Exemption Military and
Situations International
See Exhibit 2, Income
Lessons 8 through 16
Topics by Course
All courses (Basic
should only cover
Lesson 17—Adjustments to Income
Tuition and Fees
Adjustment)
Lesson 18—Military Moving Expenses Military

Lesson 19—Standard Deduction and Tax Computation All courses


Lesson 20—Itemized Deductions All courses (except
Basic)
Lesson 21—Military Employee Business Expenses Military
Lesson 22—Business Travel Expenses International
Lesson 23—Credit for Child and Dependent Care Expenses All courses
Lesson 24—Education Credits All courses
Lesson 25—Child Tax Credit All courses
Lesson 26—Miscellaneous Credits All courses (Basic
should only cover
Elderly or Disabled and
Qualified Retirement
Savings)
Lesson 27—Other Taxes All courses
Lesson 28—Foreign Tax Credit International
Lesson 29—Payments All courses
Lesson 30—Earned Income Credit (EIC) All courses
Lesson 31—Refund / Amount of Tax Owed All courses
Lesson 32—Quality Review of Tax Return All courses
Lesson 33—Concluding the Interview All courses
Lesson 34—Military Finishing and Filing the Return Military
Lesson 35—Amended Returns All courses

Notes to Facilitators – Page 5 of 12


Exhibit 2 – Summary:
Lesson 8 – Wages, Interest, etc. (Lines 7 -11)
Lesson 9 – Business Income or Loss (Line 12)
Lesson 10 – Capital Gain or Loss (Line 13)
Lesson 11 – Retirement Income (Lines 15-16)
Lesson 12 – Rental Income and Expenses (Line 17)
Lesson 13 – Unemployment Compensation (Line 19)
Lesson 14 – Social Security Benefits (Line 20)
Lesson 15 – Other Income (including Military & Foreign Earned Income)
(Lines 21-22) (Also see Lesson 16 – Military Income)
Lines 14 & 18 – Farm income is not in the scope of the Program.

Exhibit 2 – Income Topics by Courses and Form 1040 Line Entries


(See the Corresponding Lesson for the Form 1040 Entries in the Above Summary)

Notes to Facilitators – Page 6 of 12


All volunteers assisting taxpayers with their returns and conducting quality return
reviews must pass the test that coincides with the types of returns that they will
prepare/review. For example, a volunteer who passes the test for the Basic course will
only provide assistance or quality review with tax matters covered in the Basic course.

Volunteer certification can be accomplished using one of the two methods as follows:

x Successful completion of the IRS paper test or retest


x Successful completion of the IRS online test via Link & Learn Taxes

Both methods will require Form 6744, Test/Retest. Review the introductory information
in Form 6744 for testing guidance and information you will need to discuss with your
students prior to administering the test. Regardless of the testing method, volunteers
should complete the test on their own.

Students can take the test using tax software (where appropriate) and may use
any reference materials available to them as volunteers to complete the test.
Why manually grade the test? Instead, your students can have their tests
graded/scored online and receive immediate feedback regarding incorrect test entries.
They can also obtain their certification certificate online @ www.irs.gov (Keyword:
Link & Learn Taxes).

We need your help in accomplishing one of our most important goals, which is providing
the right training or mix of training that empowers all volunteers to deliver accurate,
quality return preparation assistance. We welcome all comments.
Students should submit their comments on Form 13222 in their training kit and you
may use Form 13232 available from your IRS-SPEC relationship manager.
Both forms are machine processed; therefore photocopies of the forms are not
acceptable. Also when completing the forms:

x Enter the applicable course number and city and state information shown in
Appendix C, VITA/TCE Class Numbers, or Appendix D, M-VITA Class Number.
x Do not fold, staple, or photocopy.
x Darken the circle “bubbles; do not place an “X” or check mark in the “bubbles.”

Notes to Facilitators – Page 7 of 12


At the conclusion of each class, compile all the forms and use the postage free mailing
label (Document 12107) available from your IRS-SPEC relationship manager or send
them to the following address in a 9X12 or larger envelope for processing:

Internal Revenue Service (12th Floor)


Attn: W:CAR:SPEC - STOP 45-WI
401 West Peachtree Street, NW
Atlanta, GA 30308-9944

Only evaluation forms should be mailed to the above address using the postage free
mailing label (Document 12107).

Notes to Facilitators – Page 8 of 12


Appendix A – Basic Curriculum Presentation Times & Reference Materials
(excluding breaks and lunch)
Publication
Estimated Form Publication 4012 - 678-W (From
Minutes Publication 4491 13614 Tabs Pages 6 & 7) Form 1040
Welcome &
15 Introductions
Page 3, Tab 1 and
15 Lesson 1 14
Pages 4-6, Tab 1
15 Lesson 2 Part I and Cover 4 All
15 Lesson 3 Tab A All
60 Lesson 4 Part I, III Tab B and 1 All Lines 1-5
30 Lesson 5 Part I, III Tab C and 1 All Lines 6a-6b
All except 1, 6,
30 Lesson 6 Part II Tab C and 1 8, D, 15 Lines 6c-6d
90 Lesson 8 Part IV Tab D and 2 All Lines 7-11
15 Lesson 13 Part IV Tab D and 2 A, C, 11 Line 19
15 Lesson 15 Part IV Tab D and 2 A, C, 9, 15, E Lines 21-22
15 Lesson 17 Part V Tab E and 3 A, B, 7, C, D Lines 23-37
45 Lesson 19 Part III Tab F and 4 All Lines 39-44
A, B, 5, 8, C,
30 Lesson 23 Part VII Tab F and 5 11, 14, E Line 47
Part V &
30 Lesson 24 VII Tab G and 5 A, 3, B, C, 10, D Line 49
All except 1, 3,
30 Lesson 25 Part II Tab G and 5 8, 12, D, 13, 15 Line 52 & 68
A, 4, 5, 6, C, 10, Lines 48, 50,
30 Lesson 26 Part VIII Tab G and 5 11, 12, D, E 53 & 54
All, C & 12 ES
30 Lesson 29 Tab 6 and 13 pmts Lines 64-71
A, 2, B, 5, 10,
60 Lesson 30 Part VIII Tab H and 6 11, 13 Line 66
Lines 73-77 &
Third Party
30 Lesson 31 Tab 13 All Designee
60 Lesson 32 Tab 13 All
Sign Here &
Paid
Preparers
30 Lesson 33 Tab 13 All Use Only
30 Lesson 35 Tab 13
State Returns
180 (Optional)

Testing Guidelines
15 (Using Form 6744)
240 Review Test
Closing &
Evaluation Form
15 13222

Notes to Facilitators – Page 9 of 12


Appendix B – Advanced Curriculum Presentation Times & Reference Materials
(excluding breaks and lunch)
Publication
Estimated Form Publication 4012 – 678-W
Minutes Publication 4491 13614 Tabs (From Pages 6 & 7) Form 1040
15 Welcome &
Introductions
15 Lesson 1 Page 3, Tab 1 and
14
15 Lesson 2 Part I Pages 4-6, Tab 1, All
Cover 4
45 Lesson 3 Tab A All
60 Lesson 4 Part I, III Tab B and 1 All Lines 1-5
30 Lesson 5 Part I, III Tab C and 1 All Lines 6a-6b
30 Lesson 6 Part II Tab C and 1 All except 1, 6, 8, D, Lines 6c-6d
15
165 Lesson 8 Part IV Tab D and 2 All Lines 7-11
60 Lesson 9 Part IV Tab D and 2 B, 8, C,11, 13 Line 12
90 Lesson 10 Part IV Tab D and 2 C, 9, 12 Line 13
105 Lesson 11 Part IV Tab D and 2 B, 6, C, 9, 10, 12 Lines 15-16
30 Lesson 13 Part IV Tab D and 2 A, C, 11 Line 19
30 Lesson 14 Part IV Tab D and 2 B, 6, C, 9, 12 Line 20
30 Lesson 15 Part IV Tab D and 2 A, C, 9, 15, E Lines 21-22
75 Lesson 17 Part V Tab E and 3 A, B, 7, C, D Lines 23-37
15 Lesson 19 Part III Tab F and 4 All Lines 39-44
45 Lesson 20 Part VI Tab F and 4 B, 6, 8, C, 9, D Line 40
30 Lesson 23 Part VII Tab F and 5 A, B, 5, 8, C, 11, 14, Line 47
E
30 Lesson 24 Part V & Tab G and 5 A, 3, B, C, 10, D Line 49
VII
30 Lesson 25 Part II Tab G and 5 All except 1, 3, 8, Line 52 & 68
12, D, 13, 15
30 Lesson 26 Part VII Tab G and 5 A, 4, 5, 6, C, 10, 11, Lines 48, 50, 53
12, D, E & 54
15 Lesson 27 Part IV B Lines 58-62
30 Lesson 29 Tab 6 and 13 All, C & 12 Lines 64-71
Estimated Payments

120 Lesson 30 Part VIII Tab H and 6 A, 2, B, 5, 10, 11, 13 Line 66

30 Lesson 31 Tab 13 All Lines 73-77 &


Third Party
Designee
60 Lesson 32 Tab 13 All
30 Lesson 33 Tab 13 All Sign Here &
Paid Preparers
Use Only
30 Lesson 35 None
180 State Returns
(optional)
15 Testing Guidelines
(using Form 6744)
240 Review Test
15 Closing & Evaluation
Form 13222
Notes to Facilitators – Page 10 of 12
Notes to Facilitators – Page 11 of 12
Notes to Facilitators – Page 12 of 12
Lesson 1: Course Introduction

Objective
Explain the purpose and content of the course and the volunteer agreement,
protections, rights, responsibilities and resources.

Welcome

Welcome to Volunteer Income Tax


Assistance (VITA) and Tax Counseling for
the Elderly (TCE) Process Based Training
(PBT).

By volunteering you are taking on a


challenging, yet very rewarding experience
as an important player in the tax
administration process.

Your donation of time provides a


tremendous service to the American public
and to your community by helping people
fulfill their tax filing obligations.

The primary goal of the VITA/TCE program Conduct an icebreaker or


is to provide free, complete and accurate introductions at this time.
tax return preparation for eligible taxpayers.

What is the purpose of this Page 1-1


training?
Why do we have this training? Why not just
turn you loose with a “here are the
references” go out and prepare tax returns?

The answer is found in the primary goal Emphasize that an accurate


mentioned a moment ago. We want, more return means tax law is applied
importantly, you want to prepare complete correctly and the return is free
and accurate tax returns for the taxpayers from error.
that visit you site.

Lesson 1 - Page 1 of 8
To be a successful tax preparer you need to
understand and have compassion for all
types of people.

You will need to know where and how to get


the right answer to tax questions and
prepare accurate tax returns. Stress that students need to
know how to use their materials
You get there by obtaining information from and acquire an understanding of
the taxpayer during the screening and tax law and how to apply it to get
interview process and from their supporting the answers they need to
information. prepare an accurate return.

This course provides you with the


guidelines and technical tools you need to
prepare an accurate return for each
taxpayer.

Please do not try to memorize the


information. Everything is open book,
including the test.

This training material will introduce you the


major components of the VITA/TCE return
preparation process and how they
contribute to the goal of preparing complete
and accurate tax returns.
Explain that they will have two
My goal is to teach you the process for opportunities to take the test and
completing accurate returns. At the that Form 6744 in their training
conclusion of our time together, you should Kit contains both the Test and
become a certified VITA/TCE volunteer and Retest.
provide expert quality service to taxpayers
visiting a site. Encourage on-line testing via
Link & Learn Taxes. Refer the
How will you know if I reached my goal? student to the inside cover of
First, through the testing and certification their student text.
process used to gauge your initial
understanding of the return preparation
process.
State, if they gain an
The second measure will be the results of understanding of tax law and
the quality review of returns you prepare at follow the process, they should
the site.
complete an accurate return

Lesson 1 - Page 2 of 8
As I mentioned earlier, you do not have each and every time.
memorize a lot of information in this course.
We will use a process based approach to
training which includes the following
components:
Encourage the students to
x Screening and interviewing reinforce their training and tax
taxpayers (Intake and Interview law knowledge using Link &
Sheet) Learn Taxes.
x Understanding and applying tax law
x Using references, resources and
tools
x Conducting quality reviews
Respond to each inquiry.
Are there any questions?
Page 1-2
What is included in this guide?
Complete the checklist -- What
Well, let’s get started by making sure we Do I Need? on page 1-1 with
have the products we need for training. the students.

Yes, we will use all these products. Each product is described in the
Notes to Facilitators - page 1-2
By the way, don’t be intimated by the size of of this publication.
the products. Five different courses are
covered in this material. I will be teaching
the _ (state the course being taught)__
course.
Introduce the five icons in
Beginning in Lesson 8, we will follow the Chapter 8, page 8-1.
icons for our course content.
.
Each lesson incorporates the following
components:
x A list of forms and references in the
“What do I need “ section of each
lesson Encourage the students to read
x Tips, Cautions and TaxWise® Hints the information in the margin on
to help you with key points of each each page of their text; even if
lesson you do not cover it in class.
x Concise explanations of basic tax
law relevant to taxpayers with low to
moderate incomes

x Exercises that will give you the


Point out that during the course,
chance to check your understanding

Lesson 1 - Page 3 of 8
x An on going scenario of a taxpayer, they will continually use the
Vanessa Franklin information being taught to
x Instructions for completing a return complete Vanessa’s tax return.
using TaxWise software
Explain that integrated process
Earlier, I used the term process based and process based training are
training (PBT). Some of our returning interchangeable phrases
volunteers may recognize PBT as
integrated training.
See the four bullets on page 1-1
Can anyone state the four components of
the PBT process? Further explain the process by
incorporating their answers and
the information on page 1-2 –
“What is process based
training?

Respond to each inquiry.


Are there any questions on what we have
covered thus far?

Discuss the information on


Before we discuss your responsibilities as a page 1-3.
volunteer, I would like to make sure we all
are on the same page about what you will
get out of this course.
Show the students Form 13222.
The IRS wants to know how you feel about
this course. Please complete the
evaluation form in your training kit and leave
it here for me to submit or send it to the
address shown in the letter from the
Director in the student text.
Page 1-3
What are your responsibilities as a
volunteer?
Ask the student to turn to
In order to assist taxpayers at a VITA/TCE Form 13615 in their Test/Retest
site, you must be certified. When you take book Form 6744.
your certification test, you must sign a
Volunteer Agreement (Form 13615). Discuss each item in the
agreement and explain that they
should make sure they
understand what they are
signing before they sign the

Lesson 1 - Page 4 of 8
When you sign this agreement, you are form.
agreeing to all the bulleted information on
page 1-3. Explain to the students the
importance of providing quality
Some taxpayers will insist that you accept a service and upholding the
token of their appreciation, but let me state ethical standards of the
again, you should never accept payment of VITA/TCE program.
any kind from a taxpayer for return
preparation or any tax related assistance. Emphasize the last two
standards, to never solicit or
As noted, this does mean that you cannot accept payment for services.
receive compensation from your Site (This includes a jar for donations
Sponsor. for the purchase of supplies,
tips, etc.)
So, now you know what you’re agreeing to
do as a volunteer-- correct? Share this example:
During an interview on a local
news program, a taxpayer once
complained that she had been
improperly charged a fee by a
VITA/TCE program volunteer.

Watch the students’ body


language and ask probing
questions.

Well, let’s move on and discuss your legal


liability for the services you provide.

As VITA/TCE volunteers, the rules and


regulation governing paid preparers do not
apply to you. In most cases, you are not
legally liable for your actions. Encourage the students to do an
Internet search on the Volunteer
You are protected by the Volunteer Protection Act of 1997 or
Protection Act of 1997. You must however, provide them a copy to review
act with in the scope of your volunteer on their own time.
responsibilities and any harm you cause
must not be willful or criminal misconduct.

Read and discuss the bulleted


information on page 1-4.

Lesson 1 - Page 5 of 8
As you can tell, a great many of your duties Point out that “There are some
and responsibilities as a volunteer tax people who will try to defraud
preparer revolve around trust. the government by filing false
tax returns.”
Taxpayers trust that all the information you
receive from them is protected from Stress to the students, when in
disclosure. Let’s discuss what you can do doubt about what they should do
to maintain this trust. in any situation to consult their
Site Coordinator.

Page 1-5
What type of returns can I
prepare? Restate the course you will be
teaching and the topics you will
You are probably wondering about the cover.
types of returns you can prepare, and the
answer, as you might expect, is not Emphasize that they must not
everything. assist taxpayer with tax
situations beyond the scope of
For specific information about the scope of their training, experience and
the VITA/TCE Program and each of the five certification.
courses visit the web site on the back cover
of your training guide. Ask students if they have any
questions or concerns.

Provide your SIDN (if available)


and suggest that they write it in
We will discuss this topic in more detail in their Publication 4012.
later, but all returns prepared by volunteers
must contain a Site Identification Number
(SIDN). This SIDN is an 8 digit number
preceded by the letter S that you place on
each return you prepare. The SIDN will be
supplied by the Site Coordinator.
Page 1-5
Will you receive notification of
your certification? Respond to any issues raised.

I have used the term certified volunteer Display/circulate


several times; let’s review the information Form 13645, Wallet Card (if
on page 1-5 for a better understanding of desired).
the certification process.
Page 1-6

Lesson 1 - Page 6 of 8
Are there other materials available
to assist you?
Allow the students some time to
Your Site Coordinator is responsible for read the bullets on page 1-6.
ensuring that you have all of the technical
materials and other resources you need to
perform your duties.
Encourage the students to visit
As explained earlier, you should take your the “Community Network” for
Publications 17 and 4012 to the tax electronic copies of the products
preparation site with you. Please write your and additional information. See
notes in these two publications (where the back cover of their student
possible). text.

Publications 4491 and 678-W are not


allowed at the tax preparation site (even as
reference tools).
Discuss the VITA Hotline
In addition to your Site Coordinator, IRS tax information on page 1-6 and
experts are available to assist you on the show them the location of the
VITA Hotline. number on the inside back cover
of Publication 4012.

Page 1-6
How to acquire tax software?
Use the information in the text or
I have mentioned TaxWise a few times, so, refer the students to page 3 of
what is TaxWise? Publication 4012 – How to Use
this Guide and discuss TaxWise
(including showing them the
TaxWise screen shots).

Let me point out that other software


applications are used at VITA/TCE sites.
The IRS provides site licenses for TaxWise
only.
Bring their attention to the
Your facilitator and/or Site Coordinator will caution on page 1-6. Point out
provide you with the information and that it does not only apply to
passwords required for logging into the Government equipment, but
program for training and/or tax preparation hardware and software as well
purposes. as supplies.

Lesson 1 - Page 7 of 8
Throughout your student text you will find
TaxWise hints.

Remember the student text


(Publication 4491) is not allowed at the site
and Publication 4012 contains the same or
similar information.
Page 1-7
Summary
Provide a thorough review of
Let me welcome you once again to the each of the bullets in the
VITA/TCE Program. Before we move into summary using examples from
the techniques for screening and class and your experiences.
interviewing taxpayers, let’s review some of
the critical points covered in this lesson. Show the students the
assessment (page 3- Are you
Ready to Get Started?) in
Publication 4012.

Lesson 1 - Page 8 of 8
Lesson 2: Screening and Interviewing

Objective
Cultivate and/or learn and practice techniques for screening and interviewing
taxpayers. Learn the tools and other resources available for this process.

Introduction

In this lesson, you will learn some screening Complete the checklist—What
and interviewing techniques that will ensure Do I need? on page 2-1 with the
that taxpayers receive quality service and students.
accurate return preparation assistance.

You will become acquainted with Inform the student that they
techniques and tools to assist you during must conduct a probing
the initial screening of taxpayers for interview before assisting
program eligibility. The same tools and taxpayers with their return.
techniques will also be used when
conducting probing interviews.

The information you obtain from taxpayers


during the interview is required before the
preparation of the return, during the
preparation of the return, as well as during
the quality review process.

What is included in the intake and Page 2-1


interview process?
When each taxpayer arrives at your site, Note: If Form 13614 will not be
they should be given an intake document used at your site, you will need
(IRS Form 13614 or an IRS approved to change the references in this
product) to complete. lesson.

During the screening process, the intake Refer student to Form 13614 in
document is reviewed by a “screener or the the Volunteer Resource Guide
actual volunteer preparer” to determine if or other approved product.
the taxpayer is eligibility for assistance and
if they have all the necessary
documentation.

Lesson 2 - Page 1 of 9
In dialogues with the taxpayer, listen
carefully for clues that will help you when
completing their return. For example, their
marital status, the children and relatives
living with them, childcare and tuition
expenses, sources of income, etc.

Let’s discuss what’s included in the intake Remind the class that these are
and interview process by reviewing each of minimum expectations. If
the bullets on page 2-1. possible, display as a visual aid.

So, how are you going to get taxpayers to


share all of this information with you?
That’s where your people skills come into
play, especially, your interviewing skills.

Here are some interviewing techniques to


use while working with a taxpayer:

x Build rapport Inform the class that they will


x Ask effective questions practice these techniques
x Use active listening throughout the class.
x Overcome communication barriers

Where do I find the tools to assist Page 2-1


me with this process?
As I previously stated, all volunteer tax Display a blank Form 13614 or
preparation sites must gather taxpayer direct students to the form in the
information using an intake and interview introductory section of the
sheet, such as Form 13614. Volunteer Resource Guide .

In some sites, screeners conduct a


preliminary review of the taxpayers’
information, while in others screening and
interviewing takes place at the same time.

In either scenario, the taxpayer completes Note: Advise the volunteer not
page 1 of the intake and interview sheet. to write on any of the taxpayer’s
The individual preparing the return “the personal documents or take
volunteer preparer” will conduct the probing them out of the taxpayer’s sight.
interview to validate the information
provided by the taxpayer and the
annotations made by the screener (if

Lesson 2 - Page 2 of 9
applicable).

Page 2 of the intake sheet is completed


during your interview with the taxpayer.

Always document any changes to the Stress the importance of


original information the taxpayer provided annotating changes to the
on the intake and interview sheet. taxpayer information during the
interview process.

Your notes will be used by the individual


that will conduct the final quality review of
the return.

Now it’s time to look at one of your most Ask the students to open their
important resources, Publication 4012. The Volunteer Resource Guide and
Volunteer Resource Guide has a number of review the content behind each
tools, like decision trees and interview tips, tab.
all of which will help you gather, clarify and
verify taxpayer information.

Your Volunteer Resource Guide contains Discuss the information in “How


three sections. Let’s see behind each of to “Use the Guide” and “Are You
the major sections: Ready to Get Started.”
x White tabs contain tax law in the
form of decision trees, charts and
interview tips
x Yellow tabs contain step-by-step Note: You may elaborate on
procedures for electronic return whether or not the yellow and/or
preparation using TaxWise blue TaxWise tabs will be used
x Blue tabs contain information specific during training and why.
to users of the web-based option for
TaxWise (TWO)

Are there any questions about what has Respond to inquiries and remind
been covered thus far? students that they must take and
use the Volunteer Resource
Guide at their VITA/TCE site.

How do I use the quality review Page 2-2


sheet?
Realizing that preparing accurate returns is Discuss the instructions for
the goal we all want to reach, there is completing the form on
another step in the process to assist you in page 2-3.
reaching that goal.

Lesson 2 - Page 3 of 9
The quality review process will be
discussed in detail in Lesson 32, but for
now, I would like to introduce you to
Form 8158, the Quality Review Sheet.

Form 8158 is designed to minimize the


number of returns submitted to the IRS
containing common errors.

The Quality Review Sheet should be used Advise the students that a
by your Site’s quality reviewer to confirm the quality review must be
accuracy of the return before the taxpayer conducted of each return they
signs it and leaves the site. prepare and that the information
on Form 13614 will be the basis
of the quality review.

I would like to briefing discuss the intake Direct the students to page 2-3
and interview process using TaxWise. or provide an illustration of the
TaxWise hint and/or display as a
visual aid.
TaxWise has a number of forms/worksheets
that can be used in-lieu of an intake and
interview sheet.

As shown on page 2-3, the following Advise the students that their
worksheets must be used to conduct the quality reviewer will use paper
intake and interview process using copies of the TaxWise
TaxWise: worksheets or online copies of
x Main Information Screen them to conduct to the quality
x Interview sheet (interview questions) review.
x Dependent Worksheet (if required)
x Head of Household worksheet
(if required)
x Earned Income Credit Worksheet
(if required)

How do I welcome and screen Page 2- 3


taxpayer?
Let’s greet and screen your first taxpayer.

So, how do you get the screening process Note: Publication 4475,
started? Here are some suggestions: Interview Techniques is an
x Greet the taxpayer and introduce excellent demonstration of the
yourself entire intake and interview

Lesson 2 - Page 4 of 9
x Take a few moments for small talk process. It is available in DVD
x Explain the screening, tax or VHS from your local IRS
preparation and quality review SPEC contact.
process
x Explain that you will complete page 2
of the intake and interview sheet
together, after they complete page 1
to the best of their ability
x Ask if the taxpayer has any questions

Here is a chance to try it out.


Ask for two volunteers to do the
sample interview on at the top of
page 2-4 and then discuss the
exercise.

How do I screen the taxpayer for Page 2-4


eligibility?
The taxpayer completes page 1 of Form Ask the students to locate
13614. You will interview the taxpayer to Form 13614 in the Volunteer
complete page 2 of the form and/or screen Resource Guide
the taxpayer for program eligibility.

Let’s review the suggested method for


screening taxpayers on page 2-4.

So, when you conclude this “screening”


interview you should have reviewed all the
items in the bullets at the top of Form 13614
and have an estimate of the taxpayer’s
income.

If it appears that taxpayer will qualify for Advise students that in future
assistance but does not have all the lessons, you will share the
necessary documentation, provide information that they need to
guidance necessary for them to acquire the provide guidance to the taxpayer
document. about missing SSNs, W-2,
1099s, etc.
If their tax situation (including income) is
beyond the scope of your training or the Advise the students of the
VITA/TCE program you have the following complexity of the returns they
options: will prepare at their VITA/TCE
x Seek assistance from your Site site.
Coordinator (if applicable).
x Courteously explain why they do not

Lesson 2 - Page 5 of 9
qualify for assistance.
x Suggest other service options.

Remember to return all their documentation


including the intake and interview sheet and
thank them for coming and express regret
that you cannot assist them.

Does any one have any questions or Make sure all the students have
concerns about what we have covered up a partner and have them do the
to now? sample interview on page 2-5.

Respond to all inquiries and


summarize by bringing their
attention to the “Five Step
Interview Process: chart in the
Volunteer Resource Guide.
Discuss the “Goal” column.
How do I conduct a probing Page 2-5
interview?

Remember, you may be conducting both


the screening and the probing interview at
the same time. Some sites do not separate
the two interviews.

The probing interview is for you to confirm


the accuracy of the taxpayer’s input on
Form 13614 with the intent of making sure
the taxpayers does not miss out on any tax
benefits they are entitled to and to ensure
that you fully understand their tax situation.

In your Volunteer Resource Guide, take a


Conduct a thorough review of
look at the Decision Tree and Interview Tips
the chart in the Volunteer
located behind Tab B.
Resource Guide, especially the
suggested actions.

Give the students a minute or so


to review. Next, have teams of
two do the sample interview on
page 2-6.

Point out that this sample shows


how a volunteer uses these tips

Lesson 2 - Page 6 of 9
when conducting an interview.

Will each of you complete the exercise on Discuss their answers.


page 2-7? Answer to Q1: The volunteer
did a very poor job on almost all
counts. The only thing done
correctly was the close ended
question.
Answer to Q2: The volunteer
did all of the recommended
things and did them courteously!

How do I use the interview Page 2-8


techniques?

What are interview techniques and why do Respond to any raised hands or
you need them? student statements.

Before you can begin an interview, you will


need to build a rapport with the taxpayer,
basically, put the taxpayer at ease.

After you and the taxpayer achieve a level Refer the students to the
of comfort with each other, you will need to Volunteer Resource Guide. In
ask open ended questions, and use active addition to the chart, discuss the
listening to avoid and overcome any standards of conduct with
communications barriers. emphasis on the first bullet—
Treat all taxpayers
professionally, with courtesy and
respect.

Before moving on, I would like to encourage


each of you to be organized.

Arrive at the site on time and have all your


supplies and equipment ready before the
first taxpayer arrives.

Asking effective questions can be a Have the student do the sample


challenge. You may feel that you are interview at the top of page 2-9
prying. You are not. You’re eliciting the and share your observations.
information needed to file an accurate
return that allows the taxpayer to enjoy all
the benefits or credits that they are due.

Working with a taxpayer requires you to ask Point out the TIP on page 2-8

Lesson 2 - Page 7 of 9
a lot of questions. Start the interview with and ask for a volunteer to read it
open ended questions because these and discuss it if desired.
require more than a simple yes or no
answer.

Avoid asking leading questions. They can Ask for two volunteers to do the
make the taxpayer feel that you have a sample interview at the bottom
specific answer in mind. Don’t make of page 2-9 and share your
assumptions; let the taxpayer speak for observations.
themselves.

Pay attention to what the taxpayer is saying


by using active listening. Active listening
shows that you are paying attention and
care about what’s being said.

Step 2 in Volunteer Resource Guide depicts


some active listening techniques. Other
techniques include:
x Allowing each person the time they
need to express themselves.
x Expressing emotions and/or
empathic comments based on what’s
being said.

How to overcome communication Page 2-10


barriers?
You know you have a barrier to
communications when the taxpayer
becomes upset or defensive.

You can overcome these barriers by


showing concern and understanding for
their needs and feelings.

Let’s review the suggestion for overcoming Pair up the class and have them
barriers to communications in your text on conduct the sample interview at
page 2-10. the bottom of page 2-10 and
allow time for discussions.

Point out that successful


volunteers express empathy,
understanding and compassion
for all kinds of people.

Lesson 2 - Page 8 of 9
What happens next? Page 2-11
Now that the intake sheet has been .
completed and the probing interview
finished you have three options:
x Advise the taxpayer that their return
is outside the level of your
certification and seek assistance
from your coordinator.
x Advise the taxpayer that their return
is outside the scope of the program.
x Assist the taxpayer with their return,
request assistance from the
coordinator as needed.

If return assistance is not provided, return


the intake and interview sheet to the
taxpayer along with their documents.

Summary Page 2-11

To be a successful volunteer, you will need:

x The ability to communicate with all Point out the tools available to
types of people. the students to ensure the
accuracy of the return they
x To know where and how to get the prepare (page 2-11 of their text).
information you need and document
your findings. Also tell them to take their
Volunteer Resource Guide to
x To understand how to apply the the VITA/TCE Site with them
information you obtain verbally and in and follow the interview process
writing from the taxpayer to their tax on page 4 of that book.
return.

Remember, a tax return is accurate when Close by connecting the


the tax law is applied correctly and the volunteer agreement in the
return’s based on information acquired Volunteer Resource Guide to
during this process this process.

Lesson 2 - Page 9 of 9
Notes
Lesson 3: Filing Basics

Objective
Determine which taxpayers must or should file a tax return. This lesson provides the
information you need to:
x Verify a taxpayer’s identity
x Select the appropriate tax return form
x File the return
x Identify how long a taxpayer should keep certain records and documents.

Introduction
This lesson will help you determine which Note:
taxpayers must or should file a tax return. Stress the link between the
This lesson provides the information you intake sheet and return
need to be able to: accuracy. You are building the
x Verify a taxpayer’s identity foundation for the quality
x Select the appropriate tax return form process.
x File the return
x Tell taxpayers how long they should
keep certain records and documents

Who must file? Page 3-1

Remember to use the interview techniques


and tools discussed in the Interview lesson.

What do I need to know?

To decide whether someone must file a tax


return, you need to know the individual’s:
x Age
x Gross income
x Filing status

Where do I get information on the


taxpayer’s age?

Refer to the sample Intake and Interview


Sheet at the beginning of your Volunteer

Lesson 3 - Page 1 of 20
Resource Guide. Look at the taxpayer’s Direct the students to the
date of birth. Confirm this date during the appropriate line on the Intake
interview. sheet.

Where do I get information on the


taxpayer’s gross income?

An approximation of gross income is


enough to see if a taxpayer must file a
return. Gross income is all the income the
taxpayer received during the tax year in the
form of money, goods, property, and
services that are not exempt from tax. It
includes both earned and unearned income.
To approximate gross income:
x Obtain the total of wages, tips, and
other employment compensation Remind the students to
reported in box 1 of the taxpayer’s assemble all of the income
Form(s) W-2. reporting documents.
x Take a look at Parts IV through VIII
on Page 2 of the sample Intake and Stress the importance of using
Interview Sheet at the beginning of the intake sheet as the
your Volunteer Resource Guide. beginning to a process.
Review with the taxpayer, the income
questions to see if the taxpayer had
additional income (from investments,
retirement plans, social security,
unemployment, or other income not
reported on Form W-2 or Form 1099)
and determine each amount.

Total the above amounts of income to


determine the taxpayer’s approximate gross
income. Do not include social security
benefits when determining filing
requirement unless the taxpayer is married,
filing a separate return, and lived with their
spouse at any time during the tax year.

The Income section of the Volunteer


Resource Guide under Tab D lists the Remind the students that the
sources of income that should be included Volunteer Resource Guide has a
and excluded in determining a person’s helpful Income table under
gross income. You can also refer to the Tab D. You can also alert the
Income lesson. students to the examples of
“excludable” income.

Lesson 3 - Page 2 of 20
Excludable in this case means
not taxable.
Where do I get information on the
taxpayer’s filing status?

Taxpayers may or may not know which


filing status to use. For the purposes of
determining whether a person must file a
return, narrowing the choices down to the
most likely filing status(es) is adequate in
most cases.

Check the Taxpayer Information section of


the intake sheet for:
x The taxpayer’s marital status
x Whether the taxpayer can be claimed
as a dependent on someone else’s
tax return
x The taxpayer’s potential dependents

Example page 3-2:


Based on the Intake and Interview Sheet
shown, this taxpayer will most likely use the Refer the students to the graphic
Married Filing Jointly filing status. on page 3-2 and to the
Volunteer Resource Guide’s
Use the Volunteer Resource Guide’s Determination of Filing Status
Determination of Filing Status decision tree decision tree and interview tips.
and the Interview Tips, under Tab B for Note – many military couples
helpful probing questions. who are separated by the
service assume they must file
separately. The decision tree
can help correct this
misconception.

Tell the students that these


Who is legally required to file a federal amounts change each year.
tax return?

To determine whether a taxpayer is legally


required to file a return, start with the
Volunteer Resource Guide; Tab A, Who
Must File – Chart A-For Most People and
Chart B-For Children and Other
Dependents table. Turn to that table now
and review the dollar amounts in both
Charts A and B.

Lesson 3 - Page 3 of 20
Example page 3-3:
Lucy will use the Single filing status and is
36 years old. Her gross income is Use Lucy as an illustration of the
$20,000. She must file a tax return. use of the Volunteer Resource
Guide.
Example page 3-3:
Henrietta and Javier are married and plan to
file a joint return. Henrietta is 67 and had a Again, guide the students to use
gross income of $11,000 for the tax year. the Volunteer Resource Guide.
Javier is 66. His gross income was $5,000
for the year. Since their combined gross
income is $16,000, they do not have to file
a return.

For Special Situations:

If the Who Must File charts show that an


individual is not required to file a return, You could demonstrate the lines
then continue to the Who Must File–Other for these special situations on a
Situations When You Must File in the paper Form 1040. This would
Volunteer Resource Guide to see if any of illustrate these amounts as
the following special conditions require the additional taxes.
person to file.

Some of the most common situations you


may see when individuals are legally
required to file a return are:
x Self-employed with net earnings of
$400 or more
x Advanced Earned Income Tax Credit
payment recipients who have an
amount in Box 9 of their Forms W-2
x Taxpayers who owe Special Taxes

Exercises page 3-3


Guide the students to use the
“Who Must File” section of the
Volunteer Resource Guide to
answer these questions.
Question 1:
Bob is 27 years old. His gross income was Answer 1: Yes, Bob is required
$8,800 during the tax year. Based only on to file a return because his gross
this information, is he required to file a tax income was over
return? $8,750.

Lesson 3 - Page 4 of 20
Question 2:
Janet and Harry are married and usually file Answer 2: No, Janet and Harry
jointly. During the tax year, she turned 66 are not required to file because
and he turned 64. Their gross income was their combined gross income
$16,200. Based only on this information, was less than $18,550.
are they required to file a tax return?

Question 3:
Juanita can file as a Qualifying Widow with Answer 3: Yes, Juanita must file
Dependent Children. She is 47 years old. because her gross income was
Her gross income was $14,400. Based only over $14,100.
on this information, is she required to file a
tax return?

Taxpayer Scenario Page 3-4

Taxpayer Vanessa Franklin comes to your Use the graphic of Part 1 of the
site and requests assistance with her return. Intake sheet to guide the
She is married, but lives apart from her students.
husband. Her two children and her mother
live with her. She was employed as a sales
associate in a retail department store for the
entire tax year. She also had her own
cosmetics business. Her husband was
employed as a cook for most of the tax
year, but collected some unemployment
compensation.

She completed Page 1 of her intake sheet Tell students that the
and brought her valid taxpayer identification requirements for valid taxpayer
documents. You start the process by using identification documents will be
the intake sheet to obtain her date of birth discussed later in this lesson.
and marital status.

The Taxpayer Information section indicates


she is 36 and legally married.

Next, you review the Family and Dependent Have students review the Family
Information section of the intake sheet. and Dependent Information
section of the intake sheet page
3-4.

Lesson 3 - Page 5 of 20
Vanessa has indicated three potential Refer students to the sample
dependents. You decide to ask some interview on page 3-5. Remind
questions to confirm and clarify her them that the intake sheet
information. responses are the start of a
conversation to ensure an
accurate tax return.

Vanessa may be filing as Married Filing Stress to the students that


Separately, Head of Household, or Married Vanessa does NOT want to file
Filing Jointly. The next step is to make sure jointly with her spouse.
her gross income for the tax year is more
than the gross income limit presented in the
Who Must File table.

You look at Vanessa’s Form W-2 and


proceed with asking the income questions
from Page 2 of the intake sheet.

Vanessa answered “yes” to having self- Guide students through the


employment income and “yes” to having sample interview questions on
received unemployment compensation. You page 3-6. You determine
decide to ask questions about these two Vanessa made about $2400
additional sources of income, as shown in selling cosmetics in 2007.
the sample interview below. She actually has no
unemployment income.

Based on the Who Must File table, Vanessa


is required to file a tax return because she
is under 65 years old and her gross income
($28,400) exceeds the income limits listed
for each filing status that could apply to her.

Who should file? Page 3-6

Remember to use the interview techniques


and tools discussed in the Screening and
Interviewing lesson.

Who should file a federal tax return?

Although some individuals may not be Note:


required to file, they should file a return if Stress to students that
they are eligible to claim: taxpayers who should file
x A refund of withheld taxes include:
x The Earned Income Credit (EIC) x Those entitled to a tax

Lesson 3 - Page 6 of 20
x The Additional Child Tax Credit credit – filing a return is
x The Health Coverage Tax Credit the only way to get it.
x Those who receive
Advanced Earned Income
Credit – to “account for”
the credit received.

These items are listed in your Volunteer Illustrate these items by also
Resource Guide, in the Tab A, Who Must referring the class to a 1040.
File section, Chart D-Other Situations.

Individuals who are not required to file a


return and who would not benefit from filing
a return can reduce the cost, time, and
effort of unnecessary processing by not
filing a return.

How do I find out if a taxpayer is eligible


to claim a refund?

To determine whether a person should file a


return in order to claim a tax refund or
refundable tax credit, check the taxpayer’s:
x Form(s) W-2 (boxes 2 and 17) and
Form(s) 1099
x The Family and Dependent
Information section of the intake
sheet

The taxpayer may qualify for a tax refund, TIP page 3-7:
Earned Income Tax Credit, and/or Tell the students that the Earned
Additional Child Tax Credit if: Income Tax Credit may apply
x Federal or state income tax was with or without a child. See the
withheld on any income form, and/or Earned Income Credit and Child
x The taxpayer had earned income, Tax Credit lessons for details on
and/or determining eligibility for these
x The taxpayer has a qualifying child tax credits.

When in doubt, it may be worthwhile to


begin a tax return for the taxpayer and then
file the return only if the taxpayer is eligible
for a refund.

Refer taxpayers who may qualify for the


Health Coverage Tax Credit to a Note:
professional tax preparer. Reinforce the concept of the

Lesson 3 - Page 7 of 20
scope of the VITA/TCE program
and acknowledge that some
taxpayers will need professional
assistance.

How do I verify taxpayer identity? Page 3-7


To verify a taxpayer’s identity, use the
interview techniques and tools discussed in
the Screening and Interviewing lesson.

What are Taxpayer Identification Numbers?

IRS regulations require that each person


listed on a U.S. federal income tax return
have a valid Taxpayer Identification Number
(TIN). The types of TINs are:
x Social security number (SSN)
x Individual Taxpayer Identification
Number (ITIN)
x Adoption Taxpayer Identification
Number (ATIN)

Who has a social security number?

Any individual who is legally eligible for TIP page 3-7:


employment in the United States must have Tell the students that some
a social security number (SSN). Canadians have both U.S. and
Canadian social security
numbers. Never use
the Canadian number on a
U.S. tax return.
Who has an Individual Taxpayer
Identification Number?

Some individuals who need to file tax TIP page 3-7


returns do not have social security Tell the students that Taxpayers
numbers. The IRS issues an ITIN to who cannot obtain an SSN must
nonresidents and others living in the U.S. apply for an ITIN if they file a
who are required to have a U.S. TIN but U.S. tax return or are listed on a
who are not eligible to obtain SSNs. tax return as a spouse or
dependent. These taxpayers
The ITIN contains nine digits and is must file Form W-7, Application
formatted like an SSN (XXX-XX-XXXX), but for Individual Taxpayer
begins with the number 9. You should enter Identification Number and
supply documentation that will

Lesson 3 - Page 8 of 20
the ITIN on the return wherever the social establish foreign status and true
security number is requested. identity. A federal tax return
must be associated with all
Form W-7 applications with
exceptions as noted in the
instructions for Form W-7.

Who has an Adoption Taxpayer


Identification Number?

Taxpayers who are in the process of


adopting a child and who are able to claim
the child as their dependent or are able to
claim a childcare credit need an ATIN for
their adoptive child.

The IRS issues an ATIN for the child while


final domestic adoption is pending, and the
adopting taxpayers do not have the child’s
SSN.

Like an ITIN, the nine-digit ATIN begins with


the number 9. You should enter the ATIN
on the return wherever the child’s social
security number is requested.

What documents do I use to verify


identity?

Before you enter the taxpayer identification


information on the tax return, you should
first verify the identity of the taxpayer(s), the
accuracy of each SSN (or ITIN), and the TIP page 3-8:
spelling of names entered on the taxpayer’s Tell students that taxpayer,
intake sheet. spouse, and dependent name
x Ask to see a social security card, an and social security number
ITIN letter, or other legal document mismatch is rated as one of the
for each individual who will be listed top 5 errors in processing a tax
on the return return.
x Ask to see a proof of identity for the
taxpayer (and the spouse if filing a Note: Tell students that time
joint return) spent verifying these issues can
x Verify that the SSN (or ITIN) and save time for the site coordinator
proof of identity are for the same and the taxpayer.
person

Lesson 3 - Page 9 of 20
x Verify that the SSN (or ITIN) and the TIP page 3-8:
spelling of each individual’s name on Tell students that driver’s
the social security card or other licenses and passports are not
acceptable documents match the acceptable substitutes for social
information you enter on the tax security or TIN cards.
return
x Verify that the address and birth date Direct students to the graphics
on the Intake and Interview Sheet of the social security card and
matches the information on their the resident alien card on page
identification and discuss any 3-8.
discrepancies with the taxpayers
x Make sure the taxpayer understands
how critical it is to have the correct
information in order to receive any
age-related tax benefits.

Taxpayers who cannot substantiate their


identity should seek professional tax
assistance.

What are acceptable documents if the


taxpayer doesn’t have a social security
card?

For individuals who do not bring their social


security card, you may accept either of the
following:
x An SSA letter
x An ITIN card or letter

What if the taxpayer doesn’t have an


SSN or ITIN?

For individuals without a valid SSN, explain


that they must have a taxpayer identification
number before you can assist them. Direct
them to the Social Security Administration
and advise them to complete Form SS-5,
Social Security Number Application. If the
individual is not eligible for an SSN, refer
them to the IRS for Form W-7, Application
for Individual Taxpayer Identification
Number. Note: Share the process for
using the temporary ID number
For a taxpayer who cannot obtain an SSN with the class. Demonstrate on
and has not yet applied for an ITIN, you can TaxWise.

Lesson 3 - Page 10 of 20
use a temporary identification number to TIP: page 3-9
prepare the return in TaxWise. See “Apply Tell students that, if preparing
for an ITIN”, under Tab 1 in your Volunteer the return on paper, leave the
Resource Guide. TIN spaces on the return blank
and follow the Form W-7
procedures.

Stress students are not to


change the Form W-2.

Share a Form W-7 with the


students, either on paper or
projection.

When preparing a tax return for an ITIN


application, include all Forms W-2, even if
the TIN on the W-2 does not belong to the
taxpayer. Do not change any information on
the W-2. Send it in with the return as is.
Since it is not going to be transmitted
electronically, it does not matter if the TIN
does not match in TaxWise.

Attach the tax return behind Form W-7,


Application for Individual Taxpayer
Identification Number along with
documentation that will establish foreign
status and true identity and have the
taxpayer submit according to Form W-7
instructions.
x If it is not available at the volunteer
site, the taxpayer can obtain Form
W-7 by calling the IRS at 1-800-829-
3676 (1-800-TAX FORM) or at www.
irs.gov
x If taxpayers need assistance in
completing Form W-7, refer them to
an IRS walk-in office or for
professional assistance unless a
volunteer at that site has been
trained in completion of Form W-7 or
an authorized acceptance agent is
available Remind students not to change
the Form W-2.

Lesson 3 - Page 11 of 20
What if the TIN on the Form W-2 doesn’t
match the TIN on the tax return?

The SSN on the taxpayer’s Form W-2 is


supposed to match the one you entered on
the tax return. A mismatch will delay return
processing and can create serious errors.

Taxpayers with a valid SSN:

If the taxpayer’s Form W-2 does not have


the correct SSN, you can prepare the tax
return with the materials provided. However,
the taxpayer needs to request a corrected
Form W-2 from the employer before
submitting the tax return. Tell students that these returns
can now be electronically filed.
Taxpayers with a valid ITIN:
Tell students that the TIN on the
Taxpayers who file tax returns under their electronic return is the ITIN for
ITINs (and other taxpayers without valid this Taxpayer. The ITIN
SSNs), often attach Forms W-2 showing taxpayer is NOT eligible for EIC
erroneous SSNs. If such an ITIN/SSN (Earned Income Tax Credit)
mismatch occurs:
x Do not change any information on
the Form W-2
x Effective in 2006, it is acceptable to
e-file a return with an ITIN/SSN
mismatch
x The return should reflect the ITIN for
the taxpayer, not the SSN on Form
W-2
x When entering the Form W-2(s), the
mismatched SSN should be entered
exactly as shown on the Form W-2
issued by the employer
x The taxpayer is not eligible for the
Earned Income Credit (EIC)

Exercises (continued) page 3-9:


Answer 4: True. To prevent
Question 4: processing delays, you should
True or False? It is your responsibility as a check the accuracy of each
volunteer tax preparer to check the social security number, as well
accuracy of every social security number as the spelling of the name
provided to you by taxpayers. associated with the number.

Lesson 3 - Page 12 of 20
How do I enter the identification data? Demonstrate the way TaxWise
applies the Social Security
Turn to the Main Information Screen section number issuing rules in the
in your Volunteer Resource Guide under diagnostics, if TaxWise is
Tab 1. Be sure to read all the details and available. While not actually a
helpful hints for entering the taxpayer’s database of SSN it can give a
identification information. warning when the SSN is listed
for a very different individual.

TaxWise Hint page 3-10:


Input this section of the return
on the TaxWise Main
Information Sheet. TaxWise
transfers the information to the
appropriate tax form. If you are
using TaxWise Online, you have
the option of either filling in the
forms or using the interview
based data entry to transfer the
information

Taxpayer Scenario Page 3-10


Look at the Intake and Interview Sheet for Refer students to the interview
our taxpayer Vanessa Franklin. As you sheet on page 3-10
recall, she is married, but lives apart from
her husband, who files a separate return.

Can Vanessa prove who she is?

Before completing the TaxWise Main Guide students through a


Information Sheet or the Label section of discussion of the sample
Vanessa’s tax return, make sure you verify interview on page 3-11
the identity information from her intake
sheet.

Lesson 3 - Page 13 of 20
You have now verified that the information
from Vanessa’s intake sheet matches the:
x Name, date of birth, and address on
her driver’s license
x Name and social security number on
her SSA letter.

You are now ready to enter Vanessa’s


identifying information into TaxWise.

How do I choose the appropriate


Page 3-11
tax return form?
Note: If you are e~filing the tax
returns the IRS does not care
which form is used. You may
want to determine the easiest
form for the taxpayers benefit. A
window at the top of the main
information screen in TaxWise
displays this information.
Form 1040EZ :
Of all the tax return forms, Form 1040EZ is
the simplest. The one-page form is
designed for individuals who file as either
Single or Married Filing Jointly and who
have no dependents.

Example page 3-11:


Trudy, a single 22-year-old full-time college
student, is claimed as a dependent on her
mother’s tax return. Last year Trudy
grossed $6,100 from her part-time job as an
administrative assistant. Trudy should use
Form 1040EZ. Most individuals who can be
claimed as a dependent on another
taxpayer’s return use Form 1040EZ.

Form 1040A:
Form 1040A is a two-page form. Page 1 TIP: page 3-12:
shows the filing status, exemptions, income, For taxpayers who filed Form
and adjusted gross income. Page 2 shows 1040EZ or Form 1040A the
standard deduction, exemption amount, previous year, determine
whether their situation has

Lesson 3 - Page 14 of 20
taxable income, tax, credits, payments, changed. It may be to their
amount owed or refund, and signature. advantage to file Form 1040
if additional adjustments or
Form 1040A may be filed with certain deductions will result in a lower
schedules. Turn to the Which Form to File tax!
chart under Tab A of your Volunteer
Resource Guide to see which types of
schedules and forms can be filed with a
Form 1040A.

Form 1040:
Form 1040 is a two-page form that contains
all the entries on Form 1040A plus entries
for more types of income, itemized
deductions, and other taxes. Form 1040
provides schedules for reporting these
various types of income and deductions.
Taxpayers whose taxable income exceeds
$100,000 or who have self-employment
income must use form 1040.

Which tax form do I select?

When filling out a paper tax return, you can


refer to the Tab A, Which Form to
File? Table in the Volunteer Resource
Guide as you interview the taxpayer.

When using TaxWise, always select


Form 1040 from the Main Information
Sheet. Based on the information you enter
when completing the return, the program
will tell you the simplest form to use. All
returns filed electronically are transmitted in
the same format regardless of the form
selected.

Exercises (continued) page 3-12: Answer 5: Lenny and Lisa can


Question 5: use Form 1040EZ to file their tax
Lenny and Lisa are filing a joint return and return.
have no dependents. Their combined
income was $31,000, which included $35 in
taxable interest and two months of
unemployment income for Lisa. They want
to take the standard deduction. Which is the

Lesson 3 - Page 15 of 20
simplest form that Lenny and Lisa can use
for their tax return?
Answer 6: Ray will need to file
Question 6: Form 1040 both for two reasons:
Ray is married, but he and his wife Stella because he had self-
are filing separate returns. employment income and
Their combined income was $105,000, but because he is itemizing
Ray’s income was $64,000, half of which deductions.
was self-employment income. Ray is
claiming only one exemption for himself,
and he wants to itemize his deductions.
Which is the simplest form that Ray can use
for his tax return?

How do I file a return? Page 3-13


What is electronic filing? TIP page 3-13:
Detailed instructions for
IRS e-file is a quick and easy alternative to completing and filing the return
traditional paper returns. Most VITA/ are covered in the Concluding
TCE volunteer sites are now set up for filing the Interview lesson.
electronically using TaxWise software.

Electronic filing is faster and more accurate


than traditional paper filing. With e-filing,
taxpayers receive their refund in half the
usual time, and even faster with direct
deposit.

How do the two filing procedures Direct students to the chart on


compare? page 3-13 that compares paper
to electronic tax returns.

Some of the common elements


are:
x Quality Review
x Site ID numbers
x Signature (manual or
PINs documents

What do I tell taxpayers about


Page 3-13
record keeping?
Taxpayers should keep a copy of the tax Tip page 3-14:
return, worksheets used, and records of all For additional record keeping

Lesson 3 - Page 16 of 20
items appearing on it (such as 1099 forms) information, see
until the statute of limitations runs out for Publication 552, Recordkeeping
that return. Usually, this is the later of: for Individuals.
x Three years from the date the return
was due or filed, or
x Two years from the date the tax was
paid

Taxpayers should keep:


x Forms W-2 until the Social Security
Administration has recorded the
earnings reflected on the forms
x Property records (including those on
a home) as long as they are needed
to figure the basis of the original or
replacement property
x Closing statements for a home until
the home is sold
x Brokerage statements showing the
purchase price of stock until the
stock is sold
x Contributions to nondeductible IRAs
until all IRA funds are withdrawn
x Calculations determining the
nontaxable portion of pension
income until all of the pension
income is taxable

How do I answer taxpayers’


administrative questions? Page 3-14

The Volunteer Resource Guide and


Publication 17 contain the answers to many
administrative questions that are asked by
taxpayers during the interview process.

Such questions as: “How can I get a copy of


my prior year’s return” or, “How can I get a
copy of an IRS form or publication” can be
answered by researching your reference
materials.

Turn to the “Frequent Taxpayer Inquiries”


located near the back of your Volunteer
Resource Guide and review this helpful

Lesson 3 - Page 17 of 20
information. Refer to the bottom portion of
the “Contact Information for Volunteers”
located near the back of the References
Tab of the Volunteer Resource Guide for a
list of phone numbers that you can provide
to taxpayers,

Review the index in the back of Publication


17 and locate the answers to the taxpayers
inquiries for questions not answered in your
Volunteer Resource Guide,

Question 7:
A taxpayer wants to know what the Answer 7: The index in
Presidential Election Campaign Publication 17 directs us to a
Fund is. Where can you find that paragraph in the chapter on
information? Filing Information.

Additional information on a variety of topics Demonstrate the search feature


can be obtained by contacting the IRS of the IRS website, if available.
at 1-800-829-1040, accessing their web site
at www.irs.gov, or by visiting an IRS Tax
Assistance Center in your area.

What potential pitfalls should I Page 3-14


keep in mind?
Remember:
x Always treat the information used to
prepare an individual’s income tax
return as confidential.
x Canadians have a number that is like
a social security number, but it is for
their old age pension. Do not use this
number on a U.S. tax return.
Canadians often have both a U.S.
and a Canadian social security
number.
x Many taxpayers erroneously report
amounts from Form 1099-MISC,
Miscellaneous Income, with wages or
other income. Income from box 7 of
Form 1099-MISC generally should
be reported on Schedule C or C-EZ
and on Schedule SE, Self-
Employment Tax. If the income is

Lesson 3 - Page 18 of 20
reported incorrectly, the IRS may
later issue a notice of proposed tax
increase for the self-employment
income and tax.
x Be alert to the following possible
indications of fraudulent activity:
o A Form W-2 that is typed,
handwritten, or has noticeable
corrections
o A Form W-2 from a company
that looks different from other
Forms W-2 issued by the
same company
o A suspicious person
accompanying the taxpayer
and observed on other
occasions
o Multiple refunds directed to
the same address or P.O. box
o Employment or earnings,
which are a basis for
refundable credits, that are not
well documented
o Similar returns (e.g., same
amount of refund, or same
number of dependents, or
same number of Forms W-2)

Notify your site coordinator if you suspect


any fraudulent or unusual activity.

Which forms and documents need Page 3-15


to be filed?
Turn to the chart under Tab 2 TaxWise in TaxWise Hint page 3-15:
the Volunteer Resource Guide that lists the Once the main information and
forms, types of income, and the line item income statements are entered,
entries for both Form 1040 and TaxWise. TaxWise automatically makes
available most forms and
applicable schedules. These
credit forms and schedules will
be annotated with a red
exclamation point. The volunteer
must still be alert to other
deductions and credits (such as
Hope and Lifetime Learning

Lesson 3 - Page 19 of 20
credits, and retirement savings
contribution credit if there is only
a Roth IRA contribution).

Summary Page 3-15

Let’s review some of the critical points in Provide a thorough review of


this lesson. each of the topics in the
summary, using examples from
class and your experiences.

Lesson 3 - Page 20 of 20
Lesson 4: Filing Status

Objective
Determine the most advantageous (and allowable) filing status for the taxpayer.
Selecting and entering the correct filing status is a critical component of
completing the taxpayer’s return. Refer to the Intake and Interview sheet for
information to help you make this determination.
Introduction
This lesson will help you determine the Explain the filing status can
most advantageous (and allowable) filing impact the amount of tax owed
status for the taxpayer. Selecting and and, consequently, the refund.
entering the correct filing status is a critical
component of completing the taxpayer’s Display or refer students to the
return. Refer to the Intake and Interview Intake and Interview Sheet.
Sheet for information to help you make this
determination.

Filing status is handled differently on Demonstrate different filing


different tax forms: statuses on TaxWise Main
x Form 1040 or Form 1040A: check Information Screen, if TaxWise
the box for taxpayer’s filing status in is available or refer students to
the “Filing Status” section. TaxWise tabs in the Volunteer
x Form 1040EZ: does not require an Resource Guide.
entry for filing status. Use it only for
taxpayers filing as Single or as
Married Filing Jointly with no
dependents.

To determine a taxpayer’s filing status, use The resources in Tab B of the


the interview techniques and tools Volunteer Resource Guide will
discussed in the Interview lesson. See the be referred to many times
Volunteer Resource Guide, Tab B, for the throughout the lesson. Students
Determination of Filing Status decision tree may want to keep their guides
and for helpful probing questions. open to these pages.

What are the five filing statuses? Page 4-1

Taxpayers must file using one of five filing Tip page 4-1:
statuses. Filing status impacts the Taxpayers may qualify for more

Lesson 4 - Page 1 of 18
calculation of income tax and the allowance than one filing status. Choose
or limitation of certain credits and the filing status that results in
deductions. the lowest tax (most beneficial)
for the taxpayer.

The following list puts them in order from TaxWise Hint page 4-1:
the most beneficial to the least beneficial to Filing status is selected on the
the taxpayer. Main Information Sheet in
x Married Filing Jointly TaxWise. Refer students to the
x Qualifying Widow(er) with Dependent Main Information screen in the
Child Volunteer Resource Guide, Tab
x Head of Household 1.
x Single
x Married Filing Separately
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?

Note: If students seem hesitant


to discuss their personal
situations, do not pry. Students
should be engaged, not
uncomfortable.

Marital status affect on filing status

The first step in determining the taxpayer’s


filing status is to confirm their marital status Note that the “marital status on
on the last day of the tax year. Avoid using the last day of the year” does
the information from the prior year as it may not apply to surviving spouses
have changed. as long as they did not remarry.

Generally, taxpayers are considered to be Do not assume a taxpayer


unmarried for the entire year if on the last should file as Single. Ask the
day of the tax year: appropriate questions to find out
x They were unmarried or, if the taxpayer qualifies for a
x They were legally separated, under a different status which may result
separate maintenance decree, or in a lower tax.
x They were divorced under a final
decree on or before December 31 of
the tax year

Lesson 4 - Page 2 of 18
Taxpayers are considered to be married for
the entire year if:
x They were married on the last day of
the tax year, or
x The spouse died during the year and
the surviving spouse has not
remarried

What are the requirements for Page 4-2


each filing status?
Note: Head of Household -
There are multiple requirements
that must be met to qualify for
Head of Household or Qualifying
Widow(er) with Dependent Child
statuses. The requirements are
discussed later in the lesson.
Who is considered Single?

Taxpayers can claim the Single filing status


if, on the last day of the tax year, they were:
x Not married, or
x Legally separated or divorced, or
x Widowed before the beginning of the
tax year and did not remarry

Can Single filers qualify for another


status?
Caution page 4-2: Avoid
Single taxpayers may qualify for Head of selecting a filing status that
Household or for Qualifying Widow(er) with results in a higher tax for the
Dependent Child status, which can mean a taxpayer. For example, Single
lower tax. filers with dependents may
qualify for Head of Household,
Taxpayers who are divorced can file as which often results in a lower
Single if they have not remarried on, or tax.
before, December 31 of the tax year. Or,
they may qualify for Head of Household,
which results in a lower tax.

What is Married Filing Jointly?


Remind students for Married
Married taxpayers who choose to file a joint Filing Jointly, one Form
return will use one return to report their 1040/1040A/1040EZ is filed,
combined income and to deduct combined which covers both spouses. This
allowable expenses. Married taxpayers can is different than Married Filing

Lesson 4 - Page 3 of 18
select this status even if one of the spouses Separately, where each spouse
did not have any income or any deductions. must generally file his/her own
The Married Filing Jointly status can be Form 1040/1040A/1040EZ.
claimed by taxpayers who, on the last day
of the tax year:
x Were married and lived together as
husband and wife, or
x Were married and living apart, but
were not legally separated or
divorced, or Note: The rules about common
x Lived together in a common law law marriages are very complex
marriage that is recognized in the and differ from state to state. As
state where they currently live or the a volunteer, it is not your
state where the common law responsibility to determine
marriage began, or whether a couple is involved in a
x Did not remarry and their spouse “common law marriage.” If a
died during the year taxpayer is not certain, refer
him/her to a professional (such
as an attorney).

-Q: In what circumstance can


someone not be legally married
on the last day of the year, but
still be considered to be married
for tax purposes?
A: If the person’s spouse died
during the year and the surviving
spouse did not remarry during
that same year.

Tip page 4-2:


If a spouse died during the year,
a taxpayer is considered married
for the whole year for filing
status purposes.

What are the responsibilities of each


taxpayer on a joint return?
Caution page 4-3:
Both taxpayers must include all world-wide A citizen or resident alien
income on their joint return. They each may married to a non resident alien
be held responsible for all the tax, and any may be able to file a joint return.
interest or penalty, due, even if all the More information can be found
income was earned by only one spouse. A in the Military Filing Status
subsequent divorce does not relieve either section of this publication.
spouse of the liability associated with the

Lesson 4 - Page 4 of 18
joint return. Note about SCOPE of the VRPP
program: Tell students that
In some cases, a spouse may be relieved of Publication 971 Innocent
joint liability. This topic is beyond the scope Spouse Relief is not covered in
of the VITA/TCE Program. The volunteer this course, but students and
would need to refer the taxpayer to a taxpayers may read it if they
professional tax preparer. For more would like more information.
information, see Publication 971, Innocent Stress that even if the volunteer
Spouse Relief. is familiar with the Publication
971, the taxpayer should still be
referred to a professional tax
preparer.

What is Married Filing Separately?


If an individual taxpayer will be
The Married Filing Separately status is for filing as Married Filing
taxpayers who qualify as “married” under Separately, remind him/her to
the definition provided above, and either: inform his/her spouse that the
x Choose to file separate returns, or spouse may need to file a
x Cannot agree to file a joint return Married Filing Separately return
as well.

Taxpayers who file as Married Filing


Separately will each report their own
income and deductions on separate returns.
These rules do not apply in community
property states. More information on
community property appears later in this
lesson.

Can Married Filing Separately filers


qualify for another status?
Note: This has been called
Qualified married taxpayers may qualify as “considered unmarried”.
“unmarried,” according to the IRS definition
of “unmarried,” even if they are not divorced Tell students that if the spouse
or legally separated. Such taxpayers may is temporarily away, but is
be able to use the Head of Household filing expected to return home, then
status. Filing as Head of Household may the taxpayer will probably not be
result in a lower tax than Married Filing considered “unmarried.”
Separately. Refer to the “What is Head of
Household: Can married taxpayers ever file
as Head of Household?” section of this

Lesson 4 - Page 5 of 18
lesson, to see if the “unmarried” definition
applies.

Why are taxes usually higher for Married


Filing Separately?

Special rules apply to taxpayers who file


Married Filing Separately. These generally
result in the taxpayer paying a higher tax.
For example, when filing separately:
x The tax rate is generally higher than These credits are discussed in
on a joint return. other lessons in this publication.
x Taxpayers cannot take credits for
child and dependent care expenses,
earned income, and certain adoption
and education expenses.
x Some credits and deductions are
reduced at income levels that are
half those for a joint return such as
the child tax credit, retirement
savings contribution credit, itemized
deductions, and the deduction for The taxpayer must find out from
personal exemptions. his/her spouse whether the
x One spouse (using the Married Filing spouse will be itemizing
Separately status) cannot claim the deductions or using the standard
standard deduction if the other deduction.
spouse (also using the Married Filing
Separately status) is itemizing
deductions on their return. Ask the students to locate this
list in the Publication 17, and
For the complete list of special rules see recommend that they note the
Publication 17: Filing Status: Married Filing page number.
Separately.

Are there special rules for taxpayers who


live in community property states? TaxWise Hint page 4-4:
Go to the Volunteer Resource
The income of taxpayers who lived in Guide under Tab 1, Starting
Arizona, California, Idaho, Louisiana, TaxWise. Find the appropriate
Nevada, New Mexico, Texas, Washington, section of the Main Information
or Wisconsin during the tax year and wish Sheet that addresses filing
to file separate returns may be considered status. Notice the questions
as separate income or community income asked of the taxpayer filing
for tax purposes. Each state has its own Married Filing Separately. If the
community property laws. taxpayer is in one of the

Lesson 4 - Page 6 of 18
See Publication 555, Community Property, community property states
for more information. mentioned on the form,
additional questions must be
answered. You may have to
complete a worksheet entitled
Allocation of Income for
Community Property Income.

Discuss whether your local tax


assistance program handles
If your local tax assistance program views community property issues. If it
community property tax laws for Married does, discuss Publication 555
Filing Separately filers as beyond the scope and the Allocation of Income for
of the program, refer such taxpayers to a Community Property Income
professional tax preparer. worksheet.

When Married Filing Separately, you must


enter the other spouse’s name and social
security number or ITIN on the return. This
is explained in Form 1040 Instructions for
line 3.

If filing jointly generally results in the


lowest total tax, why would married
taxpayers want to file separately?

Married taxpayers sometimes choose to file


separate returns when one spouse does not
want to be responsible for the other
spouse’s tax obligations. Or, in certain
cases, filing separately may result in a lower
total tax. For example, if one spouse has
high medical or miscellaneous expenses, or
large casualty losses, separate returns may
result in lower taxes because a lower
adjusted gross income allows more
expenses or losses to be deducted. Display Form 8379.
Challenge the volunteers to use
Another common reason taxpayers may the index to locate this
want to file as Married Filing Separately is information in the Publication 17,
to avoid an offset of their refund against the and recommend that they note
other spouse’s outstanding debt. This the page number.
includes things such as past due child
support, past due student loans, or a tax

Lesson 4 - Page 7 of 18
liability the current spouse incurred when
they were not married to each other. If a
taxpayer tells you he or she wants to file
separately, ask the taxpayer why they want
to elect this status. If a potential offset is
the reason, this is the perfect time to
educate the taxpayer about the possibility of
avoiding at least their share of the refund
offset and attaching a Form 8379, Injured
Spouse Allocation. See the Publication 17
Index, keyword: “Injured Spouse” for
additional information. The 8379
instructions are also very informative. This
form can be e-filed. See the list of community
property states earlier in the
Be aware of community property law lesson.
requirements; these laws may affect the
amount of tax owed by taxpayers living in
community property states.

What if a spouse has died during the tax


year? Ask students to locate this
information in the Publication 17,
Remember, taxpayers whose spouses have and recommend they note the
died during the tax year are considered page number.
married to that spouse for the entire year,
providing the surviving spouse has not
remarried. The surviving spouse is eligible
to file as Married Filing Jointly or Married
Filing Separately.

If the surviving spouse has remarried, he or


she must file either jointly or separately with
the new spouse. If the surviving spouse has
remarried, the deceased spouse’s filing
status would be Married Filing Separately. See the definition of Qualifying
Widow(er) below.
Determine the most advantageous filing
status for the taxpayer. Surviving spouses
who have a dependent child may be able to
use the Qualifying Widow(er) with
Dependent Child status in the two tax years
following the year of the spouse’s death.
This is discussed in a subsequent section.

Lesson 4 - Page 8 of 18
For information on signing a joint return if
one spouse has died, or cannot sign the
return, see Publication 17 Index, keyword:
Signatures.

Who is Head of Household?

Taxpayers may choose the Head of


Household filing status, if they:
x Are considered to be unmarried, but
are not a qualifying widow(er) with
dependent child on the last day of
the tax year, and
x Paid more than half the cost of
keeping up a home during the tax Note: College students often
year, and qualify as living in the home
x Had a qualifying person living in their even if they are attending school
home for more than half the year in another area.
(except for temporary absences such
as school) Stress that dependent parents
x For a married taxpayer “considered are not required to live with the
unmarried,” the taxpayer must also taxpayer.
have a child they claim as a
dependent. (Exception: if the only See the lesson on Dependency
reason the taxpayer is not claiming Exemptions in this Publication.
an exemption for the child is because
the non-custodial parent can claim
the exemption, this requirement is
met.)

Taxpayers may also choose the Head of


Household filing status if they are
considered unmarried and maintain a home
for their parent(s). This home must be the
principal place of abode for the parent(s),
but it does not have to be the same home
as that of the taxpayer. The parent(s) must
qualify as the taxpayer’s dependent(s).

Who is a qualifying person for Head of


Household status? Ask students to use the Who Is
a Qualifying Person Qualifying
Turn to the Volunteer Resource Guide You To File as Head of
under Tab B, Filing Status. Look at the Household? table in Publication
decision tree on the page titled 17 to answer this question:
Determination of Filing Status.

Lesson 4 - Page 9 of 18
Q: Alexandra’s younger brother,
Sebastian, is seventeen years
A qualifying person is defined as: old. Sebastian lived with some
x A Qualifying Child friends from January-February
x A married child you can claim as a of 2007. From March-July of
dependent 2007, he lived with Alexandra.
x A dependent parent August 1, Sebastian moved
x An “other relative” you can claim as a back in with his friends, with
dependent. whom he stayed for the rest of
x And for a married taxpayer, the the year. Since Sebastian did
qualifying person for Head of not have a job, Alexandra gave
Household must be their dependent him money every month.
child. (Exception: the non-custodial Assuming Alexandra had no
parent rule.) other dependents, can she file
as “Head of Household” for
2007?
A: No, because Sebastian only
lived with Alexandra for five
months, which is less than half
the year.

Stress that unrelated persons


may qualify as dependents, but
The footnote for an “other relative” clearly may not qualify the taxpayer as
states what “other relatives” meet the Head of Household. Also, a
criteria for Head of Household purposes. taxpayer may not be claiming a
These relatives must be dependents of the child as a dependent but the
taxpayer. child may still qualify the
taxpayer for Head of Household

Notice that the relatives that qualify a


person for Head of Household are not the
same relatives that could qualify a taxpayer
for a dependency exemption.
TaxWise Hint page 4-6:
Example page 4-6: When you get to Step 7 on the
Since Joan’s husband died 5 years ago, Interview Tips for Filing Status in
she has lived with her friend, Mary Ann. the Volunteer Resource Guide,
Joan is a U.S. citizen, single, lived with be sure to refer to the definitions
Mary Ann all year, had no income and of a qualifying person on the
received all of her support from Mary Ann. previous page if you have any
Mary Ann is a widow also. No one can claim questions.
Mary Ann as a dependent on their return.
Joan falls under the definition of a

Lesson 4 - Page 10 of 18
“qualifying relative” and Mary Ann can claim
Joan as a dependent on her return. For Head of Household, a
Qualifying Child does not have
However, Joan would not qualify Mary Ann to be a dependent of the
for Head of Household purposes, because taxpayer. (Exception: a married
she does not fall under the “other relative” taxpayer considered unmarried
definition stated in the Volunteer Resource for Head of Household
guide under Tab B, Filing Status. purposes.)

If the child is not the taxpayer’s


dependent, enter the qualifying
child’s name on line 4 of Form
1040 or Form 1040A. Only enter
one child’s name.

TaxWise Hint page 4-6:


Turn to Tab 1, Starting TaxWise
in the Volunteer Resource
Guide. Find the Main
Information Sheet that shows
the filing status section.
TaxWise requires you to enter
the child’s name and social
security number. Or
demonstrate this on TaxWise (if
available)

What are the advantages of filing as


Head of Household?

The Head of Household filing status


provides a higher standard deduction and,
generally, a lower tax rate than Single or
Married Filing Separately.

Can married taxpayers ever file as Head


of Household? Discuss this “considered
unmarried concept.
Married taxpayers may be considered
“unmarried” and file as Head of Household
if they meet the tests for married persons
living apart with dependent children.
Taxpayers are considered “unmarried” and

Lesson 4 - Page 11 of 18
can file as Head of Household if, on the last
day of the tax year they:
x File a return, separate from their
spouse, for the tax year. If a joint
return has been filed, the filing status
cannot be changed if the due date of
the return has passed.
x Have paid more than half the cost of
keeping up their home for the tax
year. See Publication 17: Filing
Status: Head of Household for the Note: The spouse is considered
Cost of Keeping Up a Home to have lived in the home even if
worksheet. temporarily absent due to
x Have lived apart from their spouse special circumstances, such as
during the entire last 6 months of the military service or education.
tax year. The spouse is considered This is very important for military
to have lived in the home even if VITA classes.
temporarily absent due to special
circumstances, such as military
service or education.
x Have provided their home as the
main home of their dependent child,
stepchild, adopted child, or foster
child placed by an authorized agency
for more than half the year. Certain
exceptions exist. To find details, see
Publication 17: Personal Exemptions
and Dependents: Exemptions for
Dependents: Children of divorced or
separated parents.

Taxpayers who are legally separated from


their spouse under a divorce or separate
maintenance agreement are considered
single. They can file as Single, or they might
qualify for Head of Household if they meet
all of the above rules.

A taxpayer who is married to a nonresident


alien spouse may be able to file as Head of
Household even though they have lived
together during the year. This information
can be found in the Military Filing Status
chapter.

Lesson 4 - Page 12 of 18
Who is a Qualifying Widow(er) with
Dependent Child?

A taxpayer, whose spouse died in one of


the two tax years prior to 2007 (either 2006
or 2005) and who has one or more
dependent children, may claim the
Qualifying Widow(er) with Dependent Child
status. To qualify, the taxpayer must:
x Be eligible to file a joint return for the
year the spouse died, regardless of
whether the taxpayer actually filed a
joint return that year.
x Have had a spouse who died in 2005
or 2006. The taxpayer must not have
remarried before the end of 2007.
x Have a child, stepchild, or adopted
child who qualifies as the taxpayer’s
dependent for the year.
x Have furnished over half the cost of
keeping up a home for
himself/herself and the qualifying
child for the entire year, except for
temporary absences.

In the year a taxpayer’s spouse dies, if the


taxpayer does not remarry, they can use the
Married Filing Jointly filing status with the
deceased spouse.

Taxpayers may be able to use the


Qualifying Widow(er) with Dependent Child
filing status for two years following the year
of death, provided they do not remarry.

The standard deduction and tax tables are


the same for Qualifying Widow(er) with
Dependent Child filing status as for Married
Filing Jointly filing status. These are more
favorable than those for Head of Household TaxWise Hint page 4-7:
filing status. Turn to Tab 1, Starting TaxWise,
and locate the Main Information
Example page 4-7: Sheet that includes the filing
Laura, whose husband Jim died in status section. For Qualifying
September of the tax year, has not Widow(er) filing status, you must
remarried, and provides all the support for enter the deceased spouse’s

Lesson 4 - Page 13 of 18
her two dependent children, ages 7 and 9. year of death on the TaxWise
Laura can file Married Filing Jointly, Main Information Sheet. There is
claiming an exemption for her deceased no place to enter the year of
husband. The next two years she can use death on a paper return.
the Qualifying Widow(er) with Dependent Stress that Qualified Widow(er)
Child status if she has not remarried. with Dependent Child filing
status is only for the years
AFTER the year in which the
spouse passes away. If the
spouse passed away in 2007,
another filing status must be
used.

How do I determine the correct


filing status? Page 4-8

To determine the best filing status, follow


Ensure that participants use the
the interview tips in the Filing Status section
resources in Tab B of their
of the Volunteer Resource Guide, Tab B.
Volunteer Resource Guides to
Then enter the filing status on the Interview
complete these exercises. It
and Intake Sheet.
may help to use both pages of
Tab B to determine filing status.
Use the Interview Tips under filing status in
This allows the volunteer to
the Volunteer Resource Guide to complete
double-check the filing status.
these exercises.

Exercises page 4-8:


Note: This answer talks the
class through the “process”
Question 1: Jane’s husband died in 2007.
Answer 1: Remember, if a
She and her husband qualified to file a joint
spouse died during the year,
return in 2006, but they did not. Jane’s
and the surviving spouse did not
children are grown and they maintain
remarry, the surviving spouse is
households of their own. She has not
considered to be married on
remarried. What filing status(es) can she
December 31 for filing status
use?
purposes.
x Single
You would answer YES to Step
x Married Filing Jointly 1. Because she was widowed in
x Married Filing Separately 2007 and has not remarried,
x Head of Household Jane can file as Married Filing
x Qualifying Widow(er) with Dependent Jointly or Married Filing
Child Separately. However, she is

Lesson 4 - Page 14 of 18
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 dependent
children. Note: The exercise
question stated they didn’t file as
Married Filing Jointly in 2006,
and this would be an opportunity
for you to use your interview
techniques to determine why
they didn’t. There might have
been circumstances that made it
more advantageous to file as
Married Filing Separately, and
those might still exist.

Question 2: Seth lives alone and has never Answer 2: Because he is not
married. What filing status(es) can he use? married and has no dependents
x Single living in his household, Seth can
x Married Filing Jointly only file as Single.
x Married Filing Separately
x Head of Household
x Qualifying Widow(er) with Dependent
Child

Question 3: Tanya’s divorce became final in Answer 3:


early September of the tax year. She has Because she is legally divorced,
sole custody of her three children, who lived Tanya can file as Single.
with her the entire year. The children are all However because she has
under the age of 19. She provided more children, she may be able to file
than half of the cost of keeping up the as Head of Household, which
home. What filing status(es) can she use? may result in a lower tax.
x Single
x Married Filing Jointly
x Married Filing Separately
x Head of Household
x Qualifying Widow(er) with Dependent
Child

Lesson 4 - Page 15 of 18
Exercises (continued) page 4-8
Answer 4:
Question 4: Sydney’s wife died in January Sydney can file as Single but he
of 2005. He filed a joint return for that year also meets the test for Head of
as the surviving spouse. In 2007, Sydney, Household and Qualifying
who has not remarried, still maintains a Widow(er) with Dependent
home for his young children all year, and he Child. Qualifying Widow(er) with
provides their sole support. What filing Dependent Child will likely give
status(es) can he use? him the lowest tax.
• Single
• Married Filing Jointly
• Married Filing Separately
• Head of Household
• Qualifying Widow(er) with Dependent
Child

Taxpayer Scenario Page 4-9


Look at the Intake and Interview Sheet for Direct students to graphic on
our taxpayer Vanessa Franklin. page 4-9 and to the Interview
Tips.

Which filing status should Vanessa


claim?

The Taxpayer Information and


Family/Dependent Information sections
show that Vanessa:
x Is married, but lives apart from her
husband
x Has two dependent children
x Provides a home for her mother

You’ll need to use the Interview Tips to help


obtain additional information, as shown in
this sample interview.

SAMPLE INTERVIEW page 4-10


Go through the Sample
Vanessa does not want to use the Married Interview page 4-10 with
Filing Jointly status, but if she chooses to students. You could team up
file Married Filing Separately, it may result students or ask two volunteers
in a higher tax. You decide to proceed with to role-play this interview.
the Interview Tips to see if Vanessa
qualifies for Head of Household, which may

Lesson 4 - Page 16 of 18
result in a lower tax than Married Filing
Separately. Continue through the sample
interview with students.
SAMPLE INTERVIEW (Continued)
page 4-10 Demonstrate with TaxWise (if
available).
Because Vanessa will file as Head of
Household, check the box for Head of Note: TaxWise Hint (this is not
Household status on the Main Information in the book) For Head of
Sheet in TaxWise or on her Form 1040. Do Household: if the child is not the
not enter the names of Vanessa’s children taxpayer’s dependent then enter
in the filing status section. Enter the the qualifying child’s name and
children’s names in the dependents section social security number in the
of the tax return. Remember, because she Filing Status section.
is married but “considered unmarried for Demonstrate with TaxWise if
Head of Household” purposes, at least one available.
of her children must be her dependent to
use this filing status.

Exercises: Answer 5: This answer takes the


students through the steps of
Question 5: An earlier question referred to the interview. The Interview
Sydney, whose wife died in January 2005. Tips say that he should use the
He filed a joint return for that year as the Qualifying Widow(er) with
surviving spouse. In 2007, Sydney, who did Dependent Child status. The
not remarry, maintained a home for his interview steps are:
young children, and he provided their sole • Step 1: No
support. We determined that he could file as • Step 5: Yes
Single or Head of Household. Go back to • Step 6: Yes
the Interview Tips and use them to identify
the recommended filing status for Sydney.
Outline the answers to the interview steps.
What filing status should he use?
• Single
• Married Filing Jointly
• Married Filing Separately
• Head of Household
• Qualifying Widow(er) with Dependent
Child

Lesson 4 - Page 17 of 18
Summary Page 4-11
Let’s review some of the critical points Provide a thorough review of
covered in this lesson. each of the items in the
summary, using examples from
class and your experiences

Consider asking the following as


a review:
Q: How does filing status impact
the tax return?
A: Filing status can impact:
• The amount of tax
• Credits
• Deductions

Remind students that it is very


important to determine the
correct filing status so that the
taxpayers pay no more tax than
is required.

If the students have teamed up,


remind them that the interview
continues after this text.

Lesson 4 - Page 18 of 18
Lesson 5: Personal Exemptions

Objective
Determine how many personal exemptions a taxpayer can claim.

Introduction
This lesson will help you determine how
many personal exemptions the taxpayer
can claim. Claiming the maximum number
of allowable exemptions will result in the
lowest tax for the taxpayer.

Personal exemptions are entered in the


Exemptions section of TaxWise and on
page 1 of the Form 1040 series. The
TaxWise entry screen is shown in the
Volunteer Resource Guide – Tab 1.

To determine the personal exemptions that


a taxpayer can claim, use the interview
techniques and tools discussed in the
Interview lesson. See Tab C in the
Volunteer Resource Guide for the Interview
Tips referenced in this lesson. They can
provide helpful probing questions.

What are exemptions? Page 5-1

An exemption is a dollar amount that can be


deducted from an individual’s total income, Dependent exemptions are
thereby reducing the taxable income. discussed in Lesson 6.
Taxpayers may be able to claim two kinds
of exemptions: TIP: The exemption amounts
x Personal exemptions allow taxpayers to are indexed for inflation and are
claim themselves (and their spouse, on generally updated every year.
a joint return)
x Dependent exemptions allow taxpayers
to claim qualifying dependents

Lesson 5 - Page 1 of 6
When can a taxpayer claim Page 5-1
personal exemptions?

To claim a personal exemption, the TIP: Always use the Interview


taxpayer must have answered “no” to the Tips decision tree in
critical data question, “Can you or your Publication 4012, Tab C to
spouse be claimed as a dependent on the determine the number of
income tax return of any other person exemptions each taxpayer can
for 2007?” claim.

This applies even if the other person does


not actually claim the taxpayer as a
dependent.

A taxpayer who could be claimed as a TIP: If someone else can claim


dependent must claim “0” exemptions. This the taxpayer as a dependent,
means they won’t be able to subtract the they cannot claim a personal
exemption amount from their gross income, exemption, but they can file for a
and they might have to use a smaller refund of any withholding.
standard deduction (Lesson 9 – Standard Page 5-3.
Deduction and Tax Computation).
Refer the student to view an
example of a taxpayer who
might be claimed by another
person as a dependent, see
Basic Exercise 1 (Ashley
Madison) in Publication 678-W.

When can taxpayers claim an exemption Page 5-2


for their spouse?

If married taxpayers file a joint return, they


can take personal exemptions for each
spouse. If they file separate returns, they
can each take a personal exemption for
themselves, as long as no one else can
claim them as a dependent.

A spouse is never considered the


dependent of the other spouse. However,
taxpayers may be able to take an
exemption for their spouse simply because
they are married.

Lesson 5 - Page 2 of 6
To claim a personal exemption for one’s TaxWise Hint: If the taxpayer is
spouse, the taxpayer must meet these married filing a separate return,
conditions: and is able to claim their
x Married as of December 31 of the tax spouse’s exemption, fill in the
year spouse’s name, SSN, and other
x Spouse cannot be claimed as a information in the TaxWise Main
dependent on another person’s tax Information sheet,
return Dependents/Non-Dependents
x Files a joint return, or files a separate section, showing the relationship
return and the spouse had no income as “other” and the Code as “3.”
and is not filing a return

What about a deceased spouse?

A taxpayer whose spouse died during the Remind the students:


tax year can generally claim the personal We discussed deceased
exemption for the deceased spouse if the spouses in lesson 4 on filing
taxpayer meets all of these conditions: status.
x Did not remarry by December 31 of the
tax year TIP: Taxpayers who are
x Was not divorced or legally separated divorced or legally separated at
from their spouse on the date of death the end of the tax year cannot
x Would have been able to claim the claim their (former) spouse as
exemption under regular circumstances. an exemption. A common-law
marriage is recognized for
federal tax purposes if it is
recognized by the state where
the taxpayers currently live or in
the state where the common law
marriage began. Legal advice
may be necessary to determine
if a common-law marriage
exists.

How do I determine how many


Page 5-2
personal exemptions a taxpayer
can claim?

The Interview Tips for Personal Exemptions


can help determine whether the taxpayer
can claim any personal exemptions. Take a
look at the Interview Tips within Tab C in
the Publication 4012. While you interview
the taxpayer, use these questions as a
guide to help you get the information you

Lesson 5 - Page 3 of 6
need from the taxpayer.

How do I enter the personal Page 5-2


exemptions?

On line 6a of the tax return, check the box TaxWise Hint:


next to “Yourself” if the taxpayer meets the TaxWise will auto-fill the entries
requirements for claiming themselves as an for lines 6a and 6b as well as for
exemption. “Number of boxes checked on
6a and 6b.” TaxWise
On line 6b, check the box next to “Spouse” automatically checks the
if the taxpayer meets the requirements for exemptions box for the taxpayer
claiming their spouse as an exemption. (and for their spouse if Married
Filing Jointly status is selected).
If the taxpayer is filing as Head of If someone else is entitled to
Household and claiming an exemption for a claim the taxpayer (or spouse),
nonresident alien spouse, check the box on check the appropriate box on
line 6c in TaxWise and enter the spouse’s line 6 of the Main Information
first name, last name, and SSN or ITIN. Sheet.

Taxpayer Scenario Page 5-3

Look at the intake sheet for our taxpayer Refer students to the scenario
Vanessa Franklin. As you recall, she is on page 5-3 and the sample
married, but lives apart from her husband, interview on page 5-4.
who also has an income.

Which personal exemptions can


Vanessa claim?

The Intake and Interview Sheet shows that


neither Vanessa nor her spouse can be
claimed as a dependent on someone else’s
tax return. TaxWise automatically checks
the “Yourself” box on line 6a of Vanessa’s
tax return.

For line 6b, Vanessa says she is not sure if


she can claim an exemption for her spouse.

Therefore, you decide to use the Interview Guide students to the use of the
Tips for Personal Exemptions under Tab C Interview Tips for Personal
of the Publication 4012. Exemptions under Tab C of
Publication 4012.

Lesson 5 - Page 4 of 6
Because Vanessa cannot claim her Reminder: Vanessa:
husband as an exemption, you will leave x Was still married on
him off the return, leaving the box on line 6b December 31, 2007
unchecked. x Did not live with her
husband.
TaxWise automatically enters “1” for x Is not filing jointly with him
“Number of boxes checked on 6a and 6b.” x Her husband had his own
income.

Taxpayer Example Page 5-4


Ray Jackson is a widower whose wife died Ask for volunteers from the
during the 2007 tax year. Ray’s intake sheet students to role play the
shows the following responses. example page 5-4.

Which personal exemptions can Ray claim?

Use the Interview Tips for Personal Reminder:


Exemptions within Tab C in x Ray’s Spouse died in
Publication 4012 to help you complete lines February, 2007
6a and 6b on his tax return. Here’s how the x He did not remarry
conversation might sound: x He will file this final joint tax
return
x Ray is no one’s dependent

Because Ray can claim himself and his late TaxWise Hint:
wife as exemptions, you will enter both their You must also go to Name
names and SSNs in the Main Information Line 2 in the U.S. address area
screen in TaxWise. TaxWise automatically at the top of the Main
checks the boxes on lines 6a and 6b and Information screen and enter the
enters “2” for “Number of boxes checked on name of the person filing the
6a and 6b.” return for the deceased person.
This may be the surviving
You will also enter the Date of Death under spouse if the filing status is
the spouse in the Taxpayer Information Married Filing Jointly or a
area of the Main Information screen in personal representative such as
TaxWise. If you are preparing a paper an executor, administrator, or
return, write “Deceased” along with the anyone who is in charge of the
deceased spouse’s name and Date of deceased taxpayer’s property.
Death across the top of the return. Once
you complete the Date of Death in TaxWise, When you print the return,
the program will automatically print that TaxWise prints the date of death
notation. and DECD next to the deceased
person’s name in the address

Lesson 5 - Page 5 of 6
area at the top of Form 1040
page 1, as required by the IRS.
Finally, Ray left critical data question 13
blank on his Intake and Interview Sheet.
During the interview, the volunteer asks this
question and finds that neither Ray nor his
wife could be claimed as a dependent on
another person’s tax return. Once this
determination is made, the volunteer should
check the “No” box for question 13. By
notating the Intake and Interview Sheet, the
volunteer will know that the issue has been
addressed, and so will the quality reviewer.

Summary Page 5-5


Can anyone name the two types of Review each of the bulleted
exemptions and give a brief definition of items and discuss as necessary.
each?

Can anyone tell me where the exemptions Remind students that we will
are claimed on the tax return? discuss dependents in Lesson 6.

Lesson 5 - Page 6 of 6
Lesson 6: Dependency Exemptions

Objective
Determine how many exemptions a taxpayer can claim for dependents.

Introduction
This lesson will help you determine how Refer students to Form 13614
many exemptions a taxpayer can claim for Part II Family and Dependent
dependents. Claiming the maximum Information. Stress importance
number of allowable exemptions will result of verbally reviewing all the
in the lowest tax for the taxpayer. information in Part II with the
taxpayers.
TaxWise determines the taxpayer’s
dependency exemptions based on the
Dependents/Nondependents information
entered on the TaxWise Main Information
sheet.

Use the interview techniques and tools


discussed in the Screening and Interviewing Refer to Publication 4012,
lesson as well as the decision trees in Tab C.
Publication 4012. They contain helpful
probing questions.

The results of your interview are Refer to Form 13614 page 2


documented on Page 2, Part III, of the Part III once dependents are
Intake and Interview Sheet. This information determined. Advise participants
will be the basis of your entries in TaxWise. to ask taxpayer all questions.

Who are dependents?

Will someone read the information on page Have someone else read the Tip
6-1? page 6-1:

A taxpayer can claim one exemption for Reiterate a dependent is neither


each qualified dependent, thereby reducing the taxpayer nor taxpayer’s
the taxable income. spouse, even if he/she has no
income or does not provide any
support.

Lesson 6 - Page 1 of 18
Who may be claimed as a Page 6-1
dependent?

A dependent may be either a “Qualifying Advise students two methods for


Child” or a “Qualifying Relative.” The determining if dependent is
requirements for both have much in qualifying child or qualifying
common, but there are some tests that are relative will be covered in detail.
specific to Qualifying Child or Qualifying
Relative.

In addition to the tests specific to Qualifying


Child and Qualifying Relative, all of the
following tests must be met for both:
• Dependent taxpayer test
• Joint return test
• Citizen or resident test

Avoid using information from the taxpayer’s


prior year documents to complete this Remind the students situations
section. change and prior year
information can be out of date

How do I apply the dependency


tests? Page 6-2

The Intake and Interview Sheet addresses Advise students Form13614


the issues concerning dependency, but you Part II is completed by the
will still need to use your interview skills to taxpayer but the Dependency
clarify whether the individuals listed are test must be applied to each
eligible to be claimed as dependents. dependent.

Select a student to read the Tip


on page 6-2.

Tab C of Publication 4012 will help with Note: Always refer to interview
probing questions to verify information on tips or decision tree when
the Intake and Interview Sheet. The two determining if person can be
alternate methods for applying the claimed as a dependent.
dependency tests are the Interview Tips
and the Can You Claim an Exemption for a
Dependent? decision tree.

Does it matter which method I use?

The Interview Tips provide more guidelines Refer to Publication 4012 tab C

Lesson 6 - Page 2 of 18
and definitions to help you along. Only the
Interview Tips incorporate all the exceptions
allowed for the Support Test. Use the
Interview Tips for the Support Test if the
dependent is:
ƒ A child with divorced or separated
parents, or
ƒ Supported by two or more people who
together provide more than half the
dependent’s support (Multiple Support)

The decision tree is a quicker method for


more experienced volunteers. You can use
the decision tree, but you will also need to
refer to the Support Test Only –
Custodial/Noncustodial Parents (Table 3,
Tab C) of Publication 4012.

Method 1: How do I use the Page 6-2


Interview Tips?
One way to apply the dependency tests is
to refer to the Interview Tips for each
dependency test.

What are the tests for Qualifying


Children?

Begin by applying the rules for a Qualifying Refer to Publication 17 for more
Child. If these tests are not met, then you detail.
can continue on to the tests for a Qualifying
Relative. Remember, a dependent may be
either a Qualifying Child or Relative to be
claimed as a dependent.

Relationship

Let’s review step one of the Interview Tips Direct the students attention to
in Publication 4012, Tab C. Tab C Interview Tips in
Publication 4012.

Have someone read


“Relationships at bottom of page
6-2. Discuss relationships –
child, niece/nephew, adopted.

Lesson 6 - Page 3 of 18
Read and discuss “Age” on
page 6-3.

Age Review the Tip on page 6-3


regarding age. Go over the
example.

Read and discuss “Support on


page 6-3.

Support Have a different student read


the example regarding support.

Refer to Publication 17 for valid


expenses.

Review the support examples if


time allows.

Residence

The child must have the same principal Stress qualifying child must live
residence as the taxpayer for more than with taxpayer for more than ½ of
half the year. The child can be out of the the year. 183 days for 2007
home for temporarily absents due to special
circumstances such as education, illness, Discuss temporary absents.
vacation, business, or military service. Give examples i.e. school,
illness, military service.

Special Exceptions for the Residence


Test

Example page 6-3: Hugh’s daughter died Discuss death and kidnapping
on January 15 of the tax year. If she met all as it relates to the residence
the dependency tests up until her death, test.
Hugh can claim an exemption for her on his
return.

A taxpayer may not claim dependency Ask if there are questions


exemptions for a housekeeper, other relative to these exceptions.
household employee, or for a stillborn child.
Refer to the Personal Exemptions and Advise students that child
Dependents chapter of Publication 17 for cannot be stillborn.

Lesson 6 - Page 4 of 18
detailed information regarding the residency Review this example if time
test. allows.

Special rules that apply to custodial and This is a special exception to the
non-custodial parents will be discussed Residency Requirement
later in this lesson.
Ask participants to locate this
chapter in their Publications 17.

Additional Rules
Once the first four tests are met then we
proceed to several more. You will find later
when we talk about Qualifying Relatives
that the next five steps will also apply.

U.S. Citizen or Resident


Step 5 is Do not confused this step with Clarify the difference between
being a member of the household. To pass US Citizen and Resident.
the residency test, the dependent must be Volunteer should ask: “Who is
either a U.S. citizen or resident of the U.S., child living with?” and “Is child a
Canada or Mexico. US Citizen?”

If a U.S. taxpayer legally adopts a child who Note: Children are usually
is not a U.S. citizen or resident, this test is citizens or residents of the
met as long as the child lives with the country in which their parents
taxpayer as a member of the household all are citizens. So, if either parent
year. is a U.S. citizen, a child born in a
foreign country can be
Foreign exchange students generally are recognized as a U.S. citizen for
not U.S. residents and do not meet the tax purposes.
citizen or resident test.

Example page 6-4: Joan, who is a U.S.


citizen, adopted an infant boy from
Cambodia who has lived with her for the
entire tax year. Even though Joan’s child is
not yet a U.S. citizen or resident, he meets
the Citizen or Resident Test because he
was a member of Joan’s household for the
entire year.

Joint Return
Let’s look at steps 6 and 7 in the Interview Page 6-4
Tips of Publication 4012. To pass the joint
return test, the dependent must not file a
joint return for the year, unless:

Lesson 6 - Page 5 of 18
ƒ The joint return is filed only to claim a
refund of taxes withheld, and
ƒ No tax liability would exist for either
spouse on separate returns

Example page 6-4: Have someone read the


example at the bottom of the
page 6-4.

Qualifying Child of More Than One Page 6-5


Person

Review step 8 and the associated footnotes Note: Taxpayers are allowed to
in Publication 4012. It is possible for a child choose who can claim the
to meet the Qualifying Child tests for more exemption, but this choice may
than one taxpayer, but the dependency affect who can receive other tax
exemption can only be claimed on one tax benefits that require a Qualifying
return. Child.

Explain about young military


members who may still be their
parent’s dependent.

Discuss the exception that


applies if there is no tax liability
for either spouse on a separate
return.

Let’s take a look at Exercise 7 (Jessica Refer the students to Exercise 7


Ellsworth) in Pub. 678-W. Jessica Ellsworth in Publication
678W. If time permits, go
through this exercise with the
participants.

If the Qualifying Child is actually claimed on Discuss the idea of these tie-
more than one tax return in a given year, breaker rules. If taxpayers
the IRS will apply the “tie-breaker rules” cannot decide who will claim the
listed within Tab C in Publication 4012. qualifying child, IRS will decide.

Dependent Taxpayer Select a student to read the


paragraph and then discuss.

Advise the students to always


ask “Can your parents or
someone else claim you or your

Lesson 6 - Page 6 of 18
spouse as a dependent on their
return?” If someone “can” then
they cannot claim themselves
(or others) regardless if the
person actually “did” claim them
as a dependent.

What are the tests for Qualifying Page 6-5


Relatives?

Dependents who do not meet the first few Discuss Qualifying Relative
tests for Qualifying Child could meet slightly rules. Relationship, Residency,
different tests and be a Qualifying Relative. Gross Income, Support, and
Joint Return.

Let’s turn to Table 2: Dependency Refer to Publication 4012,


Exemption for Qualifying Relative of the Interview Tips, Step 1.
Interview Tips in Publication 4012, Tab C.

Relationship or Member of Household: Note: Dependent can meet


The dependent must be related to the relationship test and not live in
taxpayer (or spouse on a joint return) in one taxpayer household.
of the ways listed in step 1.
Note: A close relative may not
Would someone read Example page 6-5? have to live in the same house
to meet the test.
An unrelated person can also meet this test
by being in the household all year An Unrelated person must live in
regardless of relationship. If the relationship household for entire year.
violates local laws, this test is not met. For Interview techniques are needed
example, if the taxpayer’s state prohibits here.
cohabitation, then that person cannot be
claimed, even if all other criteria are met.

Would some read the notes that apply to Note: Relationship by marriage
unrelated persons on page 6-6 and let’s does not end in divorce or
discuss each as we read? death.

Point out differences between


qualifying child and qualifying
relative:
The Interview Tips, steps 1 and 2, for QC – No income test
Dependency Exemptions can help you QR – No age test
determine if a person passes the Qualifying
Relative Member of Household or
Relationship test.

Lesson 6 - Page 7 of 18
Qualifying Child of Another Taxpayer Page 6-6
Step 3 of the Interview Tips states that an Advise the students that a
individual cannot be claimed as a person cannot be a qualifying
dependent as a Qualifying Relative if they relative if already a qualifying
meet the tests to be another taxpayer’s child of another taxpayer.
Qualifying Child for the tax year, even if that
other taxpayer is not claiming them as a
dependent.

Special rules that apply to custodial and


non-custodial parents will be discussed
later in this lesson.

Example page 6-6: Discuss this example with


Would some read the example regarding students.
Todd on page 6-6?

U.S. Citizen or Resident


This is the same as the general rule for
dependents. It applies to both Qualifying
Child and Qualifying Relative.

Gross Income Page 6-7


Step 5 of the Interview Tips addresses the Note: This rule only applies to
gross income test. The dependent’s gross qualifying relative.
income for the tax year must be less than
the personal exemption amount ($3,400 for Refer to Publication 17.
2007). Gross income is defined in
Publication 17, Personal Exemptions and
Dependents.

Will someone read the first example page Review first example on 6-7.
6-7?

Support
Step 6 addresses support. The taxpayer Note: This is another difference
must have provided more than 50% of the between qualifying child and
dependent’s total support for the tax year. qualifying relative.

When calculating the amount of total Tip page 6-7: Publication 17


support, taxpayers should compare their contains a worksheet for
contributions with the entire amount of determining support.
support their dependent received from all
sources (such as taxable income, tax-
exempt income, and loans). Review valid Have the students find the list.
support expenses listed in Publication 17.

Lesson 6 - Page 8 of 18
Let’s look at the second example on page Review this example with
6-7. students as time permits.

Example three on page 6-7: Review this example with


Steve provided $4,000 toward his mother’s students.
support during the year. His mother had
earned income of $600, nontaxable social Have students refer back to the
security benefit payments of $4,800, and worksheet in Publication l7.
tax-exempt interest of $200. She used all of
these for her support. Steve cannot claim a
dependency exemption for his mother
because the $4,000 he provided was not
more than half of her total support of
$9,600.

Social Security benefits received by a child Read the second Tip on page
and used towards support are considered 6-7.
provided by the child.

Multiple Support Agreements Page 6-8

Multiple support means that two or more Note: Only one person can
people together, who could claim the provide more than half, but see
person as a dependent except for the the exception to the rule here.
support test, provide more than half the
dependent’s support. However, only one
taxpayer can claim the exemption for a Tip page 6-8:
dependent with Multiple Support. The taxpayers who provide
Individuals who provide more than 10% of Multiple Support for a dependent
the person’s total support can agree that decide among themselves who
one of them can take the person’s will take the exemption for the
exemption. Step 10 will guide you in asking year. Volunteer tax preparers do
if the taxpayer has the appropriate not decide.
documentation.

The Form 2120 or similar statement must Hand out Form 2120, Multiple
be attached to the return. The other Support Declaration.
supporting taxpayers must sign this written
statement agreeing not to claim the Note: Multiple Support
exemption for that year Agreements apply only to a
Qualifying Relative.

Stress this applies to qualified


relative only.

Lesson 6 - Page 9 of 18
Let’s read the examples on page 6-8. Ask students if anyone has any
question regarding either
example.

Joint Return
To pass the joint return test, the dependent This general rule applies to both
must not file a joint return for the year, qualifying children and relatives
unless: and was previously discussed.
ƒ The joint return is filed only to claim a
refund, and
ƒ No tax liability would exist for either
spouse on separate returns

Use steps 11 and 12 of the Interview Tips in


Publication 4012 to help determine if the
dependent meets the joint return rules.

Dependent Taxpayer Page 6-9

As a volunteer you will always ask “Can Refer students to Tab C in the
your parents or someone else claim you or Volunteer Resource Guide
your spouse as a dependent on their tax
return?”

If a taxpayer can be claimed as a Restate this. If you are a


dependent by another person, the taxpayer dependent you cannot claim a
may not claim anyone else as a dependent, dependent.
even if the taxpayer has a Qualifying Child
or Qualifying Relative.

Special Rule for Children of Divorced or Distribute Form 8332.


Separated Parents
Let’s find Table 3 in our Publication 4012 Assign someone to read the
behind Tab C. These rules also apply to Caution on page 6-9.
parents who were never married. These
rules clarify which parent can claim a
mutually qualifying child that may or may
not live with but one parent.

In general, the child will be considered a Remind students that the


dependent of the custodial parent, if they Support Test for Children of
meet all the rules for a Qualifying Child. The Divorced or Separated Parents
custodial parent can agree to allow the is described in detail in
non-custodial parent to treat the child as a Publication 17.
Qualifying Child for two benefits only.

Lesson 6 - Page 10 of 18
Method 2: How do I use the Page 6-9
decision tree?

A quicker way for more experienced Tip: Note that the general rules
volunteers to apply the dependency tests is that apply to both Qualifying
to refer to the Can You Claim an Exemption Child and Qualifying Relative
for a Dependent decision tree within Tab C are listed at the top of the
in Publication 4012. decision tree. It then goes on to
apply the specific rules for each
type of dependent.

What about the support test exceptions?

Remember, the decision tree does not Note: The exceptions are in the
incorporate the exceptions allowed for the last block of the decision tree
Support Test. For those exceptions you and refer you back to Table 3 on
may also need Table 3 of Publication 4012. the previous page.

How do I enter the exemptions? Page 6-10

What goes in the TaxWise


Dependents/Non-dependents section? Display TaxWise (if available),
TaxWise determines the taxpayer’s otherwise use the images in
dependency exemptions based on the Publication 4012, Tab 1.
information entered on the TaxWise Main
Information screen.

Verify all the family and dependent


information before entering the following Remind the students to verify
data into the Dependents/Non-dependents and update the Intake sheet for
section of TaxWise. Let’s review the the quality review process.
required fields within Tab 1 in 4012:
ƒ Individuals’ first and last names Use the last name on the Social
ƒ Individuals’ birth dates (MM/DD/YYYY) Security Card.
ƒ Individuals’ social security numbers
(SSNs or ITINs) – be sure to physically Note: Most errors on paper and
verify with the actual documentation, e-filed return relate to mis-
such as a social security card matched names and SSN’s.
ƒ Relationship to the taxpayer
ƒ Number of months each individual lived
in the taxpayer’s home or use MX if the
dependent lived in Mexico or CN if the
dependent lived in Canada

ƒ Codes for dependents and non- Refer to the tip on page 6-10
dependents – select the correct and have someone read.

Lesson 6 - Page 11 of 18
dependent code from the drop-down list. Note: The dependent codes
correspond to the applicable
List non-dependents only if they are boxes on Form 1040 and
Qualifying Children for the Earned Income 1040A.; box 6c1 - children who
Credit or Dependent Care Credit. lived with you; box 6c2 –
children who did not live with
you due to divorce or
separation; 6c3 – number of
dependents not listed above.

Note: Be sure to check the


TaxWise Hints page 6-11: box(s) if the Dependent Care
TaxWise offers context-sensitive help for Credit and/or Earned Income
the current field. Credit apply to any individual.

Show the keyboard shortcut for


help, if performing a TaxWise
demonstration. (F1 key for
TaxWise help, Shift+F1 key for
IRS instructions)
Would someone please read the first tip
about entering dependents in TaxWise and
let’s discuss each one as we go?

Does anyone have any questions?

Taxpayer Example Page 6-11


Elaine Smith has one Form W-2 from her
Review this example with
clerk job of 36 years. She has been
students.
divorced from her husband for over 20
years. She is the main provider for her two
Note: See the Student Guide
grandchildren and two of her grown sons,
starting on page 6-11 for the
who live with her. Her sons worked odd jobs
examples of the Forms and
and earned about $4,000 each. They are
Decision Trees.
not disabled. The grandchildren are not the
children of the sons that live with her. She
would like to file a tax return and claim her
sons and grandchildren as dependents.
Go through the steps with the
How do I apply the dependency tests to
class to determine the
Elaine’s sons?
dependent status of each of the
persons.
Let’s using the decision tree to apply the
test to each of Elaine’s sons and
Demonstrate with TaxWise if
grandchildren.
available.

Lesson 6 - Page 12 of 18
Taxpayer Scenario Page 6-13
Let’s take a look at the intake sheet for our Refer students to Vanessa’s
taxpayer Vanessa Franklin. As you recall, intake sheet Family and
Vanessa is married, but lives apart from her Dependent Information is shown
husband, and has two children. Her mother on the top of page 6-14.
also lives with her. She was employed as a
sales associate in a retail department store
for the entire tax year. She also had her
own cosmetics business. Her husband was
employed as a cook for most of the tax
year, but collected some unemployment
compensation.

Now let’s apply the dependency tests to Have the students work
Vanessa’s children? independently and compare
results when finished.

The special rules of divorced or separated Discuss the SAMPLE


parents do not apply in this situation since INTERVIEW page 6-15:
they lived with her 12 months. You will find
additional help in Pub. 17 or your 4012 if
needed.

How do I determine the amount of


support Vanessa provided her mother, Page 6-15
Annabelle?

Would someone volunteer to read the


paragraph regarding Annabelle?

How do I determine Annabelle’s income?


Vanessa reveals that although her mother
receives nontaxable social security, her
taxable income (from a small pension) is
less than the exemption amount ($3,400 for
2007). Q. Does this mean she passes the A. Not necessarily.
Support test?
See the list of expenses and
totals. Her mother provided
more for her own support.
All five qualifying relative tests are not met,
so Vanessa cannot claim an exemption for
her mother. Remember to document your
findings on Vanessa’s Intake and Interview
Sheet.

Lesson 6 - Page 13 of 18
As you gain comfort with using the process
you may find the Interview Tips work better Remind the students about the
at times. It is probably easier to show the importance of updating the
taxpayer how you reached your decision intake sheet as part of the
using the Decision Tree. quality review process.

Since Vanessa cannot claim dependency Note: The volunteer should


exemption for her mother, notation should also complete Part III of the
be made to the Intake and Interview Sheet Intake and Interview Sheet,
for the Qualify Reviewer that will follow your noting that Vanessa did not
determinations. provide more than 50% of her
TaxWise will use this information to mother’s support, and only two
calculate Vanessa’s exemption deduction. dependents could be claimed.

Summary Page 6-17


Important points: Ask the class if they can now
ƒ One of the most important decisions you define “qualifying child” and
make as a volunteer is adding a “qualifying relative.”
dependent to a tax return.
ƒ Always use the tools provided as every Ask if they can identify
situation is different. differences between qualifying
ƒ Never assume even that three children child and qualifying relative.
in the same family are the same.
ƒ Look at source documents for matching
dependent names and SSN’s.
ƒ Always inquire about the potential for
someone else to claim a child, as this
can create delays in refunds being
processed.
ƒ Many other factors stem from
exemptions such as: Dependent Care
Credit, Child Tax Credit, that child’s
education credit, or medical expenses.

Filing Status and Exemptions Page 6-17


Practice:
If time permits have students
This section gives you practice applying work independently, in pairs, or
what you have learned so far. You will as part of a larger group to
review the taxpayer’s Intake and Interview complete this practice exercise.
Sheet, as well as the interview between the
taxpayer and a volunteer. You will complete Review the graphic of Janet’s
the Exemptions section of Form 1040 and Form 13614 on page 6-17 with
check your work. You will also find taxpayer.

Lesson 6 - Page 14 of 18
questions throughout this lesson. Try
answering each one, and then compare
your responses with the correct answers at
the end of the lesson.

Use Publication 4012 for probing questions,


and refer to Publication 17 if you need more
information.

Did the taxpayer complete the Page 6-18


Intake and Interview Sheet?
Q1: page 6-18: A1: No, the taxpayer left blank a
Is the information complete? question about living with her
husband during the last six
months.

Is the filing status information Page 6-19


complete?
The volunteer notices that Janet did not Read the Sample Interview on
provide complete information about her page 6-19.
marital status. Without that information,
Janet’s filing status is unclear. At this point,
the volunteer gets more information by
using the Interview Tips for filing status and
personal exemptions:

Is the personal exemption


information complete? Page 6-19

Q2 page 6-19: A2: No, the volunteer doesn’t


Based on the Interview Tips and on the have enough information to
information the taxpayer provided, do you discover if Janet can claim a
have enough information to decide if she personal exemption for her
can claim a personal exemption for herself husband. Although the volunteer
and for her husband? covered some of the questions
□ Yes □ No presented in the Interview Tips,
the volunteer needs to ask the
rest of the questions.

Lesson 6 - Page 15 of 18
Q3: If you answered “no,” what additional A3: The volunteer needs to
information would you need? determine if the spouse had any
income, or if anyone else can
claim the spouse as a
dependent.

Let’s continue with the sample interview. See the Sample Interview that
starts on page 6-20. This
interview concerns Loretta.

Is the dependency exemption Page 6-20


interview complete?
The volunteer asks Janet about each child’s
information. The volunteer turns to the
decision tree for dependency exemptions in
the Exemption section of the Volunteer
Resource Guide. Here are the questions
the volunteer asks Janet about Loretta:

Q4: Did this interview give you enough


information to decide if the taxpayer can A4: No, the interview was
claim an exemption for her daughter? incomplete.
□ Yes □ No

Q5: If your answer is “no,” what additional A5: The volunteer needs to
information would you need? address the level of support to
make the correct decision. Did
the daughter provide more than
50% of her own support? The
taxpayer must determine what
percent of the total amounts she
spent, and compare that with
what her daughter provided for
her own support.

The volunteer realizes the Interview Tips for


the Dependency Exemption cannot be
completed without determining the level of
support. After determining total support they
must determine percentages.

The volunteer helps Janet complete the Refer to class to the worksheet
Worksheet for Determining Support from in Publication 17.
Publication 17. Together they determine
that the daughter provided more than 50%

Lesson 6 - Page 16 of 18
of her own support for 2007.

Q6: Can Janet claim a dependency A6: No, Janet’s daughter


exemption for her daughter? provided more than 50% of her
□ Yes □ No own support.

The volunteer can now complete Part III of Stress updating the intake sheet
the Intake and Interview sheet. The for the quality review process.
volunteer already determined that the
taxpayer will file Married Filing Separately,
so the box for MFS should be checked. The
volunteer should also note that Loretta
provided more than 50% of her own
support, so the quality reviewer will know
why Loretta is not being claimed as a
dependent. On line 7, the volunteer will
write “1” since only the son, Rodney,
qualifies as a dependent.

How do I complete the exemptions Page 6-21


section of the return?
By now, you should have reviewed and
confirmed the filing status and dependency
determinations from the taxpayer’s intake
sheet and the interview questions.

To transfer the information to the TaxWise Demonstrate with TaxWise if


Main Information screen, Exemptions available otherwise refer to
section, complete lines 6a through 6c of the Publication 4012 Tab 1
Exemptions section and the “TaxWise Main Information
Dependents/Non-dependents section. The Screen.”
“Code” entry gives the software information
about the relationship between the
dependent and the taxpayer. Choose
carefully, as this code will impact how the
software treats the dependent for some
credits. The checkboxes for Dependent
Care (DC), Earned Income Credit (EIC),
and Child Tax Credit will also impact tax
credits that you will learn about in later
lessons. TaxWise will carry this information
to page 1 of Form 1040, completing lines 6a
through 6d.

Lesson 6 - Page 17 of 18
On a paper return, you complete lines 6a
through 6d by hand. When listing
dependents on line 6c, you will check the
box in column (4) to indicate if the
dependent is eligible for the Child Tax
Credit.

The Filing Status and Exemptions section of See the graphic at the bottom of
your Form 1040 should look like the graphic page 6-21.
on page 6-21.

Lesson 6 - Page 18 of 18
Lesson 7: Military Unique Filing Status & Exemption Situations

Objective
Determine unique filing status issues you may encounter when helping service
members whose spouses are nonresident aliens (not U.S. citizens or permanent
resident aliens).

Introduction

Keep in mind that a person is considered


married no matter where in the world they Remind the students that we
were married. It does not matter if one covered filing status in Lesson 4
spouse is living in another country. The and exemptions in
person who is the resident alien/citizen still Lessons 5 & 6.
must follow tax rules for married persons.

Nonresident aliens can be students,


teachers, trainees, and/or undocumented
immigrants. Your role is to determine if
nonresident aliens can be treated as
resident aliens for tax purposes. If they can,
all tax rules (with certain exceptions) that
apply to U.S. citizens apply, including filing
status and exemption issues. Resident
aliens and U.S. citizens must report
worldwide income on their tax return.

Filing a tax return as a resident alien does


not affect the person’s immigration status in
any way.

This lesson also covers exemption issues


related to taxpayers who want to claim an
exemption for:
x A nonresident alien spouse who
does not qualify to be a resident
alien for tax purposes, and/or
x Nonresident alien stepchildren

Lesson 7 - Page 1 of 18
Tax situations involving nonresident aliens Refer to the Intake and Interview
can be complex. If the taxpayer has a J, Q, sheet.
F, or M visa, ask the Site Coordinator if
there is a volunteer who is certified to
prepare these types of returns.

If there isn’t a certified volunteer at the site Remind the students that some
or if you are faced with a situation not taxpayers need professional tax
covered in this lesson, refer the taxpayer to help.
a professional tax preparer.

Citizen, resident alien, or Page 7-1


nonresident alien?
Let’s begin by looking at the Intake and
Interview Sheet. Locate the part of the form Refer to the Form 13614 in the
where taxpayers and/or their spouses Volunteer Resources Guide
indicate whether or not they are U.S.
citizens or resident aliens. In another part of
the form, taxpayers indicate citizenship or
residency of family members and
dependents.

For individuals who are not citizens or


resident aliens, you must determine if the
person can be treated as a resident alien
for tax purposes before continuing. An
individual must meet at least one of the
following tests to be considered a resident
alien for tax purposes:
x Green Card test
x Substantial Presence test

What is the Green Card test?

Individuals who were lawful permanent


residents of the U.S. at any time during the
tax year are resident aliens. These people
have been given the privilege, according to
immigration laws, of residing permanently in
the U.S. They receive alien registration
cards, commonly known as a “green cards,”
attesting to this status. Green cards are
approximately the size of driver licenses.
They are no longer green in color, but still
hold the name. Most green card holders

Lesson 7 - Page 2 of 18
have valid social security numbers and
must follow the same tax laws as U.S.
citizens, including the requirement to report
worldwide income on their tax returns.

More information about green card holders


is available in Publication 4588, Basic Tax
Guide for Green Card Holders, found at
www.irs.gov.

What is the Substantial Presence test?

This test is based on a formula of days and


years a person is physically present in the
United States. If individuals do not have
green cards, this test will determine if they
can be treated as resident aliens for tax
purposes.

Page 7 of the Volunteer Resource Guide


reprints the decision tree, Nonresident Alien Direct students’ attention to the
or Resident Alien? from Publication 519, appropriate page in the
U.S. Tax Guide for Aliens. This decision Volunteer Resource Guide
tree is used to determine if an alien is a
resident alien or nonresident alien for tax Use the “decision tree” of the
purposes. Volunteer Resource Guide

Use the Nonresident Alien or Resident


Alien? decision tree to determine an
individual’s residency status.

Example page 7-2:


PFC Gloria Benton’s husband, Dante, does Show how days are calculated;
not have a green card or a visa. Dante does 2007: 150 days. 2006
not have a tax home in another country. He 1/3 of 150 = 50 days 2005
was physically present in the U.S. for 150 1/6 of 150 days= 25 days.
days in each of the years 2005, 2006, and Total days= 225 days.
2007. Is Dante a resident alien under the
Substantial Presence test for 2007?

The decision tree indicates that Dante does


meet the Substantial Presence test and is Refer to first TIP on page 7-2:
considered a resident alien for tax If a person’s visa has expired or
purposes. the person is not complying with
the requirements of the visa,
then that person is not an

Lesson 7 - Page 3 of 18
2007: 150 days. 2006: 1/3 of 150=50 days exempt individual and cannot
2005: 1/6 of 150 days=25 days. exclude those days they are
Total days=225 days. physically present in the U.S.

Who is exempt from the Substantial


Presence test?

Remember, we are looking at the Refer to TIP 2 and explain


Substantial Presence test to tax people as most VITA sites do not prepare
resident aliens. People who are in the U.S. returns for individuals with F, J,
on valid F, J, M or Q Visas, for example, are M or Q valid visas.
usually considered exempt from the
Substantial Presence test.

For individuals with valid visas, do not count


the days present in the U.S. for purposes of
the Substantial Presence test. In general,
these people will be considered nonresident
aliens for tax purposes. Other examples of
exempt individuals include:
x Nonresident aliens with medical
conditions that prevent them from
leaving the country, and
x Certain commuters between the
U.S., Canada and Mexico

Publication 519 has more detailed


information on who is an exempt individual.

What if a nonresident alien meets the


Substantial Presence test?

Nonresident aliens who meet the Explain the Caution on page 7-


Substantial Presence test are treated as 3. An individual with an ITIN
resident aliens for tax purposes. is not entitled to the Earned
Income Credit. This will be
No paperwork or documentation is needed covered in the Earned Income
to indicate that a person is a nonresident Credit lesson.
alien filing as a resident alien under the
Substantial Presence test.

All persons listed on the return must have


either a valid social security number or an
ITIN. ITINs are discussed in the Filing
Basics lesson.

Lesson 7 - Page 4 of 18
Refer to TIP on page 7-3.
If the taxpayer will be applying for an ITIN, A return with an ITIN can be e-
you may prepare the return. Follow the filed. A return missing an ITIN
instructions in the Volunteer Resource cannot be e-filed.
Guide under Tab 1, Starting TaxWise.
The section is entitled, Apply for an ITIN.
This section will also instruct you on how to
advise the taxpayer to file the return and
application.
Local Taxpayer Assistance
IRS Taxpayer Assistance Centers or Centers can be found by using
acceptance agents can help the taxpayer http://www.irs.gov/localcontacts/
complete Form W-7 or Form W-7SP. Most
acceptance agents, other than the IRS,
charge a fee for this service.

For more information about acceptance


agents, see Publication 4393, What is an
IRS ITIN Acceptance Agent. You can find
this publication and more information about
acceptance agents on www.irs.gov,
keyword “acceptance agent.”

Use the Nonresident Alien or Resident


Alien? decision tree to determine if a person
meets the Substantial Presence test.

Example page 7-3


Sgt. Paul Kingman and his wife, Gabriella, Use the “decision tree” of the
were married at the end of 2007. Volunteer Resource Guide.
Gabriella does not have a green card or a
valid visa. They have no children and are Gabriella’s Calculation:
not supporting anyone else. 2007: 120 days
2006: 1/3 of 120 days= 40 days
2005 :1/6 of 120 days= 20 days
180 days

Gabriela lived in the U.S. for 120 days in Ask does Gabriella meet the
2007 (from September to December) as a Substantial Presence test?
nonresident alien. She was also in the U.S. The answer is NO.
for 120 days in each of the years 2005 and Address the answer after
2006. Gabriella does not have a tax home following the decision tree.
in another country. Does Gabriella meet the
Substantial Presence test?

Lesson 7 - Page 5 of 18
Following the decision tree, you find that
Gabriella does not meet the Substantial
Presence test. For tax purposes, she is
considered a nonresident alien.

2007: 120 days: 2006: 1/3 of 120 days=40


days 2005 :1/6 of 120 days=20 days

The total days she can take into


consideration are 180.

What if an unmarried nonresident alien


does not meet the Green Card or
Substantial Presence test?

Refer individuals who do not meet either the


green card or Substantial Presence test to a Remind students of the concept
certified volunteer or professional tax and importance of staying within
preparer to file Form 1040NR or Form 1040 scope
NR-EZ. You may want to notate this
information on page 7 of the Volunteer
Resource Guide; Form 1040NR and Form
1040 NR-EZ are outside the scope of the
VITA program.

Can we assist a married couple Page 7-4


when a spouse does not qualify to
be treated as a resident alien using
the Green Card or Substantial
Presence test?
Yes! Married couples in this situation have a
few options when it comes to filing a tax
return. Gabriella, wife of Sgt. Paul Kingman,
does not meet the Substantial Presence
test and does not have a green card.

Follow the decision tree to the box that says


“You are a nonresident alien for U.S. tax
purposes.” At this point, you determine the
filing status for Sgt. Kingman.

As a citizen married to a nonresident alien


spouse who does not meet either the Green
Card or Substantial Presence test, Sgt.

Lesson 7 - Page 6 of 18
Kingman has four filing status options:
1. The citizen/resident alien can file
as Married Filing Separately
2. The couple may chose to file as
Married Filing Jointly
3. The citizen or resident alien
spouse may qualify for Head of
Household under the regular rules for
a married person who is considered
unmarried for Head of Household
purposes
4. The citizen/resident alien may
qualify to file as Head of Household,
even while living with the nonresident
alien spouse

In the Volunteer Resource Guide, under


Tab B, follow the filing status Interview Tips.
Discuss Sgt Kingman’s situation
Using Sgt. Kingman’s situation: using the Volunteer Resource
Step 1 - he answers “yes” Guide, under Tab B, follow the
Step 2 - he could answer “no” if he does not filing status Interview Tips.
want to file a return with his spouse
Step 3 - he answers “no”

Sgt. Kingman’s filing status is Married Filing


Separately.

Who can file a joint return?


Explain taxpayers can choose to
Even though Gabriella does not pass the treat the nonresident alien
Green Card test or the Substantial spouse as a resident for tax
Presence test, it is possible for this married purposes. Remind students
couple to file a joint return. The couple can about worldwide income.
choose to treat the nonresident alien
spouse as a resident alien for tax purposes.
This information can be found in Publication
519, U.S. Tax Guide for Aliens.

How does a couple choose to be treated as


U.S. residents?

If the nonresident alien spouse agrees to


file a joint return, worldwide income must be
reported, and a signed declaration is
attached to the return stating:

Lesson 7 - Page 7 of 18
x Both people qualify to make the
choice to be treated as U.S.
residents for the entire year
x The name, address, and SSN or ITIN
of each spouse

Can resident alien status be suspended?


The choice to be treated as a resident alien
is suspended in any later tax year if neither
spouse is a U.S. citizen or resident alien at
any time during the tax year.

How does a couple end elected resident


alien status?
This section covers reversing
Either spouse may revoke their U.S resident the choice.
status for any tax year for personal reasons.
It may also be ended because of death,
divorce, or legal separation. The IRS may
end it if it is determined that inadequate
records have been kept to calculate the
correct tax liability. Publication 54, Tax
Guide for U.S. Citizens and Resident Aliens
Abroad, provides more information related
to ending resident alien status. See Table
1- 1 entitled Ending the Choice. Once it is
ended, neither spouse can make the choice
to be treated as U.S. residents for tax
purposes in any later tax year.
Refer to the TIP on page 7-5.
Let’s go back to the filing status Interview Make a note by step 2 that, if a
Tips with Sgt. Kingman and his wife. spouse is a nonresident alien,
Step 1 - he answers “yes” the taxpayer can still make the
Step 2 - after you explain the choice choice declaration.
option, he answers “yes”

Now, the Kingman’s’ filing status is Married


Filing Jointly.

Example page 7-5:

Even though Gabriella, Sgt. Paul Kingman’s


nonresident alien wife, does not pass the
Substantial Presence test, they both agree
to choose to treat Gabriella as a resident
alien by attaching a signed statement to

Lesson 7 - Page 8 of 18
their joint return.

Paul and Gabriella must report their See the note about future
worldwide income for the year and for all separate returns
later years unless the choice is ended or
suspended. Although Paul and Gabriella
must file a joint return for the year they
make the choice, they may file either joint or
separate returns for later years.

EXERCISES page 7-5 Have your students go through


this exercise.
Question 1:
Turn to Military Exercise 15 (Carpenter) in Answer 1:
Publication 678-W. Presume the Presuming that Maria arrived in
Carpenters moved to the U.S. in October, the U.S. in October, she does
2007. not meet the Substantial
Presence test.
Does Maria pass the Substantial Presence
test?

Can the Carpenters elect to file a joint However, as a married couple


return? If yes, how do they make this with one spouse who is a U.S.
choice? citizen or resident alien, they
can choose to file a joint return.
They will attach a declaration to
their return that states:
x Both people qualify to
make the choice and
Maria chooses to be
treated as a U.S. resident
for the entire year
x The name, address, and
SSN or ITIN of each
spouse

Filing as Head of Household Page 7-5


As you learned in a previous lesson,
married taxpayers can be considered
unmarried and claim Head of Household
status if they have not lived with their
spouse for the last six months of the year,
and if they meet a few other requirements.

Follow the filing status Interview Tips in the

Lesson 7 - Page 9 of 18
Volunteer Resource Guide to see if the
citizen spouse qualifies to file as Head of
Household.

Can citizens or resident aliens who live with


their nonresident alien spouse ever file as
Head of Household? Explain the exception to the
rules for Head of Household.
Yes. There is an exception that allows U.S.
citizen and resident alien spouses who live
with nonresident aliens to file as Head of
Household. All of the following requirements
must be met:
x The taxpayer is a U.S. citizen or
resident alien for the entire year and
meets all the “considered unmarried”
rules for Head of Household except
for living with the nonresident alien
spouse
x The nonresident alien spouse does
not meet the Substantial Presence
test
x The nonresident alien spouse does
not choose to file a joint return

Go through the exercise with the


students. Use Tab B, filing
EXERCISES (continued) page 7-6 status, in the Volunteer
Resource Guide. Gloria and
Dante started back on page 7-2

Answer 2: Gloria can file as


either Married Filing Jointly or
Question 2: Married Filing Separately. Since
Gloria’s husband, Dante, meets the Dante meets the Substantial
Substantial Presence test. Gloria is a U.S. Presence test, he is a U.S.
citizen. They do not have any children and resident alien for tax purposes.
do not support anyone else. Dante is He and Gloria can file as
applying for an ITIN. Gloria has an SSN. Married Filing Jointly, or they
They live together. Dante meets the can both file as Married Filing
Substantial Presence test and is treated as Separately. Dante must follow
a resident alien for tax purposes. Refer to the U.S. tax laws since he is
Tab B, filing status, in the Volunteer considered a resident alien.
Resource Guide.
What filing status options does Gloria have
for 2007? Answer 3: Yes.

Lesson 7 - Page 10 of 18
Raul can claim Head of
Question 3 page 7-6: Household status since his
Raul is a U.S. citizen and serving in the spouse is a nonresident alien,
U.S. Army in Japan. His wife and his she does not choose to file a
children live with him and he is able to claim joint return with him, and Raul
the children as dependents. Raul’s wife, a meets the other qualifications for
citizen of Japan, chooses not to be treated Head of Household. If Raul had
as a resident alien for tax purposes. She not met the other qualifications
does not want to file a joint return with him. for Head of Household, he
would have to file as Married
Raul meets all of the other qualifications for Filing Separately.
Head of Household. Even though he is
married and living with his spouse, can he
claim Head of Household status?
 Yes  No Answer 4: Yes.

Question 4 page 7-6:


Let’s review Military Exercise 15
(Carpenter) in Publication 678-W. We are
presuming that Mrs. Carpenter came to the
U.S. in October and determined that she TIP page 7-6:
does not meet the Substantial Presence In the Volunteer Resource
test. If she does not wish to file jointly with Guide, turn to tab B, Filing
her husband, could he file as Head of Status. Notate the fact that, if a
Household, presuming he meets the spouse is a nonresident alien,
considered unmarried rules and can claim the living apart rule does not
his child as a dependent? apply to the citizen spouse. You
will also find this information in
Publication 17, under Head of
Household, nonresident alien.

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. Taxpayers who are considered


unmarried for Head of Household purposes
(because they are married to a nonresident
alien) are still considered married for
purposes of the Earned Income Credit.
Taxpayers are only entitled to the credit if

Lesson 7 - Page 11 of 18
they file a joint return and meet the EIC
qualifications.
Page 7-6
Personal Exemptions
Direct students to the personal
Can the citizen/resident alien spouse claim exemptions decision tree in the
the personal exemption of the nonresident Volunteer Resource Guide,
alien spouse when the nonresident alien under tab C.
spouse does not meet the Substantial
Presence test and does not choose to file a
joint return?

Turn to the personal exemptions decision TIP page 7-6:


tree in the Volunteer Resource Guide under In this situation, the 2007 1040
tab C. Use the Interview Tips to see if the Instructions say to enter “NRA”
citizen spouse can claim the personal on line 4 (Head of Household
exemption of the nonresident alien spouse. status) of Form 1040. When
It does not matter if the citizen spouse is preparing a paper return for
filing as Married Filing Separately or as such a nonresident alien
Head of Household. Make a note on step 6 taxpayer, also write “no” on the
that, for a nonresident alien spouse, income dotted line next to line 66a
is defined as U.S. - sourced income only. All (Earned Income Credit) of Form
the other rules apply as stated. To clarify 1040.
Step 6, the person cannot be claimed as a
dependent of another on a U.S. tax return.

Example page 7-7:


Remember Raul, the U.S. citizen who is Note: Raul’s wife chooses not to
serving in the U.S. Army in Japan? His wife file a joint return.
and children live with him and he is able to
claim the children as dependents. Raul’s
wife, Japanese citizen, chooses not to file a
joint return with him. Raul can claim his
wife’s personal exemption as long as she
has no U.S. source income, she is not
anyone else’s dependent, and has an ITIN
or SSN.

Example page 7-7:


Major Tom is a U.S. citizen. He married
Anna, a Korean citizen, in 2007, but came
back to the U.S without her. Anna is still in
Korea getting her paperwork in order. She
did not choose to file a joint return with him.
Major Tom is filing as Married Filing
Separately. Anna has no U.S.-sourced

Lesson 7 - Page 12 of 18
income and cannot be claimed as a
dependent on anyone else’s U.S. tax return.
She has an ITIN for now. Major Tom can
claim her personal exemption on his tax
return.
Page 7-7
How do I enter the filing status into
TaxWise?
Turn to Tab 1, Starting TaxWise in the Display TaxWise (if available) or
Volunteer Resource Guide. Find the Main refer students to Volunteer
Information Screen screen shots. Notate on Resource Guide Main
the appropriate pages how to claim the Information Screen screen shot.
nonresident alien spouse’s personal
exemption for each of these situations.

Find the page with the filing status section.


If the taxpayer is filing as Married Filing Refer to TIP on page 7-7. When
Separately, go to the line that says Married preparing a paper return for a
Filing Separately and fill in the spouse’s taxpayer who is filing as Married
name and SSN or ITIN. Now find the Main Filing Separately, claim the
Information Sheet screen shot that shows exemption by checking box 6b
the dependents/nondependent section. List (spouse’s exemption) of Form
the spouse’s name, date of birth and SSN 1040. Enter the name of the
or ITIN and write “other” in the relationship spouse in the space to the right
column. Enter the number of months, if any, of the box. Enter the ITIN or
the spouse lived in the home. Enter “3” in SSN of the spouse in the space
the code column. A “3” means all other provided at the top of Form
dependents. 1040. This is where the
spouse’s SSN or ITIN would be
entered if a joint return was
being filed.
If the taxpayer is filing as Head of
Household and claiming the nonresident
alien spouse’s personal exemption, go to
that line in the filing status section of the
Main Information Sheet. Check the Head of
Household box. On the Main Information
Sheet, under “exemptions,” check the box
under 6(c) that states that you are using
filing status 4 and claiming an exemption for
a nonresident alien spouse. Enter the
person’s name and TIN in the space
provided. Do not enter the person again in
the dependent/nondependent section of the
Main Information Sheet.

Lesson 7 - Page 13 of 18
Dependency Exemptions Page 7-7

Can a taxpayer claim a dependency


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

Children born overseas to U.S. citizen


parents are considered to be U.S. citizens
for tax purposes. A child can be claimed as
a dependent as long as all the other rules
for qualifying child or qualifying relative are
met. Refer students to TIP at top of
page 7-8. While applying for the
The birth of a child abroad should be Consular Report of Birth,
reported as soon as possible for the parents should also apply for a
purpose of establishing an official record of social security number and
the child’s claim to U.S. citizenship at birth. passport for their child. Without
Form FS-240, Consular Report of Birth, a social security number, the
establishes official evidence that the child is parents will not be able to claim
a U.S. citizen. the child as a dependent or take
advantage of credits, such as
the Earned Income Tax Credit or
the Child Tax Credit, even if all
of the other prerequisites are
met.

Example page 7-8:


Sgt. Patricia Spencer, a U.S. citizen, is
married to Gilberto, a nonresident alien from
Spain. Their daughter, Eva, was born in
Spain, where they live.

Eva is entitled to U.S. citizenship. Her


mother should check with the military office
for information on reporting the birth of the
child so Eva will be recognized as a U.S.
citizen. Eva will need a social security
number to be claimed as a dependent on
her mother’s tax return.

Can a foreign-born stepchild be claimed as


a dependent?

Lesson 7 - Page 14 of 18
If a child is a nonresident alien, before Have students use the decision
addressing the dependency exemption tree in the Volunteer Resource
question, it is necessary to confirm the Guide under Dependency
child’s U.S. residency status for tax Exemption for Qualifying Child.
purposes. Turn to the Nonresident Alien or
Resident Alien decision tree in the
Volunteer Resource Guide.

Example page 7-8:


Sgt. Summers, a US citizen, is married to a
German citizen whose 3 children are also Read the example. Use the
German citizens. The children do not have decision tree to show why Sgt.
green cards Sgt. Summers has not adopted Summers cannot claim the
the children. They all live in Germany. children.

Follow the decision tree. The children do


not have green cards and were not
physically present in the U.S. during the tax
year. They are nonresident aliens for tax
purposes.

Now turn to the Interview Tips under


Dependency Exemption for Qualifying
Child. Step 5 asks, Is the person a U.S.
citizen, U.S. national, or a resident of
Canada or Mexico? The answer is “no.”
The children do not meet the citizenship
test. Sgt. Summers cannot claim the
children as dependents.

What if Sgt. Summers adopted the


stepchildren?

If Sgt. Summers adopted the stepchildren


and they lived with him all year, even
though they are still not citizens of the U.S.,
Sgt. Summers could answer “yes” to the Refer to TIP at bottom of page
citizenship test. If all the other rules were 7-8. An adopted nonresident
met for a qualifying child or qualifying alien child must live with the
relative, he could claim the adopted taxpayer all year to pass the
nonresident alien children as dependents citizen or resident alien test.
on his tax return. Of course, the children
would have to obtain SSNs, ITINs, or ATINs
to be claimed on his tax return.

Lesson 7 - Page 15 of 18
An Adoption Taxpayer Identification
Number (ATIN) can be obtained when a
domestic adoption is pending and other
rules are met. An ATIN can be obtained in Guide students to the section in
the case of a foreign adoption when the Publication 17.
child already possesses a green card or a
certificate of citizenship (a form claiming
citizenship because a child was born
overseas to a U.S. citizen).

See Publication 17 under the Citizen or


Resident test in Chapter 3 for more
information, including who is considered a
U.S. national.

EXERCISES (continued) page 7-9:

Question 5: Discuss the answers to


Sgt. Summers moves his family to the U.S. questions 5 & 6.
in January. The stepchildren are still not
U.S. citizens and they do not have green Answer 5:
cards. Can he claim the stepchildren as Sgt. Summers’ stepchildren are
dependents on his tax return? considered resident aliens for
tax purposes.
Since they are nonresident aliens, you must
first determine their residency status. Do He would answer “yes” to step
the children meet the Substantial Presence 5, the citizen/resident test. As
test? If they do, how would Sgt. Summers long as the other requirements
answer step 5 of the Dependency for qualifying child or qualifying
Exemption for Qualifying Child Interview relative are met, Sgt. Summers
Tips? can claim the stepchildren as
dependents on his tax return.
Question 6 page 7-9: They have to obtain SSNs or
Sgt. John Ramsey, a U.S. citizen who has ITINs.
been in the U.S. Army for 13 years, is
stationed in Germany. His wife is a German Answer 6: A. Sgt. Ramsey can
citizen who has never lived in the U.S. Their claim one dependency
two-year-old son was born in Germany. Sgt. exemption for his son on his
Ramsey’s stepdaughter, a German citizen joint return. The son qualifies as
whom Sgt. Ramsey has not adopted, also a U.S. citizen because his father
lives with them. The Ramseys provide total is a U.S. citizen. The
support for the two children. How many stepdaughter does not meet the
dependency exemptions can Sgt. Ramsey U.S. citizen or resident test. A
claim on a joint return? spouse is never considered a
dependent, although Sgt.

Lesson 7 - Page 16 of 18
Ramsey may be able to take her
personal exemption.

Summary Page 7-9

Before filing a tax return, U.S. citizens Re-enforce what filing status
married to non-citizens must determine options are available for U.S.
what filing status options are available and citizens married to non-citizens.
whether the non-citizen spouse will be
treated as a resident alien for tax purposes Remind students to use the
or as a nonresident alien? decision tree to determine
residency status of a non-
To determine the residency status of a non- citizen.
citizen, use the Nonresident Alien or
Resident Alien decision tree in the Remind students of the green
Volunteer Resource Guide. card or substantial presence
test.
Resident aliens follow the same tax laws as
U.S. citizens. Nonresident aliens follow Remind students when a U.S.
another set of tax laws, most of which are citizen or resident alien may
outside the scope of the VITA/TCE claim the non-resident alien
program. spouse’s income.
A married couple, where a citizen or
resident alien is married to a person who Remind students that a child
does not meet the Green Card or born to a U.S. citizen is usually a
Substantial Presence test, still has the U.S. citizen even if born in
option of making the choice to treat the another country.
nonresident spouse as a resident alien and
file as Married Filing Jointly. Re-iterate the rules regarding
non-resident alien stepchildren.
If the nonresident alien spouse does not
meet the Green Card or Substantial
Presence tests and does not choose to file
a joint return, under certain circumstances,
the U.S. citizen or resident alien can file as
Head of Household even though the couple
lives together.

A U.S. citizen or resident alien may claim


the nonresident alien spouse’s personal
exemption as long as the spouse:
x Had no U.S.-sourced income
x Cannot be claimed as a dependent on
someone else’s U.S. tax return, and
x Has a TIN

Lesson 7 - Page 17 of 18
A U.S. citizen’s child is usually a U.S.
citizen by birth, even if the child is born in
another country.

A nonresident alien stepchild who does not


meet the Green Card or Substantial
Presence tests cannot be claimed as a
dependent of the U.S. citizen or resident
alien because the child does not pass the
citizenship test.

An adopted nonresident alien child can


usually be claimed as a dependent of a
U.S. citizen or resident alien if the child lives
with the U.S. citizen the entire year.

Lesson 7 - Page 18 of 18
Lesson 8: Income - Wages, Interest, Etc.

Form 1040, Lines 7 - 11

Objective
Determine what income is taxable and what is specifically excluded by law as
well as what income is earned and which is unearned. Determine how to
correctly report income on a tax return.

Introduction
This lesson will help you determine a
taxpayer’s income that is reportable on
his/her tax return. You will begin to learn
how to complete the income section on
Form 1040, lines 7 through 22. We will be Refer to the chart shown on
covering lines 7 through 11 in this lesson. page 8-1. Briefly go over what
sections will be covered in the
The chart on Pg. 8-1 shows what line you course you are instructing.
use to report each type of income on Form
1040. It also shows which income topics will Stress the importance of
be covered at each certification level. volunteers preparing only
returns within the scope of their
Note that some types of income are not certification.
included in this training at any certification
level. Have students get out the Intake
and Interview Sheet and the
As you can see, Income is a very big topic. Volunteer Resource Guide
You will want to have all tools and reference
materials at hand as you work through each
tax return.

Income Overview Page 8-2

Before we get started working with reporting


income on a return, let’s define some terms.

Q: What is income? Solicit answers from students


before giving the answer

A: According to Section 61 of

Lesson 8 - Page 1 of 14
the Internal Revenue Code,
gross income means all income
from whatever source derived,
unless specifically excluded or
exempted by law.

Q: Can anyone think of an example of A: Gifts, inheritances, TANF,


excluded income, i.e. income that you do workers comp, etc.
not need to report on your tax return?

What are types of excluded or exempted


income?

Exempted income is like excluded income, Refer to income chart in the


in that you don’t have to pay tax on it, but Volunteer Resource Guide
you may have to report it on your return, (Income Tab D) for examples of
e.g. tax-exempt interest. excludible and reportable
income.
What are types of reportable income?

Earned income – any income accumulated Discuss/question to confirm


by personal effort, such as wages or students understand the concept
business income reported on Schedule of earned/unearned income
C/C-EZ or Schedule F
Note that the earned/unearned
Unearned income – any income produced income concept will be important
by investments, such as interest on savings, later in the training, especially
dividends on stocks, rental income, or most when learning about EITC.
pension income.

How is taxable income calculated on a


tax return?

There are several more income terms used Point out terms on F1040
on Form 1040: “total income”, “adjusted (TaxWise or paper). Briefly go
gross income (AGI)”, and “taxable income”. over how each is calculated or
have students read How is
taxable income calculated on a
tax return?, student guide, Pg.
8-2.

How do I get started? Page 8-3

The first step to determining a taxpayer’s Form 13614, Part IV


income is to discuss and review the Income,

Lesson 8 - Page 2 of 14
section of the Intake and Interview Sheet Have students take out the
with the taxpayer. Intake and Interview Sheet and
the income section... Briefly go
over each line.

If using the IRS Intake and


Interview form remind students
that because Part IV is on Pg. 2,
it must be completed by a
certified volunteer in conjunction
with an interview.

Q: Can anyone think of an example of an A: Look for examples of probes


interview question you might pose to the that address specific types of
taxpayer to complete/review the income income and/or income that is not
section? documented on Form W-2 or
1099.

Emphasize the importance of


probing for all income and
documenting any unusual items
with notes in the margins of the
Intake and Interview Sheet.

Many kinds of income are reported on a Note that not all income is
variety of information forms and documents reported on an information
depending on the source. In addition to return.
completing Part IV of Form 13614, you will
need to ask the taxpayer to show you all Stress that careful review and
Form(s) W-2, Form(s) 1099, and others input of information
statements reporting income. returns/income documents will
help prepare an accurate return.

Form 1040, line 7: Wages, Salaries, Page 8-3


Tips, etc.
We will now go through each type of income
and learn how to report it on the tax return.

Q: How many of you have ever received a A: Show of hands


Form W-2?

Form W-2 is the document that employers Refer to Pub 678W, for

Lesson 8 - Page 3 of 14
must have available for their employees by examples of Form W-2 or to the
January 31. Most employers use a Form W-2 for Vanessa Franklin
standardized form. found in the appendix.

Q: What are some of the things that are A: Wages, tips, compensation,
reported on the Forms W-2 examples you FIT, Social Security tax,
are looking at? Advanced EITC, Employer
Identification Number, etc.

You can see that there is a lot of


information on Form W-2 beyond just how
much an employee was paid. It is important
that the taxpayer has all Forms W-2 with
him/her when you prepare his/her tax
return.

What if the taxpayer has not received the


Form W-2 by January 31?
Have students read the section.

Stress that F4852 should only


be prepared as a last resort.
Taxpayers must attempt to
contact the employer to get their
Form W-2.

Entering Form(s) W-2 into TaxWise.

Let’s take a look at some of the tools Refer to the Volunteer Resource
available to help you enter income correctly Guide, yellow TaxWise Income
on the tax return. tab, income chart.
Ask students to find FW-2.
This chart will help you identify what kind of
income is reported on common information
returns and how to report it. Go over each line in student
guide, Pg. 8-4, Entering Form(s)
Look at the Volunteer Resource Guide, Tab W-2 into TaxWise. (Paper sites
2, and find the page titled How/Where to should skip this activity.)
Enter Income. Have students follow along in
the Volunteer Resource Guide,
TaxWise Income Tab 2.
Demonstrate on TaxWise if
available

Lesson 8 - Page 4 of 14
Q: How do you enter Form W-2 in A: Link for Form W-2
TaxWise?

Now study the page titled Form W-2


Instructions:

Review the six boxes with statements on Confirm students have located
the top of the TaxWise Form W-2. the six statements starting with
“Check if this W-2 is
handwritten…”

Q: What do you do if boxes 3, 4, 5 and 6 on A: Check the fifth box and enter
Form W-2 do not match box 1 of Form W- data exactly as it appears on
2? Form W-2.

Q: What if an address on Form W-2 is A: Check the third box and enter
different than the taxpayer’s correct data exactly as it appears on
address? Form W-2.

Q: Is it important to reproduce Form W-2 A: Yes, IRS requires that


exactly as it appears? information on electronically filed
Form W-2 matches the printed
Form W-2.

Once you enter all Form(s) W-2 into Note that TaxWise also
TaxWise, the program automatically reports automatically carries necessary
the total on line 7 of Form 1040. information for credits,
deductions, withholding, etc.
from Form(s) W-2 to other
sections of the tax return.

Entering Form(s) W-2 information when


preparing a paper Form 1040. Advise paper filing sites of the
affected lines on the Form 1040
for reporting the income.

Tip Income Have the student read the Tip


Income section and discuss.

Refer to the Intake and Interview


Sheet, Part IV

Q: If the taxpayer indicated that he/she A: Did you report all your tips to
received tip income (the Intake and your employer? Did you receive
Interview Sheet, Part IV, item 6) what more than $20 a month? Do you

Lesson 8 - Page 5 of 14
follow-up questions might you want to ask? have a record of the amount you
received?

Note that additional info should


be noted in the margins of the
Intake and Interview Sheet.

We also want you to be comfortable using


Publication 17, the primary resource you will
have at your site if you have questions
about the taxability of different kinds of
income. Let’s do a quick exercise.

Scenario: In your interview with a taxpayer,


he says that he worked as a bell-hop for just
few days and received tips totaling $18
during one month. He did not report them to
his employer. You can’t remember whether
you should include this amount in income,
so what do you do?

Look in the index of Publication 17. Hold up Publication 17 and have


participants take out their copy.

Q: On what pages will you find information A: Identify pages in current Pub
about tip income? 17 (Note that main topics are in
bold with sub-topics listed
below.)

You’ve found the answer to the question: Have participants turn to the
“All tips you receive are income and are appropriate page and read the
subject to federal income tax.” first sentence of the first
paragraph under Tip Income,
Introduction.

Allocated Tips
Have students read section and
discuss where it’s reported.

Q: On what pages of Publication 17 would A: Identify pages in current Pub


you find specific information about allocated 17
tips?

Lesson 8 - Page 6 of 14
Other W-2 Income

The term, “household employee” refers to Stress that a return preparer will
one who works in someone’s home correctly determine this income
performing household duties such as caring only by interviewing the taxpayer
for children, cleaning, or cooking. and noting it on the Intake and
Interview form...
Generally, if a taxpayer, working as a
household employee, earned less than Refer to the Volunteer Resource
$1,500 a year while working in the Guide Tab 2, How/Where to
employer’s home, the employer is not Enter Income for a TaxWise
required to provide the taxpayer with Form screenshot of where to enter this
W-2. The income, however, must be income.
included on line 7 of the taxpayer’s Form
1040.

Are scholarships and fellowships


taxable income?

Scholarships and fellowships may be fully,


partially, or non-taxable. Taxable amounts
include:
x Payment for services
x Money used for personal living
expenses, such as room and board

If the taxpayer received Form W-2 for the


scholarship or fellowship, include the
information on Form 1040, just as you
would for any other Form W-2. This income Refer to Appendix A, page 4 for
is included in the total on line 7 of Form a copy of Form 1098-T.
1040.

Educational institutions issue F1098-T to The main purpose of F1098-T is


report scholarships, fellowships and to report qualified expenses for
qualified tuition expense. education credits. Scholarships
and grants exceeding qualified
If, in your review of F1098-T, scholarships expenses is an indication of
and grants (Box 5) exceeds qualified tuition income, but do not prove it.
and related expenses (Boxes 1 or 2), probe
the taxpayer to determine if the excess was
spent on non-qualifying expenses. Refer to the Volunteer Resource
Scholarships and grants spent for room and Guide Tab 2, How/Where to
board or other personal living expenses are Enter Income for a TaxWise

Lesson 8 - Page 7 of 14
taxable. screenshot of where to enter this
income. Note that TaxWise will
Taxable scholarship or fellowship is automatically make the proper
reported on line 7 of F1040. If the taxpayer notation on the return if the
did not receive a W-2, write “SCH” on the income is entered in this field.
dotted line next to line 7.

Are distributions from Educational


Savings Accounts, such as Coverdell Have student read the section
ESA and 529 plans taxable? and discuss.

Q: What question should you ask to A: Were all distributed funds


determine if any amount shown on F1099-Q used for qualified educational
is taxable? expenses?

Stress that if any portion of


amounts reported on F1099Q
are taxable, the return is beyond
the scope of VITA/TCE and
must be referred to a
professional tax preparer.

What about income on Form 1099-MISC?

Generally, you do not report income from a


1099-MISC on Form 1040, line 7. Several
types of income reported on 1099-MISC,
e.g. non-employee compensation, prizes,
and awards will be covered in later lessons.
Some types of income reported on 1099-
MISC, e.g. rents and royalties are generally
beyond the scope of VITA/TCE. Rental
income is only taught at the
military/international level.

Form 1040, Line 8: Interest Income Page 8-8

Common sources of taxable interest income


are checking and savings accounts,
certificates of deposit (CDs), savings
certificates, U.S. government bonds,
interest on insurance proceeds, and loans
that the taxpayer makes to others.

Where will you get information about

Lesson 8 - Page 8 of 14
interest income? Have a student read the four
bullets aloud. After each of the
first three, instruct class to look
at resource materials as follows:

x Form(s) 1099-INT from institutions that x Review example of Form


pay interest on bank accounts. 1099-INT in P678W.

x If the taxpayer cashed in Series EE or x Look in the index of P17 and


Series I bonds, they should have a form find the page number for the
1099-INT from the bank. Most taxpayers for the Interest Income
don’t report savings …see Publication 17 section. (A: Page in current
under Interest Income. Pub 17)

x If the taxpayer has Series HH bonds, x Find the place on the Intake
they receive interest twice a year. Ask and Interview Sheet where
the taxpayer for the bank statements you would note that a
reporting the interest received. taxpayer had interest income.
(A: Part IV, item 3)
x Ask if the taxpayer holds any loans or
seller-financed mortgages.

What interest income is tax-exempt?


Allow time for students to read
Certain types of interest are exempt from this section.
federal income tax.
Note that careful review of 1099-
INT or other interest income
document should answer most
questions about the taxability of
the interest income.

Refer to the Volunteer Resource


Guide, TaxWise Income, Tab 2,
Interest Statement for Schedule
B, Line 1b Interest Received.
Review procedures for entering
tax exempt interest on TaxWise.

What about interest on my IRA?

Interest on a Roth IRA is generally never Have students read the section
taxable. Interest on a traditional IRA is tax and then discuss the example
deferred. Do not include that interest until on page 8-9 (Mike).
the taxpayer makes withdrawals from the

Lesson 8 - Page 9 of 14
IRA. The taxpayer will be issued a Form Note that they will learn about
1099-R to report a distribution. . Form 1099-R in a later lesson

Q: If a taxpayer had a statement that A: Look in index under


showed interest on their traditional IRA and Individual Retirement
you were unsure how it should be reported, Arrangements, sub-topic –
where in Publication 17 would you find the Interest on, treatment of for the
information? appropriate page.

How do I report the interest income?


Review the Volunteer Resource
Let’s take a look at some screen shots of Guide Tab 2 pages: How/Where
TaxWise where you will enter interest to Enter Income-. Link from line
income. 8a or 8b to Schedule B,
Schedule B -Link to the TaxWise
interest statement before you
make any entries.

(Paper sites, review bullet


points, How do I report the
interest income?, student guide,
Pg. 8-10)

Taxpayer Scenario Page 8-10


Now we are going to take a few minutes to Select students to play the roles
practice gathering income information on of taxpayer and tax return
the Intake and Interview Sheet. Remember preparer for the taxpayer
our taxpayer, Vanessa Franklin? scenario in student guide, Pg. 8-
10, while the rest of the class
observes and completes Part IV,
the Intake and Interview Sheet.
Vanessa’s Intake and Interview
sheet can be found in the
Appendix A, page 1. Go over
entries and discuss any
additional notes made.

Taxpayer Example Page 8-11


Now let’s see how our volunteer interviews Select two students to role play
Barbara Smith a US Postal Service the example. Have the rest of
employee. the class observe and complete
Part IV of the Intake and
Interview Sheet. Go over
entries and discuss any

Lesson 8 - Page 10 of 14
additional notes made.

Form 1040, Line 9: Dividends Page 8-12

How do I handle dividends?


Refer students to the caution on
The corporate distributions that volunteer page 8-12 about dividends that
tax preparers may handle are: are beyond the scope of the
x Ordinary dividends volunteer program.
x Qualified dividends and distributions
x Capital gain distributions Allow time for students to read
These are all found on Form 1099-DIV. student guide, What are ordinary
dividends?, What are qualified
Let’s take a few minutes to read about each dividends?, and What are capital
kind of dividend income. gain distributions?

Where do I get dividend information?

This information is mostly for your Review examples of Form 1099-


awareness, since, if you enter dividend DIV in P678W.Point out where
information correctly in TaxWise, it will ordinary (box 1a) qualified (box
compute the tax rate for you. Let’s first look 1b) and capital gain distributions
at the 1099-DIV, where you will find the are found (box 2a).
information.

How do I report dividend information?

Now let’s look at how you report dividends. Have students read the TaxWise
Dividends are reported on Lines 9a and 9b Hint, student guide, Pg. 8-13.
of Form 1040. On TaxWise, however, you Review the Volunteer Resource
will never enter the amounts directly to Guide, TaxWise Tab 2 Income;
those lines. How/Where to Enter Income;
Schedule B, Ordinary Dividends;
Dividend Statement for
Schedule B, Line 5 Dividend
Income pages.

Taxpayer Example Page 8-14

Now let’s quickly go over an example of a Designate two students to read


taxpayer interview about dividends. the taxpayer example on page
8-14.

Q: Where would you record Leonard’s A: The Intake and Interview


information about dividends? Sheet, Part IV, Item 3

Lesson 8 - Page 11 of 14
(comments in the margins).

Form 1040, Line 10: State and Page 8-14


Local Refunds, Credits and Offsets

Okay, now we are going to go on to talk Note that only volunteers


about how you handle taxable state and certifying at the intermediate
local refunds, credits, and offsets, which are level or above are required to
reported on F1040, line 10. cover this topic. If you are
teaching a Basic Only class,
skip to Lesson 13,
Unemployment Compensation.

What should be reported on line 10 of


Form 1040?

Taxpayers who receive a refund of state or


local income taxes may receive Form 1099-
G listing their refund amount in box 2. Not
everyone must include the refund in their
taxable income.

Only those taxpayers who itemized


deductions and received a tax benefit for Advise participants that they will
deducting their state or local income taxes learn about standard and
have to include their state/local tax refunds itemized deductions in a later
in income. lesson.

Taxpayers who claimed the standard


deduction or itemized and deducted state
sales tax for the refund year do not have to
include the refund in income.

The 1099-G will not tell you whether the Refer to Form 13614.
refund is taxable. You must determine that
through your interview with the taxpayer.

Let’s practice.

Q: Where on Form 13614 do you find a A: Part IV, Item 4


question about state tax refunds

If the answer to this question is “yes”, you


will need to ask more questions to

Lesson 8 - Page 12 of 14
determine whether you will need to Discuss the four bullets at the
complete a state tax refund worksheet. bottom of page 8-14.

x Did you receive a refund for part of your Suggest students jot these
2006 state and/or local income taxes in questions in their Volunteer
2007? Resource Guide under Tab 2 on
x If yes, did you itemize your deductions the Income page for use at the
for tax year 2006? site.
x If yes, did you include the state and/or
local income taxes that you paid for that
year?
x If yes, use the state tax refund worksheet
to see if any of the refund is taxable.

Once you have determined that you must Refer to Publication 4012,
complete a state tax refund worksheet, link TaxWise Tab 2, How/Where to
to it on TaxWise and follow the instructions. Enter Income
(Paper filers complete
worksheet in the 1040
instructions.)

Form 1040, Line 11: Alimony Page 8-15

What is alimony?

We are going to talk about one more type of


income in Lesson 8: alimony, which is
reported on Form 1040, line 11.

Alimony is a payment to or for a spouse or


former spouse under a separation or
divorce instrument. It may include payments Stress that child support
on behalf of the spouse or former spouse, payments do not need to be
such as medical bills, housing costs, and included in income. If the
other expenses. It does not include child taxpayer is unsure, ask if the
support or voluntary payments outside the payments will stop once the
instrument. The person receiving alimony child is grown.
must include it as income. (The person
paying alimony can subtract it as an
adjustment to income.)

There is no TaxWise worksheet for Alimony.


Payments are entered directly on line 11.

Lesson 8 - Page 13 of 14
Summary:

We discussed some general income


concepts:
x Includible, excludible, and exempt
income
x Earned and unearned income
x Gross income, adjusted gross income
(AGI), and taxable income

Q: Who remembers the definition of earned A: Any income accumulated by


income? personal effort, such as wages
or business income
We also discussed several specific kinds of
income in chapter 8:

x Wages, salaries and tips are reported on


line 7
x Interest income is reported on line 8
x Dividend income is reported on line 9
x Taxable state refunds is reported on line
10
x Alimony income is reported on line 11

Q: Which one of the types of income we


A: wages, salary, and tips
discussed is earned income?

We also discussed the source documents


and tools you will use to help you enter
income correctly on the tax return:

x Form 13614, Part IV


Note: volunteers certifying at the
x Income documents (Forms W-2 and intermediate level or above must
1099) complete Chapter 9.
x Publication 17
x Publication 4012 Optional: If you are doing a
x TaxWise software comprehensive problem from
the Pub 678-W, you may wish to
We will continue working all these tools as enter any entries applicable to
we learn in Chapter 9 about another kind of Lines 7 through 11.
earned income, business income or loss
reported on Form 1040, line 12.

Lesson 8 - Page 14 of 14
Lesson 9: Income - Business Income or Loss

Form 1040, Line 12

Objective
Determine how to assist taxpayers with household business income, including
self-employment income.

Introduction
Business or self-employment income or loss
is reported on Form 1040, line 12. This
includes income from a business a taxpayer
owns and income from work as an
independent contractor. In this lesson, you
will learn how to probe taxpayers for this
kind of income and determine which returns
with business income you can prepare at a
VITA/TCE site. You will learn how to
compute the net profit from business on
Schedule C-EZ to report on line 12.

As with other kinds of income, the first step


to preparing an accurate return is gathering
complete information from the taxpayer. Have students take out the
Let’s get started by taking a look at Intake and Interview Sheet and
interview tools to help do this. the Publication 4012.

Form 1040, Line 12: Business Page 9-1


Income or Loss

Q: Where on the Intake and Interview Sheet A: Part IV, Item 10, Self
is the probe for self-employment or Employment Income - business,
business income? farm, hobby (1099-Misc or any
earned income not
reported on W-2)

Many taxpayers, who work as independent


contractors, have jobs on the side, or small
home businesses, do not think of

Lesson 9 - Page 1 of 7
themselves as self-employed. It is important
to frame your interview questions to
determine if they had self-employment
income, that is, received compensation for
working that was not reported on Form W-2.

Q: Can anyone think of one or more A: Did you have any income
questions you might ask? from a business or side job?
Did you work as an independent
contractor? Did you get a W-2
for all your jobs? Did you receive
documents other than Form W-2
that show your earnings from
work?

Taxpayers may have Form(s) 1099-MISC Give examples of self-


showing some or all of their self- employment income that may
employment income. Keep in mind that not be reported on a 1099-
many payers of non-employee MISC, e.g. painters, plumbers,
compensation are not required to file Form and other service providers to
1099-MISC. Whether or not the taxpayer personal residences, retail
has a 1099-MISC, you must probe for sellers.
additional sources of self-employment
income.

Let’s take a look at an example of Form Refer students to Publication


1099-MISC. 678W, for examples of Form
1099-MISC.

Form 1099-MISC is used to report several


different kinds of income. Self-employment
income is shown in Box 7, Nonemployee
compensation. You will learn about some of
the other kinds of income reported on 1099-
MISC in later lessons.

Business income or loss, that is self-


employment income minus allowable
business expenses is reported on either
x Schedule C-EZ, Net Profit From
Business, or
x Schedule C, Profit or Loss From
Business
The total profit or loss is then transferred to
Form 1040, line 12

Lesson 9 - Page 2 of 7
VITA/TCE sites can prepare returns for self- Emphasize that taxpayers who
employed taxpayers only if they qualify to must use Schedule C are to be
report their business income on Schedule referred to a professional tax
C-EZ. preparer.

Taxpayers can use Schedule C-EZ only if Refer to the Publication 4012,
they meet all the conditions shown in the TaxWise Income Tab 2, and
flowchart in Part I, General Information on Schedule C-EZ Business
Schedule C-EZ. Income page.

Have students read in turn each


bullet point under You may use
this form if you. Comment after
each one as follows:

Qualification to Use Schedule C-EZ

You may use this form if you


x Had business expenses of $5,000 or less x Business expenses are those
amounts that are ordinary and
necessary to carry on the
business

x Use the cash accounting method x The cash method of


accounting reports all income
when received and deducts
all expenses when paid.

x Did not have an inventory at any time x Inventory are items the
during the year taxpayer buys or makes for
resale to others

x Did not have a net loss from this x Expenses were not greater
business than income—in other words,
the business showed a profit
or broke even

x Had only one business as either a sole x Has only one Schedule C-EZ
proprietor or statutory employee business to report (one for
each spouse, if MFJ). (Note
that income shown on a Form
W-2 with the “statutory
employee” box checked is

Lesson 9 - Page 3 of 7
considered self-employment
income for income tax
purposes.)

x Had no employees during the year x Was not required to issue any
Forms W-2

x Are not required to file Form 4562, x Was not required to compute
Depreciation and Amortization for this depreciation on business
business. See Schedule C, line 13, assets. Note that taxpayers
instructions. who claim actual vehicle
expenses rather than
standard mileage rate usually
must compute depreciation.

x Do not deduct expenses for the business x Allocation of a portion of


use of your home home expenses (rent,
mortgage interest, utilities,
etc.) for business use

x Do not have prior year unallowed passive x This is very unlikely. It might
activity losses from this business occur only if at sometime in
the past, the taxpayer had
business losses and was not
actively involved in making
business decisions

In your probing interview, walk the taxpayer Stress that the volunteer must
through these conditions, making notes on determine that the business
Intake and Interview Sheet. qualifies to be reported on
Schedule C-EZ before starting
to prepare the return. This will
mean estimating business
income and expenses.

Taxpayer Example Page 9-2

Let’s do a short exercise to practice. Select two students to read the


roles of Volunteer and Jason.
The rest of the class should
complete Form 13614, Item 10
and make notes, as needed.

Lesson 9 - Page 4 of 7
Q: Based on the interview, does Jason A: Yes
qualify to fill out a Schedule C-EZ?

Solicit examples of notes and


ask students to explain how the
Let’s go over some of the notations you information helped them to
made on Intake and Interview Sheet. determine if Jason qualified to
file Schedule C-EZ

How do I complete Schedule C-EZ?


Have participants follow along in
the Publication 4012, TaxWise
Income Tab 2, Schedule C-EZ
Business Income page, while
Now we are going to look at how you you go through the instructions
complete Schedule C-EZ on TaxWise. in How do I complete Schedule
Follow along on the Schedule C-EZ in your C-EZ.
Volunteer Resource Guide as we go
through the instructions step-by-step After each entry instruction, stop
to note TaxWise tips in Student
Guide and the margins of the
Publication 4012.

Advise that using links will allow


TaxWise to total gross receipts
and expenses and automatically
complete Schedule SE to
calculate self-employment tax.

What about self-employment tax?

Self-employed persons participate in Social Show copy of Schedule SE if


Security and Medicare through payment of available.
Self-Employment Tax (SE Tax). SE tax is
similar to Social Security and Medicare Tax Note that TaxWise will
that employers withhold and pay for their automatically compute and carry
employees. The SE Tax rate, paid on net the SE Tax and adjustment to
earnings from self-employment, is equal to the appropriate forms.
the combined employee and employer
Social Security and Medicare Tax rates.

Taxpayers are liable for SE Tax if they have

Lesson 9 - Page 5 of 7
net earnings from self-employment of $400
or more. Taxpayers may deduct half of the
SE Tax from income as an adjustment. SE
tax is computed on Schedule SE. SE Tax
and adjustment amounts are transferred to
Form 1040.

Taxpayer Scenario Page 9-5


Let’s read the taxpayer scenario in Student
Designate two students to read
Guide, p. 9-5. Remember that Vanessa
the scenario aloud. Instruct the
was afraid we might forget her cosmetics
rest of the class to note why the
business?
volunteer asks each question
and what in their resource
materials they will use to
conduct a “self-employment
income” interview at the site.

Q: Where will you find the questions you A: In Part I: General Information
must ask to determine if a taxpayer qualifies Schedule C-EZ. The Publication
to report SE income on Schedule C-EZ? 4012 has a TaxWise screen
shot of it in TaxWise Income
Tab 2 section, Schedule C-EZ
Business Income page.

Q: Did the volunteer cover all the questions A: Yes, the nine points to qualify
about Vanessa’s business that needed to for Schedule C-EZ were
be asked prior starting return preparation? addressed. The volunteer also
asked about information
documents.

Q: How would you document this interview A: Check “yes” on Item 10, Part
on Intake and Interview Sheet? IV. Note that the taxpayer
qualifies for Schedule C-EZ, that
there are no 1099-MISC, and
indicate which records to review
during return prep.

Summary Page 9-7

In this lesson, we discussed self-


employment or business income, which like Confirm students understand

Lesson 9 - Page 6 of 7
wages, salaries, and tips is earned income. key concepts: self-employment
income, earned income, net
We learned how to calculate net business business income.
income and where to report it on a tax
return.

We also learned how to determine which Confirm students can identify


business tax issues are within the scope of F4012, TaxWise Income Tab 2
VITA/TCE and when a taxpayer must be pages, Intake and Interview
referred to a professional tax return Sheet, and Schedule C-EZ as
preparer. resources.

Most importantly, we used tools and Optional: If you are doing an


techniques to help to gather information ongoing comprehensive problem
about self-employment income needed to from the 678-W enter the
prepare an accurate tax return. Schedule C-EZ information at
this time.

Lesson 9 - Page 7 of 7
Notes
Lesson 10: Income – Capital Gain or Loss

Form 1040, Line 13

Objective
Prepare students to determine if Schedule D is needed to report capital gains
and/or losses on the sale of assets. Determine an asset’s holding period,
adjusted basis, net short-term and long-term capital gains or losses, the taxable
gain or deductible loss, the tax liability, and the amount of any capital loss
carryover. Apply net gains and losses to the Schedule D and help the taxpayer
with loss carryover.

Introduction
This lesson will help you assist taxpayers
who must use Schedule D to report capital Instruct students to have
gains and/or losses on the sale of assets. In Publications 4012, 678W, 17
this lesson we will discuss the sale of stock and Form Schedule D and 1040
and the sale of a personal residence. If the Instructions for referral.
taxpayer has sold any other assets,
consider referring him/her to a professional
tax preparer.

This lesson will help you identify the asset’s


holding period, adjusted basis, net short-
term and long-term capital gains or losses,
the taxable gain or deductible loss, the tax
liability, and the amount of any capital loss
carryover.

What information must I have to


report a capital gain or loss? Page 10-1

To report capital gain or loss on Form 1040,


Schedule D, you will need to identify:

Lesson 10 - Page 1 of 12
x The asset’s basis or adjusted basis – the
original cost plus/minus certain other
costs/damage after the purchase.

x The holding period – the time between


the dates of ownership and sale.

x Proceeds from the sale, reported on


Form 1099-B (stocks) or 1099-S (real Refer students to P678W,
estate) as gross or net proceeds. Advanced Comprehensive
Problem for an example of Form
1099-B. If available, show Form
1099-S.

Have students quickly review


the Intake and Interview Sheet,
Part IV. Note that it does not
have a specific item for sale of
Exercises: investment property or a home.
Q: If Form 13614 does not have a specific
item about income from the sale of A: Volunteers must probe the
investment property or a home, how will you taxpayer for this type of income
know whether a taxpayer has any? and notate it in Part IV. They
usually will have received an
income document (1099-B,
1099-S, or sales records) for
transactions that are within the
scope of VITA/TCE.
Q: What are some questions you might
ask? A: Did you sell any assets, such
as your home, or investment
property such as stocks or
bonds? Do you receive any
Forms 1099-B or 1099-S?
Q: What would you advise a taxpayer if
he/she had sold house that he/she had A: You would advise him/her to
rented out to tenants for the last 10 years? see a professional tax preparer.
Preparing returns for taxpayers
with sales of assets other than a
personal residence or stocks is
beyond the scope of VITA/TCE.
First we are going to go into detail about the
sale of stocks. We will get back to the sale
of a personal residence later in the lesson.

Lesson 10 - Page 2 of 12
What is a stock’s “basis?”
Page 10-2

To get started on figuring a gain or loss on


the sale of stock, you are going to need to
know the adjusted basis of the stocks sold.
Let’s read a little bit about it. Designate students to read
Basis, Adjusted Basis, and the
example under What is a stock’s
“basis”?, Student Guide, Pg.10-
2 aloud.
(Confirm understanding after
each section.)
Q: Since at the site, you won’t have your
Student Guide, where would you look first if A: Pub. 17
you had a question about basis?

Q: Let’s practice. On what page of Pub 17


would you find information about adjusted A: Appropriate Page in current
basis? Pub 17 in Chapter 13, Basis of
Property (Note: that Adjusted
basis is listed both as a main
index topic and as a sub-topic
under Basis.)
How do I determine the holding
period? Page 10-3

Schedule D classifies capital gains and


losses as either long-term or short-term, Read How do I determine
depending on how long the taxpayer owned holding period?, Long-Term or
the stock. Short-Term, Student Guide.

Taxpayers may designate specific shares Stress that volunteers should


they want sold. If they don’t do this, the refer taxpayers without this
broker will treat the shares sold as the information to their stockbroker
earliest ones purchased. or financial planner.

All of this information is mainly for your Allow time for students to read
awareness. In order for you to prepare the the two paragraphs. Reinforce
return, the taxpayer must have the that the taxpayer must have all

Lesson 10 - Page 3 of 12
purchase and sales dates and adjusted information needed to determine
basis of the shares sold. basis and holding period.

Again, for your awareness, please read the


Tax-Free Stock Dividends and Stock Splits Review the example on 10-4.
and Taxable Dividends sections in your
student guide.

What information do I need from


Form 1099-B? Page 10-4

Now we are going to go on to how you will Have students open P678W, to
enter the information about the stock sale the example of Form 1099-B, in
on the tax return. First, let’s take a closer the Advanced Comprehensive
look at Form 1099-B. Problem, as you read What
information do I need from Form
1099-B, Student Guide.

Ask the following after each


paragraph:
x Form 1099-B, Proceeds From Broker
and Barter Exchange Transactions, is x Q. Are there any entries in
prepared by the broker who handled the boxes 3, 9, 10, 11, or 12? (A:
sale of stock. If there are entries in boxes no). Suggest students add a
3, 9, 10, 11, or 12, refer the taxpayer to a note in their Volunteer
paid tax preparer. Resource Guide to remind
them of this at the site.
x In box 1 on Form 1099-B, the
stockbroker reports the date the stock x Q. What is the sales date on
was sold. Use this date, along with the the example in the 678W? (A:
day after the purchase date provided by 3/10/2007)
the taxpayer, to determine the holding
period.

x In box 2 on Form 1099-B, the


stockbroker reports the sales price of the x Q. What is the sales price on
stock, and checks a box to indicate if the the example? (A: $8,859);
amount in box 2 is gross proceeds or net Should you add the sales
proceeds: commission to Mr. Dalhart’s
o If gross proceeds, add the sales basis? (A: no, the net
commission to the taxpayer’s basis proceeds box is checked)
o If net proceeds (gross proceeds less
commissions and option premiums),
the broker already subtracted the

Lesson 10 - Page 4 of 12
commissions and fees.

Optional: go over the example


and exercise in Student Guide,
Remember that Form 1099-B only gives Pg. 10-5.
information about the sale. The taxpayer
must provide the purchase date and Note that many brokerage
adjusted basis. statements also provide the
taxpayer with information about
the cost basis.

Review the example of a


consolidated 1099 statement in
the text on page 10-5.

How do I enter data on Schedule D, Page 10-5


Parts I and II?

Information from Form 1099-B is entered on Have students open their 4012,
Schedule D. Part I for short-term sales and to TaxWise Tab 2, Schedule D-
Part II is for long-term sales. When Capital Gains and Losses page.
preparing a return, determine the holding Point out Schedule D, Parts I
period for each block of stock sold. This will and II
indicate whether the sale should be
reported in Schedule D Part I (short term) or
Part II (long term).

After recording the information in columns a Review Capital Gain and Loss
through e, the gain or loss is calculated in Worksheet in Pub 4012,
column f. TaxWise Tab 2, Schedule D-
Capital Gains and Losses page.
If you enter the information in TaxWise by
linking to a Capital Gain or Loss Worksheet, Note instructions for mutual
TaxWise will automatically determine the funds entries with various
holding period, compute gain or loss, and purchase dates.
then carry the transaction to the correct part
of Schedule D.

How do I report capital gain Page 10-6


distributions?
Q: Who remembers what kind of income we A: dividends
talked about in an earlier lesson that

Lesson 10 - Page 5 of 12
included capital gain distributions?

To review, capital gain distributions, also


called capital gain dividends, are reported in
box 2a of Form 1099-DIV. You will include
them in total capital gain or loss reported on
Form 1040, line 13.

If, in addition to a Form 1099-B, the


taxpayer receives a 1099-DIV with a capital
gain distribution shown in box, 2a, this
amount must also be included on Schedule
D, Part II, line 13.
Note that a screen shot of this
TaxWise will automatically carry capital gain TaxWise form is in 4012,
distributions to all the correct lines of Form TaxWise Income Tab 2,
1040 if they are properly entered using the Dividend Statement for
Dividend Statement form. Schedule B, Line 5 Dividend
Income page.

How do I complete reporting of Page 10-6


capital gain or loss?
Have a student read How do I
Let’s take a moment to read how to make complete reporting of capital
the final calculation of the amount reported gain or loss? Emphasize that
on line 13. TaxWise will automatically do
the calculation.

Review each example on Page


10-7

How do I calculate and report a Page 10-8


carryover of a capital loss?
Designate students to read
aloud, Student Guide, How do I
calculate and report a carryover
As you just read, the capital loss that a of a capital loss?
taxpayer can claim in is limited. The excess,
however, can be carried over to later years. Stress that taxpayers must have
Let’s read about how to calculate and report a copy of their 2006 Capital
the carryover. Loss Carryover worksheet to
claim a prior year loss.

Lesson 10 - Page 6 of 12
Note that TaxWise will
automatically calculate the loss,
and generate the carryover
worksheet, if applicable.

Suggest that volunteers clearly


mark the capital loss carryover
that will apply to next year and
make sure the taxpayer
understands that they need to
tell whoever does their return
next year. You may even want
to make a note on the outside of
their tax records envelope.

Taxpayer Example Page 10-9


Let’s get a couple of you to act out a Designate two students to read
sample interview of the taxpayer whose the Sample Interview in Student
1099-B you looked at earlier in the lesson. Guide.
This is an interview with Jeremy Dalhart, the
Advanced Comprehensive Problem in the
678-W. The rest of you should make notes
on their Intake and Interview Sheet, Pg.2.

Q: Did the volunteer get all the information A: Yes.


needed?

Q: We all have different styles, of course. Lead discussion on students’


What different questions might you ask to ideas about effective interview
obtain the necessary information? questions.

Optional: If you have been


doing the Advanced
Comprehensive Problem from
the Pub 678-W, you may want to
take the time to enter the stock
sales information into TaxWise
before going on to Sale of a
Home.

Lesson 10 - Page 7 of 12
Who must file Schedule D for the Page 10-10
sale of a home?

Now we will discuss gain on the sale of the


taxpayer’s residence and whether it will
need to be reported on Schedule D.

Who must report the sale of a Page 10-10


home?

First, you must determine whether the


residence was the taxpayer's main home, if
the taxpayer meets the ownership and use
tests, and if the gain is more than the
allowed exclusion amount.
Volunteers can refer to Pub. 17
To determine if the taxpayer meets the for most information to help
criteria for reporting the sale of a home, use make the determination. In
the interview techniques and tools some cases, you may need to
discussed in the Screening and Interviewing refer further to Publication 523,
lesson. Selling Your Home.

As you learned earlier, the Income section


of Form13614, Intake and Interview Sheet,
does not list income from the sale of home,
but it is important to ensure that all income
is accurately reported on the return. Ask the
taxpayers if they sold their home during the
tax year. If it was their main home, the
taxpayer may be eligible to exclude all or
part of the gain from taxable income.

Will someone read the statement and all Discuss each of the four points.
four options?

You must report the sale of your main home


when one of these things is true:

What is considered a “main” Page 10-10


home?

Also, a gain from a sale of a home that is

Lesson 10 - Page 8 of 12
not the taxpayer’s main home will generally
have to be reported as income.

Only a gain from the sale of a taxpayer’s


main home may be excluded from the
taxpayer’s income. Ask students to find and read
the definition of main home in
So the first step is to find out if the home Pub. 17. (It is listed in the index
meets the definition of a main home. The under Home, definition of,):
Student Guide has a definition, but since “Usually the home you live in
you won’t have it to refer to at your site, I most of the time is your main
am going to ask you to look it up in Pub 17, home, and it can be a
which you will have at your site. House
Houseboat
Mobile home
Cooperative apartment, or
Condominium”

A: The main home is ordinarily


the one he/she lives in most of
Q: What if the taxpayer owns more than the time. (Pub 17).
one home?
A: Pub 17, appropriate page of
current Pub 17.
Q: When you are preparing a return and
have a question about the definition of main
home, where will you look first?

What are the ownership and use Page 10-11


tests?

Let’s go on to the ownership and use tests.


Allow time to read What are the
ownership and use tests?,
Student Guide. Go over the
example.

Now we’re going to do a little memory


exercise. Instruct students to close their
eyes for thirty seconds and think
about what they just read. Then
ask for volunteers to recite by

Lesson 10 - Page 9 of 12
heart all the provisions of the
ownership and use tests. (In the
unlikely event you get a
The point of this exercise was to volunteer, let him/her try.) Ask
demonstrate the importance of using your participants to open their eyes
reference materials. Reliance on them, and explain the point of the
rather than memory, will help you to offer a exercise.
high quality of service to your VITA
customers. The ownership and use tests Reinforce that Student Guide
can be found in Publication 17. Publication should not be used as a
17 is a reference that will always be reference at the site.
available at your site.

Married Homeowners
Five-year Test Period Suspension and Page 10-11
Reduced Exclusion
Allow time to read Married
Let’s take a few moments to read about Homeowners, Five-year Test
some special rules for married homeowners Suspension and Reduced
and for those that don’t fully meet the use Exclusion, Student Guide.
and ownership tests.
Go over the examples and have
Remember that the reduced exclusion is out students complete the exercises
of scope but you can advise the taxpayer. using Pub 17, as a reference.

Five-year Test Period Suspension Page 10-12


– Armed Forces Personnel
Let’s read the two paragraphs here and
then we will discuss the example.

How do I figure the gain (or loss) Page 10-13


from the sale of a home?
Designate students to read
Once you’ve determined that a taxpayer is
Student Guide sections: Selling
eligible for the exclusion, you can figure the
Price, Amount Realized, Basis,
gain or loss on the sale. You will need to
and Adjusted Basis. Go over tips
know the selling price, amount realized,
and exercises at the end of each
basis, and adjusted basis.
section.

A: No, there is no requirement to


Q: If a taxpayer sold his/her home for less
report the transaction.
than the allowable exclusion, will you need

Lesson 10 - Page 10 of 12
to calculate a gain or loss?

Q: Where would you find information on A: Pub 17, under Sale of home,
what to include in adjusted basis? subtopic-adjusted basis.

Q: How would you handle the sale of a A: Refer to a professional tax


home if the taxpayer had taken a deduction preparer. (Calculating the part of
for the business use of home in 2005? the gain equal to allowed or
allowable depreciation is beyond
the scope of VITA/TCE.)

Instruct students to complete


exercise 6 and discuss.

How much of the gain from a home Page 10-15


sale can a taxpayer exclude?
If all the requirements are met, an individual Refer students to tips on 10-15
taxpayer may exclude up to $250,000 of the
gain from taxable income; taxpayers who
are Married Filing Jointly may exclude up to
$500,000.

Where do I report any taxable gain Page 10-15


from the sale of a home?
Gain on the sale of a home must be Review the tip for this topic.
reported only if the gain is greater than the
allowable exclusion. It is reported on Part II If available, show copies of
of Schedule D. Schedule D and worksheets.
Note that TaxWise users
A loss on the sale of a home is not calculate the gain on Schedule
deductible. D Worksheet 2. (Paper filers use
worksheets in Pub. 523.)

Taxpayer Example Page 10-16

Let’s continue with our sample interview of Designate students to read the
the taxpayer. sample interview aloud while the
rest of the class makes notes on
the Intake and Interview Sheet.

Discuss the effectiveness of the


interview.

Lesson 10 - Page 11 of 12
Suggest students add a probe to
rule out previous business use
of the home.

Summary Page 10-16


Designate students to read
This lesson covered how to report the sale Summary.
of stock and the taxable portion of a sale of
a residence. Let’s take a few moments to
review.
Stress the need to use reference
We covered a lot of detailed information materials to research tax law
and practiced using Pub. 17 to find it again issues.
when preparing a return.

Lesson 10 - Page 12 of 12
Lesson 11: Income - Retirement Income
Form 1040 Lines 15 and 16

Objective
Identify and report the taxable portion of retirement income received by the
taxpayer. Understand the types of retirement income and the forms used to
report them. Identify when taxpayers of retirement are required to take a
minimum distribution from a retirement plan and when they may need to adjust
their withholding.

Introduction

This lesson will help you identify and report


the taxable portion of retirement income
received by the taxpayer. To do this, you
must understand the types of retirement
income and the forms used to report them.

You will also be able to identify when


taxpayers of retirement age are required to
take a minimum distribution from a
retirement plan and when they may need to Refer to Volunteer Resource
adjust their withholding. Guide, TaxWise Income Tab 2,
How/Where to Enter Income
We will be discussing retirement income
reported on Form 1040, lines 15 (IRA
distributions and 16 (pensions and
annuities). Some may consider Social
Security benefits to be retirement income,
but we will not discuss them in this lesson. Examples of Forms 1099-R can
They will be discussed in Lesson 14 for be found in Publication 678W,
entry on Form 1040, Line 20. Advanced Comprehensive
Problem.
Form 1099-R is the information return used
by payers to report distributions from
pensions, annuities, retirement, or profit-
sharing plans. You will learn how to use it,
interview techniques and tools, and
reference materials to calculate retirement
income and accurately report it.

Lesson 11 - Page 1 of 11
First, let’s define some terms and discuss General information about
some general information about retirement retirement distributions
distributions. pages 11-1 to 11-4

Take a few moments to read What do I


need to know about IRA and pension Allow time to read What do I
distributions? starting on page 11-1 need to know about IRA and
pension distributions? pages
11-1 & 2.
I want to be sure that everyone has the .
concepts of “before-tax” and “after-tax”
contributions.

Q: Does anyone have a 401k or similar A: show of hands


retirement plan at work?

Those of you who do may notice on your


Form W-2 that your contributions are not
included in Box 1, wages, salaries, and tips,
which means that you won’t include them in
the income you report on your tax return.

Q: Will those contributions be considered A: before tax


before or after tax?

Q: When you retire and get a distribution, A: fully taxable


will it be fully taxable, partially taxable, or
non-taxable?

Where can I get information about Page 11-2


a taxpayer’s retirement income?
Form 13614, Intake and Interview Sheet Have students look at The
includes questions about any retirement Intake and Interview Sheet.
income the taxpayer may have received. In Point out Part IV, Item 7 –
your interview with the taxpayer, be sure to Pension and/or IRA distribution.
probe for retirement income and record the Note that the taxpayer’s age
information on page 2 of Form 13614. (Part I, Item 13 – date of birth) is
important information for
handling retirement
distributions.)

Lesson 11 - Page 2 of 11
Form 1099-R is used by payers to report Review examples of Form 1099-
distributions from pensions, annuities, R in Publication 678W,
retirement or profit-sharing plans, IRAs, and Advanced Comprehensive
insurance contracts. You will use Problem. Briefly describe the
information from boxes 1, 2a, 2b, 4, 5, 7, information found in boxes 1, 2a,
and 9b, as well as the checkbox (next to 2b, 4, 5, 7, and 9b and the
box 7) that indicates if this is an IRA/SEP/SIMPLE checkbox.
IRA/SEP/SIMPLE distribution. (Refer to Form 1099-R
Instructions to Recipients or
TaxWise Help for box 7
distribution codes.)

How do I find the taxable portion of Page 11-3


retirement income?
As we’ve learned, retirement distributions Have students turn to Volunteer
may be fully or partially taxable. Let’s learn Resource Guide, TaxWise
how you will determine the taxable portion. Income Tab 2, 1099-R Pension
and Annuity Income page.
First, the easy way: In some instances the
payer will compute the taxable portion of
the distribution and report it in Box 2a of
Form 1099-R. Read the first TaxWise Hint,
page 11-3 as participants review
Volunteer Resource Guide,
TaxWise will automatically enter the TaxWise Income Tab 2,
information on the correct lines of Form How/Where to Enter Income and
1040 if you enter it on the TaxWise Form 1099-R Pension and Annuity
1099-R. Income pages.

(For paper sites, review


paragraph under the TaxWise
Hint in How do I determine the
taxable portion of pensions?,
page 11-3)

How do I determine the taxable Page 11-3


portion of pensions?

If the payer did not include an amount in


box 2a of the Form 1099-R, you may need Read the second TaxWise Hint,
to interview the taxpayer further in order to page 11-3 as participants review
compute the taxable portion of the Volunteer Resource Guide,
distribution. TaxWise Income Tab 2, 1099-R
Pension and Annuity Income
and 1099-R Exclusion pages.

Lesson 11 - Page 3 of 11
We will now do some reading that will help
you determine the additional information
that is needed to calculate the taxable
portion of distributions from IRAs or
pensions/annuities. First we will focus on
IRAs. IRA Distributions
pages 11-3 to 11-6

Allow time to read Taxable


portion of IRA income pages 11-
3 through 5 and complete the
exercises on page 5.

Review exercises and ask


summary questions to confirm
understanding:

How do I find the taxable portion of Page 11-3


IRA income?
Q: What are the four kinds of IRAs? A: Traditional, SIMPLE, SEP,
and Roth

Q: From which kind of IRA are the A: Roth IRA


distributions tax-free if the taxpayer meets
certain requirements?

Q: How should you handle a return for a A: Refer him/her to a


taxpayer that has Forms 8606 or other professional tax preparer.
documents to prove that his/her IRA VITA/TCE sites can only assist
distribution is partially taxable? taxpayers with IRA distributions
that are fully taxable or fully
excludible.

Reporting IRA Distributions Page 11-5

For a normal distribution from a traditional, Have students identify these


SIMPLE or SEP IRA, the distribution code entries on the Form 1099-R
in box 7 of Form 1099-R will be ‘7’ and the example in Publication 678-W,
IRA/SEP/SIMPLE box will be checked. Advanced Comprehensive
Problem.
Ask the taxpayer:
• Was this a distribution from a
traditional IRA?

Lesson 11 - Page 4 of 11
• Were the contributions deducted from
income in the year they were made? Ask questions (e.g. Why ask
that?) to confirm understanding
of the purpose of the interview
questions.(determine if the
If so, the entire distribution is taxable. taxpayer has a basis in the IRA)
Report it on Form 1040, lines 15a and 15b,
or on Form 1040A, lines 11a and 11b.
Note that if it is entered on
TaxWise Form 1099-R, TaxWise
will automatically carry it to the
Distributions from a Roth IRA are not proper lines on Form 1040.
taxable as long as they meet the criteria you
read about. If the distribution does not meet
the criteria, some or all of it may be taxable.
Refer the taxpayer to a professional tax
preparer.

What other distribution issues Page 11-6


must I deal with?
There are a few other issues related to Stress the importance of
reporting retirement income that you may reviewing the distribution code in
encounter. Several types of distributions are box 7 of Form 1099-R to
subject to additional taxes which are determine the type of
computed on Form 5329, Additional Taxes distribution.
on Qualified Plans and Other Favored
Accounts. The completion of this form is not Advise that descriptions of
included in the VITA/TCE training. Refer distribution codes are available
taxpayers needing it to a professional tax on the back of Form 1099-R and
preparer. in TaxWise help. TaxWise help
also notes which codes require
the completion of Form 5329.
A premature distribution is an early Premature Distribution
withdrawal from a pension fund, for page 11-6
purposes other than retirement, by a
taxpayer who is under 59 1/2. Early Designate students to read page
distributions are subject to an additional 11-6 aloud. Comment at the end
10% tax. The tax applies to the taxable of each paragraph, as follows:
portion of the distribution or payment.
The additional tax is often called
an “early distribution penalty”.

Certain early distributions are excluded from


the early distribution tax. If the distribution
code in box 7 of Form 1099-R is 2, 3, or 4,

Lesson 11 - Page 5 of 11
the taxpayer does not have to pay the
additional tax.

If the distribution code in box 7 is 1, Form


5329 needs to be completed to if the
taxpayer meets one of the exceptions and
does not have to pay the additional tax.
Refer the taxpayer to a professional tax
preparer if they meet one of he exceptions.
To properly refer taxpayers
needing professional assistance,
review the distribution code
before starting to prepare the
return.

If the taxpayer does not meet one of the


exceptions, TaxWise will automatically
generate the additional 10% tax. These
returns do not need to be referred to a
professional tax preparer. Only refer if they
meet one of the exceptions. TaxWise will automatically
generate a Form 5329, when
required, based on the
distribution code you enter in
box 7 of TaxWise Form 1099-R.

Have students look up Early


Distributions of IRAs in the
Publication 17 and read the
exceptions.

Minimum Distributions Page 11-6


Participants must start withdrawing funds Allow time to read pages 11-6 &
from qualified pension plans at age 70 ½. 7. For classes that will volunteer
Please take a few moments to read about at TCE sites, you may want to
minimum distribution rules. discuss examples and review
exercise 4 aloud.

Now, let’s take a few moments to read Withdrawal of Excess


about how to handle a withdrawal of excess Contributions
IRA contributions. page 11-7

Lesson 11 - Page 6 of 11
Allow time to read, page 11-7 &
8. (Note that limitations on
contributions to IRAs will be
covered in Lesson 17,
Adjustments to Income.)

Rollovers Page 11-8


Generally, a rollover is a distribution to the
taxpayer from one retirement account
(traditional IRA or employer’s pension plan)
that rolls over into a similar retirement
account within 60 days.
Read or designate participants
to read Rollovers section aloud.

Note that rollover distributions


are not taxable, if they are re-
deposited within the 60 day
period.

Form 1099-R will be issued to the taxpayer


by the financial institution. If it was a direct
rollover by the institution to another
institution, box 7 will contain code G.
Have students look at Volunteer
Resource Guide, TaxWise
Income Tab 2, 1099-R Pension
and Annuity Income.

Advise that if code G is entered


in box 7, TaxWise will
automatically show the
distribution as a non-taxable
rollover on Form 1040, line 15.

If there is no code G, you will need to ask Note that in this case, the
the taxpayer when the funds were re- distribution code is often ‘1’
deposited and if it was into an appropriate (premature distribution). Stress
account. the importance of probing these
taxpayers to determine if the
amount was rolled over.

Go over the TaxWise hint page


11-8 as students review

Lesson 11 - Page 7 of 11
Volunteer Resource Guide,
TaxWise Income Tab 2, 1099-R
Exclusion Worksheet page.

We have covered a lot of detailed Interview Techniques Activity


information. Before we go on to calculating
the taxable portion of pensions, let’s take a
moment to talk a little more about
interviewing and gathering necessary
information.

Scenario: You are interviewing a taxpayer.


In response to your inquiry about pension
and IRA income (The Intake and Interview Read the scenario to the left and
Sheet, Part IV, Item 7) the taxpayer shows ask questions; encourage
you a Form 1099-R. The IRA/SIMPLE/SEP discussion and a variety of
box is checked and the distribution code is examples of effective interview
‘7’ (normal distribution). questions.

Q: What questions and would you ask and A: Q1: Was this distribution from
why? a traditional IRA?

If the answer to Q1 is yes:

Q2: Did you take tax deductions


(adjustments to income) for all
your contributions to this IRA?

These questions are necessary


to determine if the taxpayer has
a cost basis in the IRA, which
would make it partially taxable.

Q: What if the distribution code is ‘1’ A: Q1: Did you roll over this
(premature distribution)? distribution into another qualified
retirement plan?

If the answer to Q1 is yes:

Q2: On what date did you take


the funds out of your IRA, and
when did you deposit them to
the new plan?

Lesson 11 - Page 8 of 11
These questions are necessary
to determine if the transaction
qualifies as a non-taxable
rollover distribution.

Q: What if the distribution code is ‘Q’? A: no additional questions are


necessary. ‘Q’-qualified
distribution from a Roth IRA are
tax-free.

If you didn’t know what ‘Q’ distribution code


signified, you could look it up on the back of
the taxpayer’s copy of the Form 1099-R or Note that TaxWise will correctly
in TaxWise Help. report this distribution as non-
taxable if the distribution code is
entered on Form 1099-R.

Form 1099-R contains a wealth of


information to help you accurately report
retirement income on a tax return. We Make students aware of
encourage you to review it carefully and use Volunteer Resource Guide,
it as an interview tool to gather additional TaxWise Income Tab 2, 1099R
necessary information from the taxpayer. entry variations page for
examples of common 1099-R
entries

How do I find the taxable portion of Page 11-8


pensions and annuities?
Now we are going to move our focus to Note that Form 1099-R will not
pension and annuity distributions. show any employee
contributions in boxes 5 or 9b

In general, pension or annuity payments are


fully taxable, if the following is true:
• Taxpayers did not pay any part of the Allow time to read Partially
cost of their pensions or annuities Taxable Pensions and
• Employers did not withhold part of the Annuities, Student Guide, page
cost from the taxpayers’ pay while they 11-9
worked
Have students follow along in
Volunteer Resource Guide,
TaxWise Income Tab 2, 1099-R
Exclusion Worksheet page as

Lesson 11 - Page 9 of 11
If the payer has not calculated the taxable you review the TaxWise Hint on
amount of the distribution and reported it on page 11-9
Form 1099-R, box 2, you will need to
complete a worksheet to calculate it. (For paper sites, review
instructions below the TaxWise
Hint on page 11-9 while
participants follow along on the
Simplified Method Worksheet,
Form 1040 instructions.)

Report disability pension income on Form Disability Pension Income


1040 according to the information page 11-10
document, i.e. report as wages on line 7 if
from Form W-2 and line 16 if from Form Allow time to read Disability
1099-R. Pension Income and Disability
Reporting, page 11-10

Caution students not to confuse


disability pension income with
other types of disability
payments such as worker’s
compensation or disability
insurance.

Note that TaxWise will


automatically carry the
information from the information
return form to the correct line.

What other retirement income Page 11-11


issues must I deal with?
Allow time to read Lump-Sum
Distributions, page 11-11

Emphasize taxpayers with a


distribution code ‘A’ in box 7
must be referred to a
professional tax preparer.

The rules for premature distributions from Premature Distributions


pension plans are similar to those for IRAs. page 11-12

Q: What is the distribution code of Form


1099-R that signifies a premature A: 1
distribution with no known exception?

Lesson 11 - Page 10 of 11
The minimum distribution rules discussed Minimum Distributions
for traditional IRAs apply also to pension page 11-12
plans.
Retirement Income Withholding
and Estimated Tax Payments
page 11-12

Designate students to read


Retirement Income Withholding
and Estimated Tax Payments,
page 11-12 aloud.

Suggest providing information


about EFTPS system to make
electronic estimated tax
payments.

Optional: If you have been


doing the Advanced
Comprehensive Problem,
suggest entering the 1099-Rs
for the two IRAs and the two
pensions.
Special Rules for Military
Personnel, page 11-13
Note that special rules can apply to military
personnel.

Summary Page 11-14

This lesson helped you identify and report


the taxable portion of retirement income
received by the taxpayer. It reviewed the
types of retirement income and the forms
used to report them. You learned when
taxpayers of retirement age are required to
take a minimum distribution from a
retirement plan and when they may need to Remind students of the
adjust their withholding. importance of interviewing the
taxpayer and carefully reviewing
Form 1099-R.

Lesson 11 - Page 11 of 11
Notes
Lesson 12: Income - Rental Income and Expense

Form 1040, Line 17

Objective
Identify and report rental income and expenses for U.S. citizens and resident
aliens. Determine how to allocate rental income expenses when property is used
for personal purposes. Identify when the at-risk and passive activity rules are
applicable and how to compute deductible depreciation expenses.
Introduction
This lesson will help you identify and report This lesson is only for Military
rental income and expenses for U.S. and International VITA students.
citizens and resident aliens residing in U.S
or abroad. To do this, you need to know Note that this lesson does not
how to allocate rental income and expenses apply to taxpayers who are in
when property is used for personal the business of renting
purposes. You must also be able to identify properties.
when the at-risk and passive activity rules
are applicable and compute deductible Have students take out Intake
depreciation expenses. and Interview Sheet.

Form 13614, Intake and Interview Sheet Advise that volunteers should
(Part IV, Income) does not list income from note rental income next to Part
rent, but it is important to ensure that all IV, Item 11.
income is accurately reported on the return.
Ask taxpayers if they rented out their home Have students take out the
or other property during the tax year. Volunteer Resource Guide.
Suggest that customize the
Income Tab D section with notes
to help them gather all
necessary information about
rental income and expense from
the taxpayer.

What types of rental income must Page 12-1


be reported?
We will discuss what kinds of rental income Designate students to read
must be reported. What types of rental income

Lesson 12 - Page 1 of 9
must be reported?, Student
Guide, 12-1, 2 aloud.

Briefly review the example and


exercise, Student Guide, pg.12-
2

We do not expect you to memorize all the Have students take out Pub 17.
details about the taxation of rental income.
Instead, we would like you to get in the
habit of looking up information, as needed,
in Publication 17, which you will have at
your site.

Q: Where will you find information about A: Appropriate pages in current


rental income in Pub 17? Pub 17 (Chapter on Rental
Income and Expenses)

Instruct students to open Pub 17


to the Chapter on Rental Income
and Expenses. Point out that
under the Rental Income
heading, there is detail about the
kinds of rental income they just
read about.

Lead discussion about effective


questioning to gather
information. Suggest students
make notes in the Volunteer
Resource Guide.

Q: Once you have determined that a A: Possible responses: Q: Did


taxpayer received rental income, what your tenant pay any advanced
questions might you ask to get additional rent or a security deposit? Did
necessary information? your tenant pay any expenses
for repairs? Did your tenant do
any work on the property in
exchange for reduced rent?

What qualifies as a rental Page 12-2


expense?
Homeowners who reside in homes they Note that itemized deductions

Lesson 12 - Page 2 of 9
own generally report mortgage interest and will be covered in a later lesson
property taxes as itemized deductions on
Schedule A. However, when a taxpayer Briefly review TaxWise Hint, pg.
rents out a home, those become rental 12-2.
expenses along with the cost of repairs,
maintenance, and certain other operating Instruct students to open the
expenses. Deductible rental expenses are Volunteer Resource Guide,
reported on Schedule E. TaxWise Income Tab 2,
Schedule E-Rental Income and
Loss page. Advise them that
they should refer to this page
whenever they enter rental
income and expenses.

Allocation of expense for partial


personal and rental use
In general, taxpayers use Schedule A, Student Guide, 12-2
Itemized Deductions, to report the portion of
the mortgage interest and property taxes
that apply to their use of the home. That
“portion” may involve time (such as six
months of the year) and/or the percentage
of the home used (when a portion of the
home is rented out and the taxpayer lives in
the other portion). For the part of the year
and/or the portion of the home that is rented
out, taxpayers report rental income and
expenses (including a portion of the
mortgage interest, property taxes, and other
expenses that relate to the rental
time/portion of the home, etc.) on Schedule Note that Form 1098 is an
E, Supplemental Income and Loss. information return that will be
Mortgage interest is reported to the covered in more detail in the
taxpayer on Form 1098. itemized deduction lesson.

Let’s read more about rental expenses and Allow time to read Partial Year
how they are allocated if the home was Student Guide, pg.12-3. Stop at
rented for a partial year. the exercise.

Do exercise aloud with class.

Continue silent reading Other


Deductible Rental Expenses and
Auto and Travel Expenses
Student Guide, pg.12-4. Stop at
Repairs vs. Improvements.

Lesson 12 - Page 3 of 9
Q: If you had a question about how to A: Pub 17, appropriate pages
handle a taxpayer’s rental expense, where from Chapter on Rental Income
would you find the information? and Expenses

Instruct students to open Pub 17


to appropriate page.

Taxpayers often misunderstand when an Repair vs. Improvement


expense qualifies as a repair or an Student Guide, pg.12-4
improvement. Let’s look at the definitions of
each in Publication 17. Designate students to read
Repairs and Improvements Pub
17, Chapter on Rental Income
and Expenses.

Lead discussion about effective


questioning to gather
information. Suggest
participants notate the Volunteer
Resource Guide.

Q: What question might you ask a taxpayer A: Possible responses: Did the
to determine whether an expenditure was work you had done add to the
for a repair or an improvement? value of the property? Was this
repair part of an extensive
remodeling of the property?

Let’s continue reading. Allow time to read Advance


Insurance Premiums Student
Guide, pg.12-4.

Complete exercise questions,


Student Guide, pg.12-5 aloud
with class.

How do I handle rental property Page 12-5


that the taxpayer also uses?
Now we are going to go over rules for when Allow time to read Rental vs.
a taxpayer uses a portion of rental property Personal Use, Student Guide,
for personal use. pg.12-5, 6. Instruct students to
complete the exercises.

Lesson 12 - Page 4 of 9
Review exercise answers aloud.

Allow time to read Personal Use


of Rental Property Student
Guide, pg. 12-6, 7. Stop at
exercises.

Instruct students to find the


Personal Use of Dwelling Unit
(Including Vacation Home)
As you can see, the rules for personal use section of Pub 17. Point out
of a home or dwelling unit are very detailed. information and Worksheet 9-1
Let’s see what tools you will have to help Worksheet for Figuring the Limit
you at the site. on Rental Deductions for a
Dwelling Unit Used as a Home.

Instruct students to open the


Volunteer Resource Guide to
TaxWise Income Tab 2,
There is a similar worksheet in TaxWise Schedule E-Rental Income and
Loss page. Have them draw an
arrow pointing to the Line 1,
“Kind” column and add the
instruction, “If taxpayer had part-
year or personal use of property,
link to Rental Worksheet - Part
Year, Part Rental, Part
Ownership, or Personal Use
Unit Worksheet.”

Instruct students to complete


exercises, Student Guide,
pg.12-7 using Pub 17 as a
reference. Review answers.

How do I handle rental losses? Page 12-8


Allow time to read How do I
handle rental losses?, including
exercises Student Guide,
pg.12-8 to end of 12-9.

Lead discussion about effective


questioning to gather
information. Suggest students
notate the Volunteer Resource

Lesson 12 - Page 5 of 9
Guide.

Q: What question might you ask a taxpayer A: Possible answers: Did you
to determine if he/she met active manage the property yourself or
participation requirements? hire someone to do it? Were you
involved in reviewing rental
agreements, arranging for
repairs and improvements or
other property management
tasks?

Note that TaxWise will


automatically calculate allowable
loss if information is entered
correctly.

Refer to Pub 17, for further


information about At-Risk Rules
and Passive Activity Limits

Review exercises.

How do I handle depreciation of Page 12-10


rental property?
The cost of property with a useful life of one Allow time to read How do I
year or more, and used in a trade or handle depreciation of rental
business or held for the production of property? Student Guide, pg.12-
income (such as rent), is recovered by 10 and complete exercises on
deducting an expense called depreciation. pg. 12-11.

Briefly review exercise answers.

Basis and Adjusted Basis


Student Guide, pg.12-11 to 12-
13

You learned about basis and adjusted basis


in Lesson 10, Capital Gain or Loss.

Q: Look in your Publication 17 index, On A: Appropriate pages. (Main


what page(s) in Publication 17 could you index topic: Basis; Sub-topics:
find information about basis and adjusted Adjusted basis, Cost basis,
basis of rental property? Improvements to real estate,
Real estate)
Generally, the basis for depreciation is the

Lesson 12 - Page 6 of 9
purchase price of the property, including the
cost of improvements, but not including the
value of the land on which it sits. When
property is converted from personal use to Review example on Student
rental use, the basis is the lesser of the Guide, pg.12-11
adjusted basis or fair market value (FMV) at
the time of conversion Designate students to read text
below the example on Student
Guide, pg.12-11 to the bottom of
the page

Review example and exercise at


the top of Student Guide, pg.12-
12

How do I figure a MACRS Page 12-12


deduction?
Allow time to read How do I
figure a MACRS deduction?
Student Guide, pg.12-12 to 12-
13 and complete exercise on
pg.12-13.

Review exercise.

Q: In what publication can you find MACRS A: Pub 925


depreciation tables?
Note that Pub 925 can be
downloaded from www.irs.gov.
Suggest participants notate the
Volunteer Resource Guide with
this reference.

Lead discussion about effective


questioning to gather
information. Suggest students
notate the Volunteer Resource
Guide.

Q: What questions might you ask to gather A: Possible responses:


all information needed to correctly calculate When did you first start trying to
depreciation? rent out the property? How
much did you pay for the
property? What is the assessed
value of the land, versus the

Lesson 12 - Page 7 of 9
building? Have you made any
improvements to the property?
Have you purchased appliances
or other assets for use in the
property?

Entering rental income and


expense in TaxWise
Student Guide, pg.12-13

Review all the steps in How do I


enter the Rental Income and
Expenses in TaxWise? Student
Guide as class follows along on
the Volunteer Resource Guide,
TaxWise Income Tab 2,
Schedule E-Rental Income and
Expense page.

Sample Interview Page 12-14


Designate students to read
Sample Interview on Student
Guide, pg. 12-14

Solicit suggestions for what


additional information the
volunteer will need to gather
before entering information on
Tony’s return.

Summary Page 12-14


Rental income and deductible rental Designate students to read
expenses are recorded on Part I of Summary Student Guide, pg.12-
Schedule E, Supplemental Income and 14, 15
Loss.

U.S. citizens and resident aliens must report


rental income for the months their home is
rented,

When renting out part of the property, Stress that because the rules for
certain expenses must be divided between claiming rental income and
rental use and personal use expense are detailed and

Lesson 12 - Page 8 of 9
sometimes complex, volunteers
Limitations on the deductibility of a rental should refer to their research
loss apply to taxpayers who use rental materials every time they
property for personal purposes prepare a tax return.

Because rental activities are generally Optional: Military


considered passive activities, rental losses Comprehensive Problem in the
are not fully deductible. However, taxpayers 678-W includes a rental which
who actively participated in the renting of you may wish to practice on.
the property may deduct up to $25,000 of
their rental losses.

Lesson 12 - Page 9 of 9
Notes
Lesson 13: Income - Unemployment Compensation

Form 1040, Line 19

Objective
Identify how to report unemployment compensation.
Introduction

This lesson will help you assist taxpayers


who have unemployment compensation
payments.

Form 1040, Line 19: Page 13-1


Unemployment Compensation
What is unemployment compensation? Emphasize that unemployment
compensation is generally
Unemployment compensation generally received when a person is laid-
includes any amount received under an off from work.
unemployment compensation law of the
United States or of a state. In most cases, it Ask the students to determine if
is taxable. unemployment is “earned
income”.
Where can I get unemployment Answer - It is not, see the chart
compensation information? in Pub 4012 under the Earned
Income Credit Tab.
Begin with the question on the intake sheet:
Part IV, 8, Unemployment. Ask the taxpayer
for any Form(s) 1099-G that document
unemployment compensation payments Note:
from each government entity. If a person received
unemployment compensation
In most states, a taxpayer can elect to have anytime during the tax year they
federal income taxes withheld from their should receive a Form 1099-G
unemployment compensation benefits. Be or a statement from the
sure to review box 4 of Form 1099-G for Unemployment Compensation
any federal income tax withheld. Office. If they did not receive the
form or statement the taxpayer
How do I report unemployment can contact the Workforce
compensation? Development Office for the State

Lesson 13 - Page 1 of 2
in which they received
The total for all amounts in box 1 of Form(s) unemployment compensation.
1099-G should be entered on:
Line 3 of Form 1040EZ TaxWise Hint page 13-1.
Line 13 of Form 1040A From line 19, link to create each
Line 19 of Form 1040 1099-G. Enter any withholding
amounts in box 1 and box 4.
TaxWise automatically displays
the total unemployment income
on line 19 and includes the
withholding on line 64 of Form
1040.

Summary Page 13-2


This lesson explained: Provide a thorough review of
• What is unemployment compensation each of the bullets in the
• How to report unemployment summary using examples from
compensation class and your experiences.

Lesson 13 - Page 2 of 2
Lesson 14: Income - Social Security Benefits
Form 1040, Line 20a

Objective
Determine how to assist taxpayers who have social security and railroad
retirement benefits

Introduction
This lesson will help you assist taxpayers
who have social security and railroad
retirement benefits.

Form 1040, Line 20a: Social Page 14-1


Security and Railroad Retirement
Benefits
Social security benefits are payments made Refer students to Form 13614,
under Title II of the Social Security Act. Intake and Interview Sheet,
They include OASDI (old-age, survivors, Income. Advise participants to
disability insurance) benefits, and some ask taxpayer if receiving SSA
workers’ compensation benefits. Generally, benefits and/or RR benefits.
if social security benefits are the taxpayer's
only source of income, then the benefits are Demonstrate TaxWise 1040
not taxable and the taxpayer probably does Worksheet 1 if available.
not need to file a federal income tax return. Otherwise refer to the Volunteer
Resource Guide.
If the taxpayer received social security
benefits plus other income, some portion of If the taxpayer’s only source of
the social security benefit may be taxable. income is SSA benefits none will
be taxable. The taxpayer will not
have a filing requirement.

If the taxpayer also has other


sources of income, the SSA
portion may be taxable.
SSI, supplemental security
benefits, not taxable.

Lesson 14 - Page 1 of 8
Again demonstrate with
TaxWise or the Volunteer
Railroad Retirement Benefits (RRBs) are Resource Guide.
benefits paid to railroad employees working
in jobs that are covered by the Railroad
Retirement Act. The RRA benefits have two
components: tier 1 (social security
equivalent benefits) and tier 2 (pension plan
benefits treatment).
Two categories of RRB’s. Tier 1
How are these benefits reported to the and Tier 2. Details to follow.
taxpayer?

Form SSA-1099
Social security benefits are reported to the
taxpayer on Form SSA-1099, Social
Security Benefit Statement. To correctly
calculate the taxable portion, you need to
know the amount in box 5 (Net Benefits).
Taxpayers who did not receive Form SSA-
1099, or have misplaced it, can get a
printout of benefits from their local social
security office. These numbers are reported
on Form 1040, line 20a and b, and on Form
1040A, line 14a and b. See Publication
4012 for specific information on how the
data on Form SSA-1099 is input into
TaxWise.
Explain contents of SSA-1099.
Display one if possible or use a
sample from Publication 678W

Refer to the Volunteer Resource


Guide, yellow Tab 2,
“How/Where to Enter Income.”

Demonstrate linking TW to
complete SSA-1099 worksheet
input. Advise participants of
Medicare Premium input.
Form RRB-1099 and Form RRB-1099R
Railroad retirement benefits are reported on
Form RRB-1099 (Tier 1) and Form RRB-
1099R (Tier 2). These benefits fall into two

Lesson 14 - Page 2 of 8
categories that are treated differently for
income tax purposes. See Publication 4012
for specific information on how the data on
Form RRB- 1099 and Form RRB-1099R is
input into TaxWise.

Tier 1 railroad retirement benefits are equal


to the social security benefit that a railroad
employee or beneficiary would have been
entitled to receive under the social security
system. These benefits are called "social
security equivalent benefits" and for tax
purposes are treated like social security
benefits. They are shown on the BLUE part
of Form RRB-1099. Box 5 shows the net
social security equivalent benefits for Tier 1
in 2007.
Tier 1 treated as social security
benefits. Form RRB-1099. See
the Volunteer Resource Guide,
Railroad Retirement, Civil
Service, and Social Security
Tier 2 Railroad Retirement Benefits Benefits, for TaxWise entry.
The tier 2 benefits consist of the rest of the
tier 1 benefits, called the “non-social
security equivalent benefits,” as well as any
tier 2 benefits, vested dual benefits, and
supplemental annuity benefits. These
benefits are shown on the GREEN part of
Form RRB-1099R, and are treated as an
amount received from a qualified employer
plan. Vested dual benefits and
supplemental annuity benefits are fully
taxable pensions. Boxes 5 and 6 show the
Tier 2 benefits paid in 2007.
Tier 2 is treated as pension
benefits. Form RRB-1099-R.

Example page 14-2:


Jacob is a retired railroad switchyard
operator. Using the Intake and Interview
Sheet, the volunteer determined Jacob
received Railroad Retirement Benefits. He
received Form RRB-1099 and Form RRB-
1099R. Information from both forms will be
used to prepare his return.

Lesson 14 - Page 3 of 8
How do I find the taxable portion of social
security benefits and railroad tier 1
benefits?
Discuss this example with the
The taxable amount, if any, of a taxpayer's class.
social security benefits depends upon filing
status and other reportable income. Part of
the following benefits received by the
taxpayer may be taxable:
• Social security benefits
• Railroad retirement benefits, tier 1
(social security equivalent portion)

Generally, if social security benefits were


the taxpayer's only source of income, the
benefits are not taxable and the taxpayer
does not need to file a federal income tax
return. If the taxpayer received social
security benefits and other income,
complete the Social Security Benefits
Worksheet to calculate the taxable portion.
Ask the participants to locate
this worksheet in the 1040
instructions.

Always use worksheet to


calculate taxable portion.

TaxWise HINT page 14-2:


From Form 1040, line 20, press
F9 to link to the Social Security
Benefits Worksheet. Scroll down
to the Social Security and
Railroad Tier 1 Benefits section.
Enter the information required
from Form SSA-1099 or Form
RRB-1099; also see Publication
4012, Railroad Retirement, Civil
Service, and Social Security
Benefits for instructions on how
Some of the benefits received are taxable if to record the numbers.
total income, plus one-half of the benefits
received, is more than certain base income
amounts, which vary based upon the
taxpayer's filing status.

Lesson 14 - Page 4 of 8
TIP page 14-3:
The taxable portion of social
security benefits is never more
than 85% of the net benefits the
taxpayer has received. In many
cases, the taxable portion is less
If the taxpayer files a joint return, combine than 50%.
the income and benefits of both spouses
when completing the worksheet. Even if the
spouse received no social security benefits,
include the spouse’s other income when
completing the worksheet. If both spouses
received benefits, combine both their
benefits and income when completing the
worksheet for the return.

The process:
Input both incomes if joint return.

Example page 14-3: Input all benefits if joint return.


Wanda and Dan are both retired and will file
a joint return. Wanda received Form SSA-
1099 with an amount of $4,300 appearing in
box 5. Dan retired from the railroad, and
box 5 of his Form RRB-1099 shows an
amount of $6,800. Wanda and Dan will use
the combined benefits of $11,100 and only
one worksheet to calculate if any of their
benefits are taxable Note: The following TaxWise
hint should read:

“Go to line 20 and link to 1040


Worksheet 1. Then enter the
information from the SSA or
RRB 1099.”

TaxWise Hint page 14-3:


The Volunteer Resource Guide
offers specific information as to
how to input each amount from
SSA Form 1099, Form RRB-
1099, and Form RRB-1099-R
into TaxWise. Link from Form
1040, line 20a to enter the
information on SSA Form 1099

Lesson 14 - Page 5 of 8
and Form RRB-1099. Link from
Form 1040, line 16a to enter the
information on Form RRB-1099-
R.

If you are preparing a paper


return, report taxable social
security benefits by following
these steps:
1. Complete the other income
and adjustment items on page 1
of Form 1040 or Form 1040A.
2. Complete the Social Security
Benefits Worksheet in the 1040
Instructions to calculate if any of
the benefits are taxable.
3. If you determine that any
benefits are taxable:
On Form 1040, enter the social
security benefits received on line
20a, and enter the taxable
portion (from line 18 of the
worksheet) on line 20b
On Form 1040A, enter the
benefits received on line 14a,
and enter the taxable portion of
benefits on line 14b
4. If you determine that no
benefits are taxable, report the
full benefits on Form 1040, line
20a, or on Form 1040A, line
Exercises page 14-4 14a. Report “0” on form 1040,
Question 1: Hank comes to your site to get line 20b or on Form 1040A, 14b.
some help with his tax return. He is upset -Refer to the Volunteer
because his neighbor told him that he would Resource Guide.
have to pay tax on all of his social security
benefits this year. After talking to Hank, you
learn that his wife died in 2006. In 2007, he
sold his farm and moved into senior
housing. The sale of the farm created
$31,896 of taxable income for Hank. His A1: D. $9,965 or 85% of the net
neighbor told him, with that much income, benefits is the maximum amount
the entire $11,724 of his social security that could ever be taxable. Use
benefits would be taxable. What is the the worksheet in the 1040
maximum taxable amount of Hank’s instructions or TaxWise to
benefits? calculate this.

Lesson 14 - Page 6 of 8
Lump-Sum benefit Payments Page 14-4
Some taxpayers may have received a lump-
sum benefit payment in 2007. This payment
could be for both the current tax year and
the prior tax year. Box 3 of the taxpayer's
Form SSA-1099 or Form RRB-1099 will
show the lump-sum payment. The form will
also show the year, or years, of the
payment.

When figuring the taxable portion of social


security benefits, two options are available
for lump-sum benefit payments:
The first option allows the taxpayer to report
the whole payment in 2007, the year it was
received. When the taxpayer chooses this
option, complete the Social Security
Benefits Worksheet as usual by including Students should complete this
the entire lump-sum payment on line 1. exercise using the worksheet in
The second option is to treat the payment the 1040 instructions OR
as received in the earlier year or years. This (TaxWise if available)
is done by figuring whether any part of
these benefits is taxable, based on the
earlier year’s income. Any part that is
taxable is then added to any taxable
benefits for the current year (2007) and
included on Form 1040, line 20b.

If the taxpayer chooses to spread the


payments back to earlier years, only 2007
income will be adjusted. The taxpayer does
not file amended returns for the earlier
years. However, a special procedure must
be used to figure the taxable portion of the
benefits assigned to the earlier years. If
taxpayers want to use this option, refer
them to a professional tax preparer or to As always complete Social
Publication 915, Social Security and Security Worksheet, or if
Equivalent Railroad Retirement Benefits. TaxWise is available use it...

First option: Report whole


payment this year.
Second option: send your
taxpayer for professional help.

Lesson 14 - Page 7 of 8
Exercises (continued) page 14-5
Question 2: Joan presents you with her A2: B. There are (ONLY) two
Form SSA-1099, which includes a lump- options available for figuring the
sum benefit payment for both 2006 and taxable portion of social security
2007. For which option would you refer her benefits paid as lump-sum
to a professional tax preparer? 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, Social Security and
Equivalent Railroad Retirement
Benefits.

Summary Page 14-5


This lesson explained how to determine
whether income from taxpayers’ social
security benefits and railroad retirement
may be taxable.

Generally, if social security benefits were


the taxpayer’s only source of income, the
benefits are not taxable and the taxpayer
does not need to file a federal income tax
return. If the taxpayer received social
security benefits and other income, the
Social Security Benefits worksheet needs to
be completed to calculate the taxable
portion.

When figuring the taxable portion of social


security benefits, two options are available
for lump-sum benefit payments. The
taxpayer may report the whole payment in
the year it was received or treat the
payment as received in the earlier year or
years.

Lesson 14 - Page 8 of 8
Lesson 15: Income – Other Income

Form 1040, Line 21

Objective
This lesson will help you determine:
x Other forms of income and how to report other sources of income.
x How to properly report income earned from worldwide sources.
x Who is eligible for foreign income exclusion and how to calculate the
excludible amount using Form 2555, Foreign Earned Income or Form
2555 EZ, Foreign Earned Income Exclusion.
This lesson includes Military, Foreign Earned Income, and Worldwide Income.
Students should be directed to disregard the material that does not apply to their
site.

Introduction
This lesson will help you determine other Important Preliminary note:
forms of income and how to report other This lesson contains three
sources of income. components:
1. Regular “other” income
This lesson will also help you properly 2. Worldwide Income
report income earned from worldwide 3. Military Foreign Earned
sources. To do this, you need to be able Income Exclusion
to identify the type of income and, if
reportable, convert it to the equivalent That is why there are three
U.S. dollar value of the foreign currency. summaries. Chose the section(s)
This requires using the contemporaneous appropriate to the volunteers you
exchange rate or, if not known, an are training.
average annual exchange rate.
Remind the students that all
This lesson will help you determine who is income is taxable unless
eligible for the foreign earned income excluded.
exclusion and how to calculate the
excludible amount by using Form 2555, Refer the students to the
Foreign Earned Income, or Form 2555- Volunteer Resource Guide and
EZ, Foreign Earned Income Exclusion. IRS Pub 17

Lesson 15 - Page 1 of 18
Form 1040, Line 21: Other Income Page 15-1

How do I handle other income?


“Other income” is anything that does not Refer the students to Form 1040
have its own line on Form 1040. line 21. If TaxWise is available you
Here are examples: could share it.
x Prizes and awards
x Gambling winnings, including Caution:
lotteries and raffles Total gambling winnings must be
x Jury duty fees reported on line 21 of Form 1040.
x Alaska Permanent Fund dividends If the taxpayer also had gambling
losses, the losses can only be
If you are unsure about sources of other deducted on Schedule A (see the
income, consult the Volunteer Resource Itemized Deductions lesson for
Guide and Publication 17, or discuss the more information.)
income item with your site coordinator.

To ensure that all taxable income has


been included use the interview
techniques and tools discussed in the
Screening and Interviewing lesson.

How do I report other income?


In most cases, if a taxpayer has "other
income" they must file Form 1040 and TaxWise Hint:
report the income on line 21. To report each source of “other
income,” enter the type under
line 21 and then link to the
appropriate form, worksheet, or
scratchpad. TaxWise adds up the
other income amounts and
displays the total on line 21.

Illustrate this is the TaxWise


software (if available).

Taxpayer Scenario Page 15-2

The volunteer continues working with our Review the Scenario with the
taxpayer, Vanessa Franklin. Recall that students
Vanessa is married but, lives apart from
her husband. She qualifies to file as Display the intake sheet.
Head of Household. Her husband was
employed as a cook for most of the tax

Lesson 15 - Page 2 of 18
year, but collected some unemployment
compensation. They do not live in a
community property state.

Select two students to guide


Sample Interview page 15-2 the class through the Sample
Interview on page 15-2

Note: At the end of the sample


interview: “On page 2 of the Intake
and Interview Sheet indicate
Vanessa’s responses to these
questions. This is important for
the quality review process. This is
a very important part of the VRPP
process.

Important: Where do we go from


here?
Note to instructor: if your site
volunteers will have no worldwide
income or military issues, proceed
to the summary. Otherwise
continue on.

What is worldwide income? Page 15-2

Would someone read the two paragraphs


at the bottom of the page?

Example:
In 2007, Alfredo Kendall earned $40,000 This is a good illustration of the
while working in Dallas, Texas, for Dade concept of “worldwide income.
Corporation. In September 2007, he
transferred to their office in Stuttgart, $40,000 in Texas
Germany. While in Germany, he earned $30,000 in Stuttgart
$30,000 (U.S. dollars). All of Alfredo’s $70,000 total
wages, including the income he earned in
Germany, is included in his gross income; We will discuss conversion issues
enter $70,000 on line 7 of his Form 1040. shortly.

Income is treated the same on the return


regardless of the country from which it is TIP page 15-3:
derived. Similar income earned inside or Foreign income might be reported
outside the U.S. is generally taxed in the to the taxpayer on forms or in

Lesson 15 - Page 3 of 18
same way on the return. Likewise, income ways that are not used in the
earned in the U.S. and not taxed will be United States. Question the
treated in the same way if earned outside taxpayer closely to ensure that the
the U.S. The lines on which income is taxpayer is reporting all worldwide
reported on Form 1040 are the same income. Review the income
whether the U.S. citizen or U.S. resident records to ensure that includable
alien is living within or outside U.S. amounts are accurate and
boundaries. complete.

Remind the students to notate the


intake sheet for the Quality
Review Process

EXERCISES
Q1: Marta Bremer, a U.S. citizen, lives in A1: D.
Mussbach, Germany. Her 2007 income Marta’s gross income includes
included $22,000 in wages earned in her:
Germany. She earned $300 in interest $22,000 wages,
from her U.S. bank and $2,000 $ 300 interest, and
unemployment compensation from the $2.000 unemployment,
state of Iowa. What is Marta’s gross $24,300
income? - all of which should be reported
A. $2,300 on her tax return.
B. $22,300
C. $24,000
D. $24,300

Q2: Mary Carleton, a U.S. citizen, lives in A2: C.


Belgium. Her 2007 income included Mary’s gross income includes her:
$10,000 in wages from her Belgian $10,000 - wages,
employer, $200 in interest from her U.S. $200 - interest, and
bank, $8,000 in alimony payments, and $8,000 - alimony,
$8,000 in child support payments from her $18,200
ex-spouse. What is Mary’s gross income? All of which should be reported on
A. $8,000 her tax return.
B. $16,200 Her child support payments are
C. $18,200 her only nontaxable income.
D. $26,200

How do I convert foreign income Page 15-3


to U.S. dollars?
Exchange Rates
All amounts on the U.S. tax return must
be stated in U.S. dollars. Convert income
taxpayers received in foreign currency

Lesson 15 - Page 4 of 18
into U.S. dollars using the “exchange
rate.”

U.S. exchange rates are stated in two


ways:
- Units of foreign currency to one U.S.
dollar: 0.74855 Euro = 1 U.S. Dollar
- U.S. dollars to one unit of the foreign
currency: 1.33592 U.S. Dollar = 1
Euro

To convert a sum of money into U.S.


dollars, divide the amount of foreign
currency by the exchange rate for the
foreign currency to one U.S. Dollar.

Example page 15-3


Ryan received 3,000 Euros (€3000) on a
day that the exchange rate was 0.74855
Euros to one U.S. dollar. Based on this
exchange rate, the value of Ryan’s €3000
is: €3000 ÷ 0.74855 = $4,007.75

In other words:
Amt of foreign currency
Exchange rate of foreign
currency to one U.S. dollar

= Amount in U.S. dollars

3,000 Euros
.74855 = $4,000.75

Exercises Page 15-4

Q3: Caryn received 200 Euros on a day A3: A. Dividing 200 Euros by the
that the exchange rate was .75514 Euros .75514 exchange rate comes to
to one U.S. dollar. In U.S. dollars, she $264.85.
would have ____.
A. $264.85 200 Euros
B. $377.57 .75514 = $264.85.
C. $115.03
D. $11.50

Lesson 15 - Page 5 of 18
Q4: Given an exchange rate of .7000, A4: C. Dividing 36,000 Euros by
how much is 36,000 Euros worth in the .7000 exchange rate comes to
U.S. dollars? $51,428.57.
A. $252.00 36,000 Euros
B. $25,200.00 .7000 = $51,428.57
C. $51,428.57
D. $61,614.00

Which exchange rate should I use?


Exchange rates for a particular currency
are likely to change every day, so the
exchange rate is determined by the date
of transaction. The date of transaction is
either the date on the check or the date
the money is credited to the taxpayer’s
account.

However, the taxpayer can use the


average annual exchange rate if:
ƒ They have received foreign income
evenly throughout the year, and
ƒ The foreign exchange rate was
relatively stable during the year

Taxpayers may use the monthly average


exchange rates if they earned foreign
income evenly for one or more months,
but less than twelve months.

Example page 15-4


Edward Naropa worked in Dallas for Note: he was only paid in pesos
Lubbock Incorporated from January until for three months. Before that his
September 2007. On September 29, he pay was in dollars.
was transferred to Lubbock’s Mexico City
office, where he will be working for three
more years. In Mexico, he is paid in
Mexican pesos.

Because he received the majority of his


2007 salary in U.S. currency, he should
not use the annual average exchange rate
for the Mexico source income. If he does
not know the exchange rate at the time he
received the funds, he can use the
monthly average exchange rate for
October, November, and December.

Lesson 15 - Page 6 of 18
Where to Obtain Exchange Rates
In mid-January, the IRS distributes Remind the students that the
exchange rates for various currencies to phone numbers are in Pub 54.
its worldwide offices, including the prior You could also share the following
year’s average annual exchange rate US Treasury web site:
information. http://fms.treas.gov/intn.html#rates
(if available)
To obtain exchange rates, call the IRS
International office at 215-516-2000, or
the overseas IRS offices. The phone
numbers of these offices are listed in
Publication 54, Tax Guide for U.S.
Citizens and Resident Aliens Abroad. You
may also contact banks that provide
international currency exchange services.

Because taxpayers should use the rate


that most nearly reflects the value of the
foreign currency at the time they receive
the income, taxpayers may use an
exchange rate that is different from the
rates posted in IRS worldwide offices if
they find it to be a truer representation.

Blocked Income and Soft Currency


Some taxpayers with foreign income may
have “blocked income” or “soft currency”
issues.
ƒ Blocked income refers to a situation
when a taxpayer cannot convert
foreign currency to U.S. dollars due to
local law or government policy. Special
tax rules allow taxpayers with blocked
income to delay reporting part of their
income.
ƒ Soft currency refers to a situation
when a person can only convert back
to U.S. dollars an amount that equals
what the taxpayer brought into the
foreign country in U.S. dollars.

Refer taxpayers with questions about


blocked income and soft currency to a
professional tax preparer, military legal
assistance officer, or the IRS.

Lesson 15 - Page 7 of 18
Exercises (Continued) page 15-5:
Q5: You can generally use the average A5: C.
annual exchange rates posted in the IRS The average annual exchange
worldwide offices for taxpayers who rate should be applied only when
_____. the taxpayer received foreign
A. Have blocked income in a foreign income evenly throughout the
country year and when the exchange rate
B. Earned income in a country with remained relatively stable.
fluctuating currency values
C. Received foreign income evenly
throughout the year

Entering Foreign Employer


Compensation in TaxWise
Refer to the 4012, under the TaxWise tab
titled ‘Income,’ and find the page titled Display this in TaxWise (if
How/Where to Enter Income. available)

Link from line 7 to Form FEC-Foreign


Employer Compensation.

If the taxpayer qualifies for EIC, note that


the return cannot be filed electronically.
Be sure that a paper return is marked on
the Main Information Sheet.

Enter the taxpayer’s address at the time TaxWise help is the F1 key in the
the money was earned. For Section e, disk based version of the
TaxWise Help can be used to determine software.
the appropriate country code. Enter the
foreign employer’s information. List the
compensation amount in U.S. dollars.

Once you enter the information, TaxWise


automatically reports the total on line 7 of
Form 1040.

That is it for worldwide income. Foreign


earned income follows.

Lesson 15 - Page 8 of 18
What is the foreign earned
income exclusion? Page 15-6

Certain taxpayers can exclude income


earned in foreign countries. For 2007, the Note: This lesson will help you
maximum exclusion amount is $85,700. determine who is eligible for the
The foreign earned income exclusion foreign earned income exclusion
does not apply to wages and salaries of and how to calculate the
military and civilian employees of the U.S. excludible amount by using Form
Government. 2555, Foreign Earned Income, or
Form 2555-EZ, Foreign Earned
For tax years beginning after 2005, non- Income Exclusion.
excluded income is taxed for both the
regular tax and the AMT (Alternative
Minimum Tax) at the rates that would
apply if taxable income included the
foreign earned income exclusion and
foreign housing exclusion.

What are the eligibility requirements?


To claim the foreign earned income To determine eligibility and
exclusion the taxpayer must: amount, use the interview
- Demonstrate that his or her tax home techniques and tools discussed in
is in a foreign country (the tax home Lesson 2, Screening and
test) Interviewing.
- Meet either the bona fide residence
test or the physical presence test TIP: The terms “foreign,” “abroad,”
- Have income that qualifies as foreign and “overseas” do not include
earned income Puerto Rico, U.S. Virgin
The requirements are applied separately Islands, America Samoa,
to each individual. If a husband and wife Guam, the Commonwealth of
are working overseas, each must meet all the Northern Marianas, Wake
requirements to qualify for the exclusion. Island, the Midway Islands,
If they do qualify, each is entitled to an and Johnston Island.
exclusion of up to $85,700 (on qualified
income) for 2007.

Exercises
Q6: page 15-6: Miranda has lived in A6: B. Miranda is not eligible for
Puerto Rico since 1999. Is she eligible for the foreign earned income
the foreign earned income exclusion? exclusion because Puerto Rico is
A. Yes not a foreign country.
B. No

Lesson 15 - Page 9 of 18
What is a qualifying tax home?
To claim the foreign earned income
exclusion, the taxpayer’s tax home must
be in a foreign country. The tax home is Very Important Note:
defined as the country in which the Generally, most military personnel
taxpayer is permanently or indefinitely and their dependents will not
engaged to work as an employee or a qualify for the foreign earned
self-employed individual, regardless of income exclusion.
where the family home is maintained.

For taxpayers who work abroad but 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. The
tax home for military personnel is the
permanent duty station, either land- or
ship-based.

Could someone please read the Example


page 15-6?

When do I choose the exclusion?


The foreign earned income exclusion is
voluntary. It is not always an advantage to
claim the exclusion. If taxpayers wish to
claim the exclusion, they must file either
Form 2555 or Form 2555-EZ with a timely
return (including extensions). If the
taxpayer is not eligible for the foreign
earned income exclusion, then any taxes See the lesson Foreign Tax Credit
paid on this income to a foreign for more information.
government may be eligible for the foreign
tax credit.

Once the taxpayer chooses to exclude


foreign earned income that choice Reinforce the point that it is the
remains in effect for that year and all later taxpayer’s choice to exclude, then
years until revoked. Taxpayers may they must take action to revoke if
revoke the exclusion for any tax year by they want to stop excluding, but
attaching a statement. When the then can’t exclude again for 5
exclusion is revoked, the taxpayer may years without approval.
not claim the exclusion again for the next
five tax years without the approval of the
IRS.

Lesson 15 - Page 10 of 18
Exercises (continued) page 15 - 7
Q2: True or False? Alan has lived and
worked in China since August 16, 2000. A2: A. Generally, the tax home is
For 2007, China is his tax home. the country in which taxpayers
A. True maintain their place of business.
B. False 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.
How do I determine the tax
home? Page 15-7

There are specific criteria that must be


met in order for a foreign country to
qualify as a taxpayer’s tax home.

Would someone read that second


paragraph please?

What is a regular place of abode?


“Regular place of abode” is defined as
one’s home, habitation, domicile, or place
of dwelling. It does not necessarily include
one’s principal place of business.

If the taxpayer maintains a place of


business, or is assigned to overseas
employment in a foreign country for an
indefinite period, and does not maintain a
regular place of abode in the U.S., the tax
home is overseas and the taxpayer may
be eligible for the foreign earned income
exclusion.

How do I determine whether the U.S. is


the taxpayer’s regular place of abode?
Ask three questions to determine whether
a U.S. home is the taxpayer’s regular
place of abode. Ask if there are concerns about
Can someone read question 1? either of the questions.
Question 2?
Question 3?
If the answer to two of the questions is

Lesson 15 - Page 11 of 18
“no,” the taxpayer is considered to be
indefinitely assigned to the new location
abroad and is eligible for the foreign
earned income exclusion.

If the answer to all three questions is


“yes,” and the job duration is for less than
one year with the taxpayer returning to the
U.S. home, the taxpayer is considered
“temporarily away” from home. In this
case, the taxpayer does not qualify for the
foreign earned income exclusion, but may
qualify to deduct away-from-home
expenses.

If the answer to two of the three questions


is “yes,” with the same expectation of job
duration and return to the U.S. home, the
location of the tax home depends on the
facts and circumstances.

Example page 15-8


Henry is in the armed forces. He was
assigned to a post in Japan in 2007. This
assignment was for an indefinite period
that exceeds one year. Margaret, his wife,
accompanied him to Japan and has
foreign earned income. They have not
used their home in the U.S. as a place of
residence for over a year. Therefore, their
tax home for 2007 is Japan.

Exercises (continued) page 15-8:


Q8: Stan is employed on an off-shore oil
rig in the territorial waters of a foreign A8: B. Stan is considered to have
country and works a 28-day on/28-day off an abode in the United States and
schedule. He returns to his family does not satisfy the tax home test
residence in the U.S. during his off in the foreign country. He is not
periods. Does Stan’s employment satisfy eligible for the foreign earned
the tax home test? income exclusion.
A. Yes
B. No

What is the period of stay


requirement? Page 15-9

Lesson 15 - Page 12 of 18
The period of stay is the amount of time
the taxpayer stays in the foreign country. Bona fide means:
To meet the period of stay requirement, 1. made in good faith without
the taxpayer must be either: fraud or deceit
ƒ A U.S. citizen or resident alien from a 2. made with earnest intent :
tax treaty country who is a bona fide SINCERE
resident of a foreign country (or 3. neither specious nor
countries) for an uninterrupted period counterfeit : GENUINE
that includes an entire tax year, or
ƒ A U.S. citizen or U.S. resident alien
who is physically present in a foreign
country or countries for at least 330 full
days during any period of 12
consecutive months

What is the bona fide residence test?


To meet the bona fide residence test,
taxpayers must show that they have set
up permanent quarters in a foreign
country for an entire, uninterrupted tax
year. Simply going to another country to
work for a year or more is not enough to
meet the bona fide residence test. A
taxpayer must establish a residence in the
foreign country.

A brief trip to the U.S. will not prevent the


taxpayer from being a bona fide resident, Ask students to read the example
as long as the intention to return to the on 15-9 and discuss as needed.
foreign country is clear.

Exercise (continued) page 15-9


Q9: Zach, a U.S. citizen, has homes in the
U.S. and in Spain, where he has worked A9: A. Since Zach went to Spain
for the last two years. Zach’s wife, who is to work and has established a
also a U.S. citizen, lives with him in Spain. permanent residence there with
Zach visits the U.S. frequently and intends his wife he meets the bona fide
to eventually live there again. Does Zach residence test.
meet the bona fide residence test in
Spain?
A. Yes
B. No

What is the physical presence test?


If the bona fide residence test was not
met then they may qualify under the

Lesson 15 - Page 13 of 18
physical presence test rules. To qualify,
the taxpayer must be physically present in
a foreign country 330 full days during a
period of twelve consecutive months.

In order for a day to count for the test, it


must be a full day in a foreign country.
When arriving from the U.S., or returning
to the U.S., any day in which part of the
time is spent in the U.S. or over
international waters does not count as a
qualifying day in a foreign country.

The taxpayer may move about from one


place to another in a foreign country or to
another foreign country without losing full
days. But if any part of the taxpayer’s
travel is not within a foreign country or
countries and takes 24 hours or more, the
taxpayer will lose full days.

Please read the Example on page 15-10.


Ask if there is need for further
clarification.
What is qualifying income?
Page 15-10
To qualify for the exclusion, income must
be earned income.

How does earned income qualify for


the exclusion?
To qualify for the exclusion, the earned
income must be for services performed in
a foreign country. Amounts paid by the
United States or its agencies to its Refer the class to the 4012 for the
employees do not qualify for the Earned Income Table under the
exclusion. This includes military pay and Earned Income Credit Tab; it has
payment for such activities as post a list of earned and unearned
exchanges, commissaries, and officers income.
clubs.
ƒ Compare the list in the text to the list in
the 4012. Have the students read the middle
example on page 15-10 and ask
. for questions?
What are sources of earned income?
Services must be performed in a foreign

Lesson 15 - Page 14 of 18
country. Where the payments come from
or where they are deposited is not a factor
in determining the source of the income.

If a taxpayer works predominantly in a


foreign country, but does some work in
the U.S., an adjustment must be made to
the total foreign earned income.

Example page 15-10:


Earl works and lives in the Bahamas. He
worked 50 weeks in 2007. He attended a
business meeting in Florida for one week,
and was on vacation for one week. One
fiftieth or 2% of his wages are not foreign
earned income, because of the week Ask if there are questions on
spent working in Florida. anything you have covered.

Exercises (continued) page 15-11


Q10: Juanita lives in Scotland. She is
retired and her income consists of U.S. A10: B. Social security benefits,
social security, a pension, and several pension, and dividends do not
stock dividends. Does she qualify for the qualify as earned income, and
foreign earned income exclusion? therefore, Juanita does not qualify
A. Yes for the foreign earned income
B. No exclusion.

When do I complete and file Form


2555 and Form 2555-EZ? Page 15-11

To be able to use Form 2555-EZ, the


taxpayer must: If available you should display the
- Be a U.S. citizen or resident alien who TaxWise Form 2555 EZ. The
has wages and salaries, but not self- volunteers will be using that to
employment income prepare returns. It shows the
- Have total foreign earned income of requirements at the top of the
$85,700 or less form. It would answer the
- Have no business or moving expense example just below.
deductions
Taxpayers who do not meet these
restrictions should file Form 2555 to claim
the exclusion.

Lesson 15 - Page 15 of 18
Example 15-11
Could someone read the example on
page 15-11? Discuss this example.

Exercises (continued) page 15-11


Q11: Mallory is a U.S. citizen who has
$34,000 of foreign earned income. She A11: B. Since Mallory’s earned
has no other income. Which form should income is less than $85,700, she
she file? can file Form 2555-EZ.
A. Form 2555
B. Form 2555-EZ Direct the students to the TaxWise
form 2555-EZ to answer this
question.
How do I complete Form 2555-EZ?
Taxpayers who are eligible to file Form
2555-EZ should complete Parts I, II, and
IV of the form. Complete Part III if the
taxpayer was in the United States or any Note: Unlike many other topics
of its possessions during the tax year. this is not well covered by the
4012. This is a topic that may also
How do I complete Form 2555? be out of scope for many
Use the following guidelines when volunteers.
completing Form 2555.
ƒ Part I is completed by all taxpayers
ƒ Part II is completed by taxpayers who
qualify under the bona fide residence
test
ƒ Part III is completed by all taxpayers
who qualify under the physical
presence test
ƒ Part IV is completed by all taxpayers
— list all foreign earned income
ƒ Part V is completed by all taxpayers
ƒ Part VI is completed by taxpayers
claiming the housing exclusion and/or
housing deduction
ƒ Part VII is completed by taxpayers
claiming the foreign earned income
exclusion
ƒ Parts VIII is completed by taxpayers
who have deductions allowed in
figuring adjustments to gross income
that are allocable to the excluded
income. The three most common
deductions that may affect the

Lesson 15 - Page 16 of 18
exclusion are:
•Self-employment tax
•Itemized deductions Note: This section says, “Self-
•Moving expenses employment tax (self-employment
income may be exempt from
After adjusting the exclusion for any income tax but not self-
deductions allocable to excluded income, employment tax”. This is an
enter the amount of the foreign earned advanced tax topic.
income exclusion in parenthesis on Form
1040 line 21. Subtract the amount from
the income to arrive at total income on
line 22.
TaxWise Hint: Link from Line 21 of
Form 1040 to Form 2555 or Form
2555EZ in the area designated for
Form 2555 or 2555EZ only.

Taxpayer Example
Page 15-12
Ask two people to do the
interactive interview on 15-13 and
then give the class the opportunity
for discussion.

Refer your students to the Sample


interview on page 15-13. This
scenario is from Pub 678W
Exercise 15 the Jack & Jill Stetson
military practice exercise.
That concludes the lesson for Line 21 of
1040. Let’s look now at Line 22.

Form 1040, line 22: Total Income


Page 15-14
Total income from all sources is entered
on:
x Line 22 (Form 1040, lines 7 – 21)
x Line 15 (Form 1040A, lines 7 – 14)
x Line 4 (Form 1040EZ, lines 1 – 3)
(total income is the same as
adjusted gross income)
TaxWise Hint:
Taxpayers are sometimes alarmed at how TaxWise automatically totals all
high their total income is. If this happens, the income amounts you enter
reassure the taxpayer that the return is and displays the result on line 22

Lesson 15 - Page 17 of 18
not finished yet! It is very likely that of Form 1040
adjustments, deductions, and credits will
considerably reduce the total tax owed.

Summary
Page 15-14
Can someone read each of the points in
the summary on page 15-14? Note:
To ensure a more accurate return,
Are there any questions or concerns? correctly identify income from all
sources, and know the difference
This is the end of the income section of between taxable and non-taxable
the course this summary is meant to income.
recapitulate the whole income section.

The income lessons have explained how


to determine a taxpayer's income and
complete the Income section of Form
1040. The rest of the course discusses
deductions and credits that may be
available against this income.

Lesson 15 - Page 18 of 18
Lesson 16: Military Income

Objective
Determine which items received by service members are reportable on the tax
return and the status of any medical separation pay or related to service in a
combat zone.
Community property laws may impact he income reported by some military
members on their returns.

Introduction

This lesson will help you determine which


items received by service members are Note: Members of the Armed
reportable on the return and the status of Forces access their W-2’s on
any medical separation pay or pay related the military “My Pay” web site.
to service in a combat zone.

Community property laws may impact some


military members on their returns.

To identify these types of income, use the


interview techniques and tools discussed in
the Screening and Interviewing lesson.

What are the types of income? Page 16-1

Service members receive many different Refer your students to Table 1 in


types of pay and allowances. Some are Publication 3 the Armed Forces
includible in gross income while others are Tax Guide
excludible from gross income.

Let’s look at pages 4 and 5 of Publication 3,


Armed Forces’ Tax Guide, for detailed lists
of these types of military pay and to
determine if they are included in gross
income, or excluded.

Lesson 16 - Page 1 of 9
What is includible income? Caution:
Includible items are subject to tax and must If the amount shown in box 1 of
be reported on the taxpayer’s tax return. Form W-2 differs from the last
The items listed in Table 1 of Publication 3 Leave and Earnings Statement
are included in gross income, unless the for 2006, advise the taxpayer to
pay is for service in a combat zone or in a contact the local accounting and
qualified hazardous duty area declared by finance or payroll office for an
statute. All includible military income will explanation.
generally be shown in box 1 of Form W-2
and reported on line 7 of Form 1040.

What is excludible income? TIP:


Excludible income does not have to be If service members were
reported as income on Form 1040, provided a commuter highway
Form 1040A, or Form 1040EZ. The vehicle (such as a van) by
exclusion applies whether or not the item is their employer, refer them to
furnished in kind or is a reimbursement or Publication 525, Taxable and
allowance. For example, the personal use Nontaxable Income, and to a
of a vehicle cannot be excluded from gross professional tax preparer.
income as a qualified military benefit.
Excludible income will not be included in the
amount in box 1 on Form W-2.
A1: B. The payments and
EXERCISES – page 16-2 withholdings for the enlistment
Q1: You need to account for enlistment and and reenlistment bonuses are
reenlistment bonuses separately when reflected on the service
preparing a service member’s tax return member’s Form W-2.
because the tax withholding information is
not shown on Form W-2. Refer to
Publication 3.
A. True
B. False A2: B. The basic allowance for
housing (BAH) and basic
Q2: Which of the following items is allowance for subsistence (BAS)
excludible from service members’ income? are both nontaxable income.
A. Student loan repayments
B. Basic Allowance for Housing (BAH) or Note: Nontaxable here means
Subsistence the same as excludible.
(BAS) income
C. Basic pay
D. Hardship duty pay

Lesson 16 - Page 2 of 9
What is military separation with Page 16-2
disability severance pay?

Disability separation pay has varying effects


on a service member’s income and taxes.

What is severance pay?

Service members separated from the Note: This is a strange topic


service after years of service or medical because the taxability of the pay
reasons are given severance pay, which is can change. They receive the
generally taxable as wages. If the member money before the VA decides
receives disability severance pay and is how much will be untaxed.
later awarded Veteran’s Affairs
(VA) disability benefits, up to 100% of the If the determination is late the
disability severance benefit may be service member may have
excluded from income. The VA makes the already filed their tax return and
determination that the member is entitled to paid tax. If this happens, once
medical disability benefits, and the the determination is made the
determination process can take several taxpayer can amend the return.
months, and sometimes years.

What is VA disability compensation?

A monetary benefit paid to veterans who


are disabled because of injury or disease
incurred or aggravated during active military
service.

The veteran’s service must have been Note: The benefits are not
terminated through separation or discharge subject to federal or state
under honorable conditions. Disability income tax.
compensation varies with the degree of
disability and the number of dependents,
and is paid monthly.

What happens after a service member


receives a letter of determination?
Once the VA makes a determination, all
future pension payments from the
government are offset by the disability
amount paid directly from the VA. These
payments are not taxable and are not
included in Form W-2 or Form 1099-R. The

Lesson 16 - Page 3 of 9
amount of the disability benefit is calculated
by the VA, based on the percentage of
disability and other factors.

Payments made before the letter of


determination was issued have already
been taxed and amended returns may need
to be filed. A copy of the letter should be
attached to the amended returns.

Exercises (continued) page 16-3

Q3: Disability payments sent directly from A3: C. Once the VA sends the
the VA to the discharged service member letter of determination, all
_____. pension payments are offset by
A. Are taxable the disability percentage paid
B. Appear on the taxpayer’s Form W-2 directly from the VA, which are
or 1099-R not taxable and not included in
C. Are not included on the taxpayer’s any Form W-2.
Form W-2 or 1099-R
D. May begin before the VA issues the
letter of determination

Example page 16-3


Would someone please read the example? Discuss this example with your
class and stress the fact that the
VA determination was issued
after Anita had already reported
the income and paid tax on it.

What is a combat zone? Page 16-3

The President of the United States Refer your students to the IRS
designates these areas by Executive Order Web site (www.irs.gov) or to the
The U.S. Armed Forces are engaging or DFAS (Defense Finance and
have engaged in combat. An area becomes Accounting Service) for a
a combat zone and ceases to be a combat complete list.
zone on the dates the President designation
is made.

Hazard duty areas are determined by


Congress. Members of the Armed Forces
deployed overseas, away from their
permanent duty station, in support of

Lesson 16 - Page 4 of 9
operations in a qualified hazardous duty
area, or performing qualifying service
outside the qualified hazardous duty area,
are treated as if they are in a combat zone
solely for the purposes of the extension of
deadlines.

What is the combat zone exclusion?


Members of the U.S. Armed Forces who
serve in a combat zone may exclude certain
pay from their income. The entitlement to
the pay must have fully accrued in a month
during which they served in the combat
zone or were hospitalized due to wounds,
disease, or injury incurred while serving in See IRS Publication 3, Armed
the combat zone. They do not have to Forces’ Tax Guide for the
receive the pay while in a combat zone, in a complete list of military pay that
hospital, or in the same year they served in can be excluded from service
a combat zone. members’ income.

When does service outside a combat


zone qualify as service inside a combat
zone?
Service in a combat zone includes periods
that military members are absent from duty
because of illness, wounds, or leave. If, as
a result of serving in a combat zone, military
personnel become prisoners of war or are
missing in action, they are considered to be
serving in the combat zone as long as they
keep that status for military pay purposes.

What qualifies as service outside a


combat zone?

Military service outside a combat zone is


considered to be performed in a combat
zone if:
x The service is in direct support of
military operations in the combat zone,
and
x The service qualifies a member for
special military pay for duty subject to
hostile fire or imminent danger, and

Lesson 16 - Page 5 of 9
x Hostile fire/imminent danger pay is paid
due to dangers or risks from the combat
zone

Military pay received for this service will


qualify for the combat zone exclusion if the
other requirements are met.

What is non-qualifying presence in a


combat zone?
The following military service does not
qualify as service in a combat zone: TIP page 16-4:
x Presence in a combat zone while on Service personnel are
leave from a duty station located considered to be serving in a
outside the combat zone combat zone if they are either
x Passage over or through a combat assigned on official temporary
zone during a trip between two points duty to a combat zone or they
that are outside a combat zone, and qualify for hostile fire/imminent
x Presence in a combat zone solely for danger pay while in a combat
a member’s personal convenience zone.

Exercises (continued) page 16-5


Q4: Which of the following may qualify as
service in a combat zone? A4: A. Military members are
A. Temporary duty in a combat zone considered to be serving in a
B. Traveling through a combat zone combat zone if they are either
between two points outside of the assigned on official duty to a
combat zone combat zone or they qualify for
C. Presence in a combat zone while on hostile fire/imminent danger pay
leave from a duty station located while serving in direct support of
outside a combat zone.
D. the combat zone
E. Direct support of a qualified
hazardous duty area, but not entitled
to hostile fire/ imminent danger pay.

What is the amount of the combat zone


exclusion?

x Enlisted members, warrant officers, Reminder: If the service


or commissioned warrant officers member finds an error on the
who serve in a combat zone during W-2 the correction must be
any part of a month (even if it’s only made by DFAS.
one day) can exclude all of that
month’s military pay, including
awards and re-enlistment bonuses

Lesson 16 - Page 6 of 9
for which the member becomes Note: As a volunteer, you need
eligible while in the combat zone. to be exact in entering the W-2
Military pay earned while hospitalized into TaxWise as it appears.
due to wounds, disease, or injury
incurred in the combat zone can also
be excluded.
x Commissioned officers (including
limited duty officers) may exclude
pay according to the rules for
enlisted members. However, the
amount of the exclusion is limited to
the highest rate of enlisted pay plus
the amount of imminent
danger/hostile fire pay received for
each month during any part if which
they served in a combat zone or
were hospitalized as a result of their
combat zone service.

Will someone please read the paragraph


above the TaxWise Hint on page 16-5?

Demonstrate with TaxWise or


using other method.

TaxWise Hint page 16-5:


On the Main Information Sheet,
right above the Presidential
Campaign Information section,
there is a line for “Special
Military Processing.” If the
taxpayer served in a combat
zone during the tax year, click
on this box and select the name
of the combat zone from the
dropdown menu, or choose
“Combat Zone.” This will identify
the return to the IRS, and can
avoid certain reject conditions,
such as federal withholding
exceeding 50% of the wage
amount.

Lesson 16 - Page 7 of 9
Taxpayer Example Page 16-6
The Military Comprehensive Problem in the Guide the class through this
Publication 678-W has an example of Form sample interview. If it is
W-2 with combat pay excluded. Here’s how available you should
a volunteer might help a taxpayer that has demonstrate entering a W-2 with
combat pay: combat zone pay using the
TaxWise software.

What are the laws regarding Page 16-6


community property?

The community property states are Arizona,


California, Idaho, Louisiana, Nevada, New
Mexico, Texas, Washington, and
Wisconsin. Special rules apply to married
taxpayers who file separately or who were
divorced during the tax year and were
domiciled in a community property state.

How do community property laws affect


Armed Forces pay?
Married taxpayers who choose to file
separately, when subject to community
property rules, have to figure community
income and separate income for state and
federal income tax.

State community property laws apply to


active military pay. Generally, the pay is
either separate or community income based
on the marital status and domicile of the
couple while the service member was/is in
active military service.

For military personnel in community


property states, the key word is domicile.
Domicile describes someone’s legal,
permanent residence. It is not always where
the person presently lives.
Whether an item is subject to community
property laws depends on whether the
payment is classified as active pay or
retired/retainer pay:

Lesson 16 - Page 8 of 9
Will someone read the first bullet on page Discuss each response.
16-6?

Summary Page 16-7


What income and expenses received or x Medical separation pay
incurred by members of the Armed Forces
x Combat zone exclusion
are includible/ excludible from taxable
x Community property laws
income?

Lesson 16 - Page 9 of 9
Notes
Lesson 17: Adjustments to Income

Objective
Determine which, if any, adjustments to income a taxpayer is eligible to claim on
their return. Adjustments to income are amounts that a taxpayer is eligible to
claim on their return. The results is an “adjusted gross income” which is used to
figure the taxpayer’s tax. Adjustments are applied to reduce income before
figuring the tax; credits are subtracted directly from the tax liability.

Introduction
This lesson will help you determine which, if Adjustments are considered
any, adjustments to income a taxpayer is Intermediate. However, Basic
eligible to claim on their return. Adjustments courses should cover Tuition &
to income are amounts that a taxpayer can Fees Deduction.
subtract from total income. The result is an
“adjusted gross income” (AGI), which is a
factor in computing several deductions and
credits.

What are the adjustments on Form 1040?


Form 1040 provides the largest number of
adjustments to income. In this lesson, you
will learn how to identify and work with Refer to the Volunteer Resource
these adjustments: Guide, TaxWise Adjustments to
Income Tab 3 for a screen shot
• Educator’s expense of the Adjustments to Income
• Half of self-employment tax section of Form 1040.
• Penalty on early withdrawal of savings
• Alimony paid
• IRA deduction
• Student loan interest deduction
• Jury duty pay
• Tuition and fees

There are several other adjustments to


income on Form 1040. In general, these are
beyond the scope of the VITA/TCE
program.

Lesson 17 - Page 1 of 15
We will go over each one of the
adjustments, but first we will look at how
you will identify the adjustments to income
that a taxpayer may be able to claim. To do
this, you will need to ask if the taxpayer had
the types of expenses listed on the
Adjustments section of the 1040.

Notice that there are only three items in the


Adjustments section on Form 13614. Let’s
look at each and identify which of the
adjustment(s) are being addressed. Have students review the
Adjustments section on the
Intake and Interview Sheet.
Q: Which adjustment does Contributions to
IRA, 401k or other retirement account
address?

A: IRA deduction

Q How about Alimony payments?

A: Alimony paid

Q: And education related expenses?

A: educator’s expense, student loan interest


deduction, tuition and fees

Q: Why do you think that three adjustments:


half of SE tax, penalty on early withdrawal
of savings, and jury duty pay are not
addressed by any of the items?

A: Because these three adjustments are


connected with kinds of income (SE
income, interest, and other income). You
will address the adjustment when
discussing the income with the taxpayer.

Q: Will you have to ask any more


questions?

A: Yes, Form 13614 is a tool to assist you


with starting the conversation with each
taxpayer.

Lesson 17 - Page 2 of 15
Suggest students customize
their Volunteer Resource Guide
throughout this lesson, adding
Q: What are some of the questions you notes to remind them about
might ask? additional information they will
need to gather.
A: Solicit discussion of effective questions;
examples:
• You said you were a teacher. Did you
buy any supplies for your classroom?
• I see you are divorced. Did you pay or
receive alimony?
• Did you pay any interest on a student
loan?
• You said you received some jury duty
pay. Did you have to turn it over to your
employer?
• Did you pay for college or vocational
school?

How do I handle educator Page 17-2


expenses?
Eligible educators can deduct up to $250 of
qualified expenses paid in 2007. If the
taxpayer and spouse are both eligible
educators, they can deduct up to $500, but Who is eligible
neither can deduct more than their first Designate students to read How
$250 of qualified expenses. do I handle educator expenses?,
Who is eligible?, page 17-2

Expenses that qualify include expenses


such as books, supplies, equipment
(including computer equipment, software, Advise to use Publication 17 or
and services), and other materials used in Form 1040 instructions to
the classroom. research specific requirements.

What expenses qualify?

Expenses that do not qualify are home


schooling or non-athletic supplies for Advise to use Publication 17 or
physical education or health courses. Form 1040 instructions to
research specific expenses that
qualify.

Lesson 17 - Page 3 of 15
Taxpayer Example Page 17-3
The taxpayer must reduce education
expenses by certain reimbursements they
received:
• Expense reimbursement not included on
Form W-2
• Tax-free interest on U.S. Series EE and I
Savings Bonds
• Non-taxable distributions from a Qualified
Tuition Program (QTP) or Coverdell
Education Savings Account (ESA)?
.
Q: What questions might you ask the
taxpayer to gather information about
possible reimbursements?
A: Solicit discussion of effective questions;
possible answers:
• Did you receive reimbursement that is
not listed on Form W-2? Review TaxWise Hint on page
• Did you redeem tax-free interest on U.S. 17-3. Advise students to input
Series EE and I Savings Bonds? total qualified expenses and
• Did you receive non-taxable earnings TaxWise will automatically
from a Qualified Tuition Program (QTP) impose the $250 limitation.
or Coverdell Education Savings Account
(ESA)? Note that excess educator
expenses may be deductible as
Educator expenses are entered on line 23 employee business expenses
of Form 1040. (subject to the 2% of AGI
limitation) on Schedule A.

At this time we will have a chance to Designate students to read the


practice interviewing taxpayers that are sample interview on page 17-4
teachers. while the rest of the class
follows along making notes on
Form 13614.

Discuss students’ notes.

How do I handle self-employment Page 17-4


tax?
Self-employed taxpayers can subtract half
of their self-employment tax from their Note that TaxWise automatically
income. calculates SE tax and SE tax

Lesson 17 - Page 4 of 15
deduction (Form 1040, line 27)
from the information entered on
Schedule C-EZ.
See Appendix A for Vanessa’s
If you establish that the taxpayer or spouse completed Form C-EZ and Form
has self-employment income, you will SE
calculate the self-employment tax using
Schedule SE. This topic was covered in the
lesson on business income.

How do I handle penalties for early Page 17-5


withdrawal?
Taxpayers can adjust their income to
deduct penalties they paid for withdrawing
funds from a deferred interest account
before maturity. If the taxpayer incurred an Refer to Publication 678W, page
early withdrawal penalty, it will be reported 83 for an example of Form
in box 2 of Form 1099-INT. It may also be 1099-INT with an early
reported on Form 1099-OID. withdrawal penalty.

Early withdrawal penalty is reported on line


30. In TaxWise, it must be entered on the Review the TaxWise hint, page
Interest Statement-Schedule B, early 17-5 while students review
penalty column when you enter Form 1099- Volunteer Resource Guide,
INT. TaxWise Income Tab 2,
Schedule B – Interest and
Interest Statement for Schedule
B, Line 1b Interest Received
pages. (Note there is no
TaxWise link from line 30.)

How do I handle alimony paid? Page 17-5

Alimony is a payment to a spouse or former


spouse under a divorce or separation
instrument.

Alimony does not include child support or


voluntary payments outside the instrument.
Stress this point.
The person paying alimony can subtract it
as an adjustment to income; the person .
receiving alimony must treat it as income. Note that alimony income was
discussed in Chapter 8.

Lesson 17 - Page 5 of 15
Taxpayers who qualify to deduct alimony
payments will not necessarily have any
documentation. You will have to gather this
information through the interview. Let’s see Have students refer to an Intake
what tools you will have. and Interview Sheet.

Q: Where on Form 13614 is the item about


alimony paid?

A: Part V, Adjustments Note: Volunteer Resource


Guide does not have a tool to
Q: Will this item on Form 13614 help you to help determine the deductibility
determine whether the payments made of Alimony payments. Advise
were qualifying alimony payments? participants that they may want
to customize their Volunteer
A: No, it does not provide any qualification Resource Guide with some
rules. notes and references.

Q: What additional questions might you Caution that alimony payment


ask? deductions are matched with
alimony income reported by the
A: Possible responses: recipient. A missing or incorrect
Did your divorce decree require you to SSN will result in disallowance
make the payments? Were you also of the deduction and/or an audit.
required to make child support payments?
Do exercise on page 17-6 as a
Q: If you were unsure about whether the group aloud.
taxpayer’s payments were deductible,
where would you find additional
information?

A: Publication 17, Chapter 18

Report alimony payments on Form 1040,


line 31a. The SSN of the recipient must be
included.

How do I handle IRA Page 17-6


contributions?
An IRA, or Individual Retirement
Arrangement, is a personal savings plan
that offers tax advantages to set aside Note that IRA contributions will
money for retirement. Generally, amounts in also be discussed in a later
an IRA, including interest and gains, are not lesson about the Retirement
taxed until distributed. Savings Credit.

Lesson 17 - Page 6 of 15
There are several different kinds of IRAs
which you already learned about in Lesson
11 (Retirement Income). In this lesson, we
will be discussing contributions to traditional
IRAs, which may be deductible as an
adjustment to income.

Taxpayers must meet eligibility Eligibility requirements to


requirements in order to make IRA contribute, page 17-7
contribution and deduct it. Let’s look at
some of them? Designate students to read each
of the four bullets under What
• Types of IRAs the taxpayer(s) are the eligibility requirements
contributed to. Only contributions to for an IRA contribution?, page
traditional IRAs are deductible. 17-7

After each bullet is read, ask for


• Age limit: Taxpayers can contribute to a examples of questions or other
traditional IRA only if they are less than sources of information the
70-1/2 years of age at the end of the tax volunteer might use to gather
year. the necessary information

• Compensation: Individuals must have Possible sources of information:


taxable compensation (wages, self-
employment income, commissions, • Taxpayer interview: Q: Was
taxable alimony, taxable scholarships or your contribution to a
fellowships). traditional, Roth, SEP or
SIMPLE IRA?
• Time limits: Taxpayer(s) must make that
they make IRA contribution(s) for TY • The taxpayer’s puts his/her
2007 during 2007 or by April 15, 2008. birth date on Form 13614
(which you will verify in
interview)

• Taxpayer interview and


information documents about
income. (Be sure to note all
income on Form 13614.)

• Taxpayer interview: Q: What


date did or will you make the
contribution?

Lesson 17 - Page 7 of 15
Note that the taxpayer can
choose to deduct contributions
made between 1/1 and 4/15,
2008 on their 2007 or 2008 tax
return.

Note that taxpayers can deduct


TaxWise will automatically screen taxpayers a contribution they are planning
for these eligibility requirements provided to make before April 15, 2008. If
that the information you gather is entered they fail to make it, however,
correctly. they will have to file an amended
return.
Q: Where would you look if you wanted to
double-check one of these requirements?

A: Publication 17, Chapter 18, Individual


Retirement Arrangement, p.113

Let’s take a look at Form 13614. Have students review a Form


13614.

Q: What item addresses IRA contribution Suggest that participants


deduction? customize their Volunteer
Resource Guide with notes to
A: Part V, Adjustments, Item 1 prompt them to ask.
(Note that the credits section has almost the
same question.)

Q: Is the taxpayer’s response to this one


item going to give you all the information
you need?

A: No, if the answer to Item 1 is ‘yes’ you


will need to probe for additional information
Allow time to read How much
Let’s read about contributions. can a taxpayer contribute to an
IRA and What is the
compensation requirement?
Including examples and
exercises, pages 17-7 & 8.
This information is mainly for your
awareness, since TaxWise automatically Have students use the index of
applies the limitations. Publication 17 to find the
answer.

Lesson 17 - Page 8 of 15
Q: If you wanted to get the definition of
compensation for IRA purposes or the
contribution limit rules for spousal IRAs,
where could you find the information?

A: Publication 17, Chapter 17, Individual


Retirement Arrangements (IRAs)

As mentioned earlier, only contributions to


traditional IRAs are deductible. The Briefly review the Volunteer
taxpayer may be able to deduct their full Resource Guide, Adjustments
contribution. The deduction is phased out at Tab E, IRA Deduction Phaseout
certain income levels. Charts pages. Note that all the
income levels (with the
Let’s take a look at the Volunteer Resource exception of MFS) are above
Guide, Tab E. Adjustments. general limitations to be served
at VITA sites and most retired
TCE customers no longer
contribute to IRAs.

Note that TaxWise will


automatically compute the
limitation if information is
correctly entered on the
If part of the contribution is not deductible, Deductible and Nondeductible
you must complete Form 8606 for the Worksheet.
taxpayer’s record. TaxWise will do this
automatically. (For paper sites, go over
procedures for completing the
IRA Deduction Worksheet,
pages 17-9 &10.)

Reporting IRA Deduction, page


17-10
Note that TaxWise will
automatically make the entry
from the Deductible and
The IRA deduction is entered on line 32 of Nondeductible Worksheet.
Form 1040.

Although there is not a taxpayer scenario


regarding Vanessa contributing to an IRA, Demonstrate how her $600
her sample return in Appendix A shows that contribution to a traditional IRA
she has $600 IRA Deduction is entered in TaxWise.

Lesson 17 - Page 9 of 15
Note: It is important to list both
traditional and Roth IRAs on the
IRA Worksheet in TaxWise.
This information may have an
affect on the Retirement Savers
Credit which will be discussed in
Lesson 26

How do I handle student loan Page 17-10


interest?
Taxpayers may be able to take a deduction
for up to $2,500 of interest they paid during
the tax year on student loans. The
deduction is phased out at certain income
levels. This deduction is not available to
taxpayers using Married Filing Separate
filing status.

For your review, qualifications to claim the


deduction are outlined in your student guide
on pages 17-11 &12. Now, however, I will Have participants open
ask you to obtain the information from the Publication 17 to Chapter 19,
source that you will have at your site. Education-Related Adjustments
and review Table 19-1, Student
Loan Deduction at a Glance.

Note that this table should not


be relied on alone. If volunteers
need further details, they should
As Table 19-1 indicates, the amount of the consult the text that follows this
student loan interest deduction is phased table.
out at certain income levels.
Briefly review the Volunteer
Resource Guide Adjustments
Tab E, Student Loan Interest
Deduction Limits. Note that the
phase-out limits are above the
general VITA income limits and
Now we are going to discuss how to go that this would not be a common
about gathering the information to deduction for TCE customers.
determine if a taxpayer qualifies for the
student loan interest deduction.

Q: Where on Form 13614 is this deduction Have students review the Intake
addressed? and Interview Sheet.

Lesson 17 - Page 10 of 15
A: Part V, Item 3, Education related
expenses

As you can see, this item just begins your


conversation.

Q: What other questions might you ask?

A: Did you pay interest on any student


loans? Who was the student? Was the loan If available, have students look
used only for qualified educational at a copy of Form 1098-E.
expenses? Remind participants that
payments of less than $600 will
Lenders are required to issue Form 1098-E not be reported on Form 1098-
to persons who paid more than $600 in E, but may still be deductible. It
student loan interest. is up to them to gather the
information on them.

Figuring and reporting the


deduction, page 17-13
Refer to Volunteer Resource
Guide, TaxWise Adjustments
Tab 3. Point out link instructions
for line 33.

Taxpayer Example Page 17-13

Use the Student Loan Interest Deduction


Worksheet for F1040 to figure the deduction
and report it on line 33. If using TaxWise, Designate participants to read
link from line 33 to 1040-WKT2. the roles of Brenda and the
volunteer. Instruct the rest of the
Let’s practice interviewing a taxpayer about class to take notes on Form
their student loan interest. 13614. Discuss notes taken and
why.

Is pay for jury duty an adjustment Page 17-14


to income?
Note that jury pay can only be
As you learned earlier, jury duty pay is deducted if it is included in
included in other income reported on Form income on line 21.
1040, line 21. If an employee receives
regular wages during jury duty, often they Note that TaxWise has a special
must turn their jury pay over to the entry line for jury pay under
employer. In this case, they must include “other”.

Lesson 17 - Page 11 of 15
the jury pay in income and deduct it as an
adjustment to income as a write-in on line
36.

If during your interview you learn that the


taxpayer received jury pay, probe to find out
if it he/she was required to turn it over to the
employer.

Jury pay deduction is reported on line 36.

How do I handle tuition and fees? Page 17-14


Taxpayers can deduct up to $4,000 in
qualified tuition and related expenses paid Refer to Volunteer Resource
during the tax year. The amount of the Guide Adjustments Tab 3 or
deduction is determined by the taxpayer’s Publication 17 for phase-out
filing status, MAGI, and other factors. This chart. Note that as with IRA
deduction is phased out at certain income contributions and student loan
levels. deduction, phase-out limitations
are above general VITA
limitations.

Form 8917, Tuition and Fee Deduction, will Review Vanessa’s Form 8917
help you compute the taxpayer’s Modified located in Appendix A.
AGI for this deduction. TaxWise will
complete this part of Form 8917
automatically.
Eligibility requirements, pages
17-14 &15
Allow time to read Who Is
eligible for this deduction?,
pages 17-14 &15. Review
examples.

Now let’s look at qualified tuition and Allow time to read What are
expense. qualified tuition and expenses
and What is an eligible
educational institution?, pages
17-15 & 16 or refer participants
to Publication 17, Chapter 19,
Education-Related Adjustments
for a definition of qualified
education expenses.

Lesson 17 - Page 12 of 15
Refer students to Intake and
Interview Sheet
Let’s take a moment to talk about how you
will gather information from the taxpayer.

Q: Where on Form 13614 will you make


notes about the tuition and fees deduction

A: In Part V, adjustments near Item 3,


Education related expenses.

You will need to ask some additional


questions.

Also, students who have incurred or paid


qualified educational expenses at an Form 1098-T, page 17-16
eligible educational institution will receive
Form 1098-T. This information return shows Take a look at Vanessa’s Form
qualified expenses paid and grants 1098-T located in Appendix A.
received. The difference between the two
should help you to determine the qualified
expense.

You will learn about education credits in a


later lesson. Since taxpayers may receive Review How do I use TaxWise
only one benefit for the same expense, you to compare education benefits?
must help them choose whether it would be Page 17-16.
more beneficial to use qualified education
expenses to claim the tuition and fees
deduction or the credit.

In most cases the credit is most beneficial,


but there are exceptions. To get the best
benefit for the taxpayer, compute it both
ways.

Taxpayer Scenario Page 17-17

Let’s proceed with interviewing our Designate students to read the


taxpayer, Vanessa Franklin. roles of Vanessa and the
volunteer. Instruct the rest of the
class to think of how they would
gather the information from a
taxpayer. Lead a short
discussion on effective
interviewing techniques.

Lesson 17 - Page 13 of 15
As time permits, designate
students to role play and/or
enter the Taxpayer Example,
pages 17-16 &17 into TaxWise.

Total Adjustments Page 17-18


The other adjustments on Form 1040 are
beyond the scope of the VITA/TCE program
and will not be covered in this lesson

Total Adjusted Gross Income Page 17-18


Adjusted Gross Income (AGI) is the amount
of income that the taxpayer will carry Vanessa’s completed Form
forward after all adjustments have been 1040, page one is in Appendix
subtracted from the total income. A.

Taxpayer Example (Enter in Page 17-18


TaxWise)
Demonstrate in TaxWise how to
enter Vanessa’s education
expenses. In doing so, don’t
forget that although she actually
paid $530 in qualifying
education related expenses; her
employer reimbursed provided
$100. That is why she only gets
an adjustment of $430.

Quality Review Page 17-19

Quality review is a vital component of the Quality Review pages 17-18


tax preparation process. It must be &19. Designate participants to
performed on every return we prepare. Let’s read each bullet point in the
look at how we would look at this part of the Quality Review, pages 17-19 &
return. 20 as the class reviews Form
8158 and determines which
items would be covered.

Lesson 17 - Page 14 of 15
Summary Page 17-20
In this lesson, you learned how to identify
and work with these adjustments to income: Solicit questions and comments.
• Half of self-employment tax
• Penalty on early withdrawal of savings
• Alimony paid
• IRA deduction
• Student loan interest deduction
• Tuition and fees adjustment

If you believe a taxpayer could benefit from


an adjustment that was not covered in this
lesson, encourage the taxpayer to consult a
professional tax preparer.

In this lesson, you saw that TaxWise makes


it much easier to work with adjustments by
providing easy access to electronic
worksheets and by doing many calculations
for you.
Optional: Demonstrate
adjustments on a
comprehensive lesson from
Publication 678-W.

Lesson 17 - Page 15 of 15
Notes
Lesson 18: Military Moving Expenses

Objective
Determine which military members are entitled to an adjustment to income for
moving expenses. This includes determination of qualifying moves, allowances
and reimbursements, moving expenses and completion of Form 3903.

Introduction
This lesson will help you determine which
military members are entitled to an
adjustment to income for moving expenses.
To do this, you will need to determine
qualifying moves, allowances and
reimbursements, moving expenses, and
complete Form 3903.
Note: the special rules for
military members on active duty
To deduct moving expenses as an who move for PCS.
adjustment to income, the taxpayer
generally must meet certain time and
distance tests. However, a member of the
Armed Forces on active duty who moves
because of a permanent change of station
does not have to meet these tests.
Note: the service members’
travel voucher for the move will
contain much of the information.
Un-reimbursed moving expenses are
deducted using Form 3903. Military
members receive a variety of moving
reimbursements and allowances, which
must be considered when determining if the
expenses are deductible. The service
member’s travel voucher will contain much
of the information needed to compute the
deduction.

Lesson 18 - Page 1 of 7
What is a permanent change of Page 18-1
station?

What is a permanent change of station?


Only expenses incurred as a result of a
permanent change of station (PCS) are
deductible. A permanent change of station
includes a move from:
• Home to the area of the first post of
duty
• One permanent post of duty to
another
• The last post of duty to home or to a
nearer point in the U.S. The service
member must move within one year
of ending active duty or within the
period allowed under the Joint Travel
Regulations.

What does a permanent change of station


include for spouses and dependents? Note: The service member and
If the Armed Forces move service members his family may be in different
and their spouses or dependents to or from locations.
separate locations, the moves are treated
as a single move and the qualified
expenses of both moves are combined and
deducted on the same tax return.

EXERCISES page 18-2


Question 1:
Which of the following is a permanent
change of station?
Answer 1: C. A move by a new
enlistee from her home to her
first post of duty is considered a
PCS.

What expenses are included in the Page 18-2


moving expense adjustment?
What expenses are included in the moving
expense adjustment?
Qualifying expenses are military moving
expenses that fall into the following two
categories. The cost of:

Lesson 18 - Page 2 of 7
• Moving household goods and
personal effects
• Reasonable travel and lodging TIP page 18-2:
expenses Publication 521, Moving
Expenses, has detailed
information on deductible and
nondeductible moving
expenses. This publication
also contains a special section
To qualify as “reasonable,” the route taken on Members of the Armed
must be the shortest, most direct route Forces.
available, from the former home to the new
home. Additional expenses for stopovers or
side trips are not deductible as moving
expenses.

Qualifying expenses that exceed


government allowances and
reimbursements are deductible.

How do I handle military Page 18-2


reimbursements?

You need to determine whether any moving


allowances or reimbursements provided by
the government should be included in a
service person’s income, and how to
accurately report the deduction on Form
1040.

Typically, service members move their own


household items, in a personal vehicle or
rented trailer. This is called a Do It Yourself
Note: If TaxWise is available
(DITY) move; the most common form of
you can show this. It goes in as
military move. The military provides an
wages on line 7.
incentive payment equal to 95% of the
estimated cost to the government for DITY
The calculation looks like this:
moves. When the move is completed, the
service member provides receipts and
Gov’t est $2500
paperwork to substantiate authorized
Actual expenses $1750
expenses. The net financial profit is taxable,
and is reported on a separate Form W-2.
(95%) of Gov’t Est $2375
Actual expenses $1750
Income to Jones $625

Lesson 18 - Page 3 of 7
DITY payments are entered as income on
line 7 of Form 1040. Service members may
not take a moving expense deduction
based on the expenses approved by the
finance office when settling the DITY move,
as they have already been used to reduce
taxable income.

Example page 18-3


Captain Jones receives orders for a PCS.
He chooses to pack and drive his
household goods to the new duty station in
his own vehicle. The Air Force estimates
that the move would have cost the .
government $2,500. Captain Jones’ actual
expenses for the move were $1.750. He
receives a payment for $2,375 (95% of the Note: moving expenses are an
government’s estimate) but Box 1 on Form adjustment to income on the
W-2 will show only $625 ($2,375 minus front of the 1040. The taxpayer
$1750) for the DITY move. Captain Jones does not need to itemize.
cannot deduct any of his expenses, since
he’s already been reimbursed.

What forms of reimbursement are not


included as income?
Certain forms of reimbursement provided by
the government are not to be included as
income on the service member’s tax return.
• Moving or storage services furnished
to the military member
• Nontaxable allowances such as:
o Dislocation allowance
o Temporary lodging allowance
o Mileage allowance in lieu of
transportation
o Per diem allowance

EXERCISES continued page 18-3


Question 2: Sgt. Sherry Bishop received
Form W-2 for $1,000 as a result of a DITY
move to a new PDS. The government paid
her a mileage allowance of $300, a lodging
allowance of $200, and a dislocation
allowance of $1200. How much should Sgt.
Bishop include in her gross income on line
7 of Form 1040?

Lesson 18 - Page 4 of 7
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
military should not be
included as gross income on the
service member’s tax return,
How do I calculate the adjustment? even if they exceed
Deductions can only be claimed for the allowable expenses.
amount of expenses not covered by a
nontaxable reimbursement or moving
allowance. To calculate the amount of a
service member’s moving expense
adjustment, complete Form 3903, Moving
Expenses:
• Allowable expenses are shown on
line 3. TaxWise Hint page 18-4:
• All reimbursements and allowances Link from line 26 of Form 1040
are included on line 4. to access Form 3903, Moving
• If the expenses are greater than Expenses. Check the box near
reimbursements, the difference will the top of the form to indicate an
be carried to line 26 of Form 1040, Armed Forces PCS move. Line
and reduce the taxpayer’s Adjusted 2 is broken into two separate
Gross Income. entries: one allows you to enter
• If all reimbursements were the miles traveled and compute
nontaxable allowances, then no the standard mileage amount;
amount is included in line 7 wages, there is a separate line for “other
even if the reimbursements were travel costs.” If you need to add
greater than the allowable expenses. together expenses or
When this occurs, Form 3903 is not reimbursements, link from lines
needed. 1, 2 or 4 to bring up a scratch
pad. If you determine that
nontaxable reimbursements are
greater than allowable moving
expenses, remove Form 3903
before continuing with the
return.

This is shown in the Volunteer


Resource Guide under the
TaxWise adjustments to income
line.

Lesson 18 - Page 5 of 7
Taxpayer Example Page 18-4
Service members can deduct allowable Go through this Sample
moving expenses either in the year in which Interview with the class to
they were incurred or the year in which they determine if the Sierras had any
were paid, whether or not there was deductible moving expenses.
reimbursement by the government. Note this is the Sierra tax return
that is referred to on page 18-5
Service members using the cash method of
accounting (the most common) can deduct
moving expenses in the year of
reimbursement if the expenses were paid in
the year:
• Before the year of reimbursement, or
• Immediately after the year of
reimbursement but by the due date,
including extensions, for filing the
return for the reimbursement year

Exercises continued page 18-5


Question 3: In December 2006 Petty Officer
Ben Wharton moved from California to
Washington. The move qualified as a PCS.
He incurred $800 in mileage expenses and
$1600 in lodging. He paid $1400 to ship
household goods over the allowed weight
limit, and $500 to ship his dog. He filed his
travel voucher in January, 2007, and
received $2400 mileage and travel
allowance. He also received a $1500
dislocation allowance.

Can Petty Officer Wharton claim his moving


expenses on Form 3903 in 2006 or
2007? 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.

Lesson 18 - Page 6 of 7
Taxpayer Example Page 18-5
Have two students demonstrate
this interview.

To see an example of a return


with military moving expenses,
refer to the Military
Comprehensive exercise (the
Sierras) in Publication 678-W.

Summary Page 18-6


This lesson described the types of military
moves that qualify for tax benefits, what
kinds of expenses are deductible, and how
to use Form 3903 to compute the moving
expense deduction. These expenses are
deductible as an adjustment to income on
Form 1040, line 26.

EXERCISE ANSWERS see page 18-6

Lesson 18 - Page 7 of 7
Notes
Lesson 19: Standard Deduction and Tax Computation Screening
and Interviewing

Objective
Determine the taxpayer’s correct standard deduction amount, identify who can
take the standard deduction, and explain how the deduction is calculated.
Explain how tax is computed and reported.

Introduction
This lesson will help you determine the
taxpayer’s correct standard deduction
amount, identify who can take the standard
deduction, and explain how the deduction is
calculated. You will also need to help Instruct students to find standard
taxpayers understand how their tax is deduction amounts in
computed and reported. Publications 4012 or 17.

Q: Using your Publication 4012, under A: Volunteer Resource Guide,


which tab can you find the standard Deductions, Tab F.
deduction for most people?

What is a deduction? Page 19-1

A deduction reduces the amount of the Let’s take a closer look at


taxpayer’s adjusted gross income. standard deductions.
Deductions reduce the amount of income
that is taxed.

Most taxpayers have a choice of either


taking a standard deduction or itemizing
their deductions.

What is a standard deduction? Page 19-1

A standard deduction is a benefit that


eliminates the need for many taxpayers to
itemize actual deductions, such as medical
expenses, charitable contributions, and

Lesson 19 - Page 1 of 5
taxes, on Schedule A of Form 1040. The
standard deduction is higher for taxpayers
who are 65 or older or blind. If you have a
choice, you can use the method that gives
you the lower tax.

The standard deduction amount depends


on your filing status, whether you are 65 or
older or blind, and whether an exemption
can be claimed for you by another taxpayer.
Generally, the standard deduction amounts
are adjusted each year for inflation. The
standard deduction amounts for most
taxpayers for 2007 are shown in your
Publication 4012, Tab F.

Q: What is the standard deduction for a A: Publication 4012,


taxpayer with a filing status of head of Deductions, Tab F, $7,850.
household?

Who cannot take the standard


deduction?
Review the situations when a
x Married filing separate taxpayer may not be allowed to
x Nonresident or dual status alien take the standard deduction on
page 19-1.
Taxpayers benefit from the standard
deduction if the amount is more than their
total allowable itemized deductions.

What is an itemized deduction? Page 19-2

Itemized deductions are deductions for Itemized deductions are covered


certain expenses that are listed on in detail in the next lesson.
Schedule A (Form1040).

How does age or blindness affect Page 19-2


the standard deduction?
If a taxpayer does not itemize deductions,
then he or she may be entitled to a higher
standard deduction if they are age 65 or Review the TaxWise Hint on
older at the end of the year. A taxpayer is page 19-2.
considered 65 on the day before their 65th
birthday. Therefore, a taxpayer can take a
higher standard deduction for 2007, if they

Lesson 19 - Page 2 of 5
were born before January 2, 1943.

If a taxpayer is blind on the last day of the Refer to the footnote on the
year and the taxpayer did not itemize table in Publication 4012, Tab F.
deductions, then they are entitled to a
higher standard deduction. Discuss qualifications for age
and blindness.

Review example on page 19-2.

Refer TIP in Student Guide,


page 19-3.

Complete Exercises on page 19-3 of Have a student read aloud and


Student Guide. check your answers at the end
of the lesson.

How do I determine which Page 19-3


deduction to use?
If not required to itemize taxpayers should See list of things to include on
estimate their deductions allowable for page 19-3.
itemizing and take the larger of the two
options.

Examples: Review all examples on page


19-4.

Q: Loretta and Chauncey are married. They A: If they file jointly and take the
are under 65 and neither is blind. Neither standard deduction, it will equal
can be claimed as a dependent on $10,700. If they file separately,
someone else’s tax return. What would their they can each take a standard
standard deductions be? deduction of $5,350.

Q: Rupert is 78. He lost his wife 10 years A: His standard deduction is


ago, so he is filing as Single. He is not blind $6,650.
and he cannot be claimed as a dependent
on someone else’s return. Have someone read the third
example and discuss.

What about individuals who can be Page 19-5


claimed as dependents?

The standard deduction is generally lower


for an individual who can be claimed as a
dependent on another person’s tax return.

Lesson 19 - Page 3 of 5
The deduction is generally limited to the
greater of:
• $850, or
• The individual’s earned income
for the year, plus $300

However, the deduction cannot be more Show students where to check


than the regular standard deduction amount the box for a dependent being
for the filing status used. If the dependent claimed by another taxpayer on
taxpayer is 65 or older and/or blind, this the Main Info Sheet, TaxWise
calculated standard deduction will be section in Publication 4012, Tab
increased by $1,300 ($1,050 if married or 1 and/or on TaxWise.
qualifying widow(er) with dependent child)
for each box checked for age or blindness.

To calculate the standard deduction, use


the Standard Deduction Worksheet for
Dependents found in the Publication 4012
under Deductions, Tab F.

Taxable Income and Tax Page 19-5


Taxable Income (TI) is the result of reducing Refer to lines of Form 1040, on
AGI by the standard deduction or the total blow up, TaxWise, and/or in
itemized deductions, and the exemption Publication 4012, Tab 4.
amount.

Adjusted Gross Income (AGI) is total


income minus adjustments to income.

The exemption amount is the number of


exemptions claimed multiplied by the
current dollar amount allowed for each
exemption.

Other allowable deductions are covered in


itemized deduction in the next lesson.

The taxable income is based on these


values:
x Adjusted gross income
x Standard or itemized deductions
x Exemption amount

Lesson 19 - Page 4 of 5
Example:

Mr. and Mrs. Brown are filing a joint return. Discuss example on page 19-6
Their taxable income is $25,300. First find and have students look up tax in
the range that includes their income: table of Publications 678-W, 17
$25,300-$25,350. Then read across to the and/or Form 1040 Instructions.
column that applies to their filing status:
MFJ/Tax $3,016.

Taxpayer Scenario Page 19-6


Let’s take a minute to practice asking Have two volunteers role play
interview questions the “Vanessa” taxpayer scenario
on page19-7.

Show the results of using the


standard deduction and three
exemptions on Vanessa’s return
and the resulting tax.

Summary Page 19-8

You should be able to identify those who


can take the standard deduction, and how
the deduction is affected by their filing
status, age, blindness, and status as a
dependent.
Point out that itemized
All of this will make it easier for you to help deductions are in the next
taxpayers understand how their deduction lesson but that they are an
is computed and the impact on their tax. intermediate/advanced topic and
You should also understand that the tax that if students do not certify at
computation is based on taxable income. that level they are not allowed to
The tax may be further reduced by tax do returns for taxpayers that
credits to be covered in an upcoming itemize and must refer them to a
lesson. volunteer that is certified in that
area or refer them to a
You are now ready to work with taxpayers’ professional tax preparer.
personal deductions to get the lowest
possible tax.

Lesson 19 - Page 5 of 5
Notes
Lesson 20: Itemized Deductions

Objective
Calculate and accurately report itemized deductions on Schedule A. Calculate
taxable income. Use interviewing techniques and tools learned in previous
lessons to determine if a taxpayer should itemize deductions.

Introduction

What are itemized deductions?


Itemized deductions are subtractions from a
taxpayer’s adjusted gross income
(AGI) which reduce the amount of income Review the difference in Itemized
that is taxed. Most taxpayers have a choice and Standard Deductions taught in
of taking a standard deduction or itemizing the previous lesson.
deductions. Taxpayers should use the type
of deduction that results in the lowest tax.
You have a choice unless using
MFS status. See TIP in student text
page 20-1.

Itemized deductions include amounts paid


for qualified: Explain Schedule A is used to
calculate itemized deductions.
• Medical and dental expenses
• Certain taxes you paid Review some items on Schedule A.
• Mortgage interest
• Gifts to charity Display on TaxWise if available or
• Certain miscellaneous deductions refer to Volunteer Resource Guide,
TaxWise section, Tab 4.

Medical and Dental Expenses Page 20-2

Q: Are all medical and dental expenses Note: Itemized deductions reduce
deductible? the amount of income taxed.
Use standard or itemized
A: Unreimbursed medical and dental deductions, whichever results in the
expenses totaling more than 7.5% of the lowest tax.
AGI are deductible.
See TIP, page 20-2: If you and a
taxpayer disagree as to whether a

Lesson 20 - Page 1 of 10
Let’s review whose expenses are covered. particular expense is deductible,
then politely refer the taxpayer to a
Now let’s review the types of medical and professional tax preparer. The
dental expenses covered. taxpayer may be correct, but you
should not deduct an expense
unless you are sure it is deductible.

Example Page 20-2

Stewart and Carmen are divorced. Their


son, Raymond, lives with Carmen, who
claims him as a dependent. Carmen paid
for and deducted Raymond’s standard
medical and dental bills, but Stewart
deducted the emergency bill he paid when
Raymond broke his arm.

Have students work Exercise Q1 on page Review answer when complete. A1:
20-3. The total of qualified medical and
dental expenses is $3250.

Taxpayer Scenario Page 20-3


Remember in the previous lesson that Ask two students to read the Sample
Vanessa indicated that she had expenses Interview.
that indicated that she may be able to
itemize rather than take the standard Refer to the appropriate screen
deduction. As we go through this lesson we shots under Tab 4 of Publication
will gather Vanessa’s expenses and enter 4012 and/or demonstrate entering
them on the Schedule A. Vanessa’s medical expenses in
TaxWise.
Are there any questions about Medical and
Dental expenses before we move on to the
next portion of the Schedule A?

Taxes Page 20-4


This topic helps you calculate and
accurately report deductible taxes on
Schedule A.

What taxes are deductible? Page 20-4

Deductible taxes are reported on lines 5


through 9 of Schedule A. See Tab F in your
Publication 4012.

Lesson 20 - Page 2 of 10
Review state and local income taxes or Line 5, Schedule A.
general sales tax.

Review real estate taxes. Line 6, Schedule A.

Review personal property taxes. Line 7, Schedule A.

Review other taxes. Line 8, Schedule A.

Example Page 20-5

Suppose Wayne pays his mother’s property Review the example.


taxes. He cannot deduct the tax Explain there must be a legal liability
payments because he was not liable, and and payment must be made by the
his mother cannot deduct them because taxpayer.
she didn’t pay them. However, if Wayne
gives the money to his mother, then she
can pay the taxes and deduct them.

How do I deduct the taxes? Page 20-5

Explain the general sales tax option. Compare state and local income
taxes withheld to the general sales
tax option to determine the best tax
advantage.

Foreign income taxes paid may be claimed Refer to Pub. 17 chapter on Taxes
on line 8. If customer has paid foreign for expenses that are not deductible.
income tax, the Foreign Tax Credit may
yield the lowest tax benefit. If the customer
wants to claim the Foreign Tax Credit using
Form 1116, refer to a professional tax
preparer unless you are certified in
International issues.

Let’s complete exercises - Q2 & Q3. Page 20-6

A2: B. In addition to qualified real


estate and property taxes, taxpayers
can elect to deduct either general
sales tax or state and local income
taxes. They cannot deduct both.
A3: B, C, D.

Lesson 20 - Page 3 of 10
Taxpayer Scenario Page 20-6
Now let’s get back to our taxpayer Vanessa Ask two students to role play the
Franklin in the Taxpayer Scenario in the Vanessa scenario regarding
student text (page 20-6). Vanessa’s tax deductions.

You will find a copy of Vanessa’s Form Refer to the appropriate screen
1098 that lists her real estate taxes, in the shots under Tab 4 of 4012 and/or
appendix at the back of your student guide. demonstrate entering Vanessa’s
deductible taxes in TaxWise.

Interest Page 20-7


What type of interest is deductible?

Home Mortgage Interest, Points (paid as a Review Form 1098 – Mortgage


form of interest), Qualified Mortgage Interest Statement:
Insurance Premiums, and Investment . Amount of Interest paid
Interest. . Legally liable for debt
. More than one mortgage – may
have multiple Form 1098’s.

Refer participants to Publication 17,


the chapter on Interest Expense and
see “Amount Deductible”.

Example Page 20-8

From 1991 through 1998, Alfredo and Cindy Review & discuss the example.
Kendall borrowed a total of $91,000 using
their home as security. Alfredo and Cindy
used the loans to pay off gambling debts,
overdue credit payments, and some
nondeductible medical expenses.
The total amount of Alfredo and Cindy’s
secured debt is currently down to $72,000.
The fair market value of their home is
$230,000, and they carry $30,000 of
outstanding acquisition debt (the amount
used to buy, build, or improve their home).
If Alfredo and Cindy file a joint return, they
can deduct the interest on their loans
because:

• The total of these loans ($91,000) does

Lesson 20 - Page 4 of 10
not exceed $100,000, and
• The total amount of the secured debt
($72,000) is not more than the home’s
fair market value minus any outstanding
acquisition debt ($230,000 - $30,000 =
$200,000)

Points Page 20-8

Points are the charges paid by a borrower Refer students to Publication 17 the
and/or seller to a lender to secure a Interest Expense chapter to help
loan. They are also called: determine if points are fully
ƒ Loan origination fees (including VA and deductible.
FHA fees)
ƒ Maximum loan charges
ƒ Premium charges
ƒ Loan discount points
ƒ Prepaid interest

Only points paid as a form of interest (for Advise students to see Publication
the use of money) can be deducted on 17, “Items You Cannot Deduct”.
Schedule A. Review the items with class.

Qualified Mortgage Insurance Premium Page 20-9

Private mortgage insurance (PMI)

What qualifications are required to deduct


PMI?
ƒ Paid/accrued January 1, 2007 to
December 31, 2007
ƒ Borrower bought or refinanced home
ƒ AGI is $100,000 or less Ask participants if there are any
ƒ AGI between $100,000 and $109,000 questions on Qualified Mortgage
eligible for reduced deduction Insurance Premiums.

Could someone read exercise 4 on page Discuss the potential answers.


20-9 regarding interest? A4: $2180.

Taxpayer Scenario Page 20-9

Now let’s get back to our taxpayer Vanessa Ask for two volunteers to read the
Franklin. sample interview on page 20-10 in
the student text.

Refer to the appropriate screen

Lesson 20 - Page 5 of 10
shots under Tab 4 of 4012 and/or
demonstrate entering Vanessa’s
interest expenses in TaxWise.

Gifts to Charity Page 20-10


Next we will discuss gifts to charity or
charitable donations. Can anyone name a
charitable organization?
Refer the students to the
This topic helps you identify and report a Contributions chapter in Publication
taxpayer’s deductible gifts to charity, and 17 and review the first column in
explain to taxpayers how they need to Table 24-1.
document their contributions.

Qualified charitable contributions are


reported on lines 16 through 19 of
Schedule A. Turn to Tab 4 in your
Volunteer Resource Guide to review these
lines.

Which gifts to charity are deductible?


Taxpayers can deduct contributions to
qualifying organizations that:
ƒ Operate exclusively for religious,
charitable, educational, scientific, or
literary purposes
ƒ Work to prevent cruelty to children or
animals
ƒ Foster national or international amateur
sports competition if they do not provide
athletic facilities or equipment

Which gifts to charity are not Page 20-11


deductible?

Example

Susan ran a 10K organized by the Chamber Review the example use student
of Commerce to benefit a qualified participation.
charitable organization. She paid the race
organizers a $30 entry fee and received a
“free” t-shirt and pancake breakfast after
the race.
Susan did not make a contribution to the
qualifying organization. She paid the

Lesson 20 - Page 6 of 10
Chamber of Commerce, which allotted
funds to the benefiting organization.
Therefore, none of Susan’s entry fee is tax
deductible. If the race had been organized
by the qualifying organization itself, part of
her entry fee may have been deductible.

What limits apply to charitable Page 20-12


deductions?

Taxpayers whose total contributions are


more than 20% of their AGI may be able to
deduct only a percentage of their
contributions, and must carry over the
remainder to a later tax year.
Review student text pages 20-12
Explain the records a taxpayer should keep thru 20-13 on what records to keep
for charitable contributions. for charitable contributions.

Let’s work Exercise (Q5) on page 20-13. Review answers. Answer 5: $632.

Taxpayer Scenario Page 20-13


Let’s review Taxpayer Scenario in student Refer to the appropriate screen
text on page 20-13. This is an overview of shots under Tab 4 of 4012 and/or
Vanessa’s scenario with her charitable demonstrate entering Vanessa’s
donations. charitable contributions in TaxWise.

What are casualty and theft Page 20-13


losses?
Explain Casualty & Theft Losses are
Refer taxpayers to professional tax outside the scope of volunteer
preparer. services.

Miscellaneous Deductions Page 20-14

Miscellaneous itemized deductions are


expenses a taxpayer pays in order to:
ƒ Produce or collect income
ƒ Manage, conserve, or maintain property
held for producing income
ƒ Determine, contest, pay, or claim a
refund of any tax

For some miscellaneous deductions, only


the portion that exceeds 2% of the

Lesson 20 - Page 7 of 10
taxpayer’s AGI can be deducted. Other
miscellaneous deductions are deductible
regardless of AGI.

Which deductions are subject to the 2% Review student text on page 20-14
limit and which deductions are exempt listing deductions subject to 2% limit
from the 2% limit? and a listing of deductions that are
exempt from the 2% limit.

Refer students to Pub. 17 Chapter


on Miscellaneous Deductions for
non-deductible expenses.

Let’s work Exercise (Q6) on page 20-15. Review answers. A6: $695.

Taxpayer Scenario Page 20-15


Now let’s review the miscellaneous Refer to the appropriate screen
expenses that Vanessa incurred. shots under Tab 4 of the Volunteer
Resource Guide and/or demonstrate
entering Vanessa’s miscellaneous
expenses in TaxWise.

Completing Form 1040, Lines 40 Page 20-16


thru 42
Completing Schedule A
Once you have used Schedule A to
calculate the taxpayer’s itemized
deductions, return to the Form 1040 screen
(See Tab 4 in your Volunteer Resource
Guide). TaxWise will automatically:
1. Compare the total of itemized
deductions to the standard deduction
and enter the larger of the two amounts
on line 40.
a) In cases where the taxpayer is
itemizing even though the
standard deduction is larger, be
sure to check the box to the left of
line 40.
2. Subtract line 40 from line 38 (AGI) and
display the result on line 41.
3. Calculate the exemption deduction on
line 42.

Lesson 20 - Page 8 of 10
4. Subtract line 42 (exemptions) from line
41 to determine the taxable income
amounts.
5. Calculate the tax on line 44.

Taxpayer Scenario Page 20-16

Q: Having completed Vanessa’s


Schedule A, is it better for her to take the
itemized deductions or should she just stick
with the standard deduction?

A: Vanessa is better off to go with the


$7,850 standard deduction rather than her
total itemized deductions of $7,068.

Summary Page 20-17

Medical and Dental Expenses Discuss each topic briefly and ask
Qualified medical and dental expenses are the students if they have questions.
those the taxpayer paid during the tax year
for the taxpayer, spouse, and dependents.

Taxes
ƒ Taxpayers can elect to deduct state,
local, or general sales taxes.
In addition, taxpayers may also deduct:
ƒ State, local, or foreign real estate taxes
ƒ State and local personal property tax
payments

Interest
Generally, the taxpayer receives Form
1098, Mortgage Interest Statement, which
shows the deductible amount of interest
paid by the taxpayer.

Only points paid as a form of interest (for


the use of money) can be deducted on
Schedule A.

Points paid to refinance a mortgage are


generally not deductible in full the year the
taxpayer paid them.

Lesson 20 - Page 9 of 10
Gifts to Charity
The contributions to qualifying organizations
that taxpayers can deduct include:
ƒ Monetary donations
ƒ Dues, fees, and assessments paid to
qualified organizations above the value
of benefits received
ƒ Fair market value of used clothing and
furniture
ƒ Cost and upkeep of uniforms that have
no general use but must be worn while
performing donated services for a
charitable organization
ƒ Unreimbursed transportation expenses
that relate directly to the services the
taxpayer provided for the organization
ƒ Part of a contribution above the fair
market value for items received such as
merchandise and tickets to charity balls
or sporting events.
Taxpayers should keep receipts and
records of all their contributions.

Miscellaneous Deductions
For some miscellaneous deductions, only
the portion that exceeds 2% of the
taxpayer’s AGI can be deducted. Other
miscellaneous deductions are deductible
regardless of AGI.

Completing Form 1040, Lines 40 through


42
Once Schedule A has been completed in
TaxWise, Form 1040 automatically:
1. Compares itemized to standard and
enters the larger of the two amounts on
line 40. Optional: Demonstrate on a
2. Subtracts line 40 from line 38 (AGI) and comprehensive lesson from 678-W
displays the result on line 41. how to enter itemized deductions on
3. Calculates the exemption deduction on TaxWise.
line 42.

Lesson 20 - Page 10 of 10
Lesson 21: Military Employee Business

Objective
Determine and claim qualified employee business expenses for members of the
Armed Forces. Use the interviewing techniques and tools discussed in the
Screening and Interviewing lesson. Determine where to report the deductible
expenses.

Introduction
This lesson will help you determine which
expenses are deductible and where to claim Caution: As you go through this
them on a tax return. You will learn the lesson remind the students that
deductible and nondeductible expenses for Congress is allowing taxpayers
the Armed Forces, such as uniforms, to deduct the costs they incur in
education and travel that are related to generating taxable income. In
working as a member of the Armed Forces. general, if the costs are not
These expenses may be reported on Form connected to generating taxable
2106 with one exception. Reservists deduct income there is no deduction.
them on Schedule A as a Miscellaneous
Itemized Deduction subject to the 2% limit. Remind the students that we are
talking about unreimbursed
To determine itemized deductions of special expenses, or expenses that
interest, use the interview techniques and exceed the reimbursement they
tools discussed in the Screening and receive.
Interviewing lesson. Ask taxpayers if they
had any work-related expenses, and Stress the 2% “limit”, or
whether they received any reimbursements. threshold.

Remind students that the Intake


and Interview Sheet does not list
employee business expenses,
but it is important to ensure that
service members take
advantage of deductions to
which they are entitled.

Lesson 21 - Page 1 of 14
What are uniform expenses? Page 21-1
Military personnel can deduct the cost of Discuss these two basic rules
buying and maintaining uniforms if the for uniforms.
uniforms are: specifically required as a
condition of employment, and not adaptable
to general use as regular clothing.

Deductible vs. non deductible uniform Discuss required use vs.


expenses? allowed use and how it differs
from a civilian.
Although members of the Armed Forces are
required to wear uniforms while on duty,
they are generally allowed to wear their
uniforms in place of regular civilian clothing Remind students that service
when off duty. members must reduce the
deductible expenses by any
Military regulations prohibit off-duty wear of nontaxable uniform allowance or
certain uniform; service members can reimbursement they receive
deduct the cost and upkeep of those
uniforms.
Discuss uniform cost vs. normal
In addition, service members can deduct upkeep.
the cost of required items that do not
replace regular clothing. See example on 21-1.

The same rules apply for active duty Read and discuss each of the
personnel and reservists. Exercises on page 21-2.

Review the answers at the end


of the lesson if necessary.

Are professional dues deductible? Page 21-2

Discuss the types of dues that


may and may not be deductible.

Will someone read the exercise at bottom of Discuss the answer.


page 21-2?

Lesson 21 - Page 2 of 14
What are work-related educational Page 21-3
expenses?

Will someone read the introductory So, what are deductible


paragraph? educational expenses?

Read the TIP page 21-3:

Define the educational expenses


that are subject to 2% of AGI
and what is not.

What does not qualify as work-related Page 21-3


education?

Taxpayers cannot claim an employee Caution: If your taxpayer is not


business expense for education that is: itemizing, qualified education
ƒ Needed to meet the minimum expenses should be claimed
educational requirements for their elsewhere as an adjustment or
trade or business, or credit. See Lesson 24 –
ƒ Part of a program of study that will Education Credits.
qualify them for a new trade or
business.

Example Page 21-3

Sgt. Vance Ventura, an Army pilot, incurred Consider a scenario that would
educational expenses to obtain an make Sgt. Vance Ventura’s
accounting degree. He cannot deduct his accounting degree deductible?
accounting degree expenses on
Schedule A because the degree qualified
him for a new trade or business.

Exercises Page 21-3

Question 4: Answer 4: B. The education


For educational expenses to be claimed as does not have to lead to a
an employee business expense deduction, degree as long as it helps
the education must help the taxpayer maintain or improve skills or
qualify for a degree. knowledge needed for the
A. True taxpayer’s current job.
B. False

Lesson 21 - Page 3 of 14
What are deductible and nondeductible Page 21-3
educational expenses?

Deductible educational expenses include


tuition, supplies, laboratory fees,
correspondence courses, travel, costs of
research, and typing as part of an
educational program.
Educational expenses are not deductible if Remind students that deductible
they are: educational expenses must be
ƒ Items of a personal nature, such as reduced by the amount of
the cost of dinner on campus while educational reimbursement or
the taxpayer attends evening classes allowance received.
ƒ Items of a capital nature, such as
computers or desks

Exercises (continued) Page 21-4

Question 5: Have someone read. Answer 5: B. Educational


expenses may be claimed as
miscellaneous deductions if the
education improves the skills
used in the taxpayer’s current
job.

What about travel for education? Page 21-4

Service members who have qualified


deductible educational expenses may
deduct the cost of travel and transportation
for that education. This includes the cost of
going from work to school, or travel
expenses if the taxpayer travels overnight
mainly to obtain work-related education.
The taxpayer cannot deduct the round-trip
cost of going from home to school unless
the taxpayer is regularly employed and
goes to school on a temporary basis (not
reasonably expected to last more than one
year) for work-related education.

For more details on allowable travel and


transportation for education, see the

Lesson 21 - Page 4 of 14
chapter on Business Deduction for
Work-Related Education in Pub 970, Tax
Benefits for Education.

Taxpayers cannot deduct the cost of travel


that is itself a form of education, even if it is
directly related to their duties.

The next section describes work-related


travel and transportation expenses.

Exercises ( continued): Page 21-4

Question 6: Answer 6: B. Major Manchester


Major Lindsey Manchester is stationed in cannot deduct the cost of
Manila. On weekends, she drives to Taal to traveling to Taal on weekends
take lessons in traditional Philippine dance. because the travel is not work-
Can Major Manchester deduct these travel related.
expenses?
A. Yes
B. No

What are travel expenses? Page 21-4


Travel expenses must be ordinary and
necessary expenses of temporarily traveling
away from home for a person’s job and Give the students other
must be greater than the total of any examples of ordinary vs.
advances, allowances, and reimbursements necessary.
received for such expenses.
ƒ Ordinary expenses are customary or
usual in the person’s field or
business
ƒ Necessary expenses are appropriate
or helpful in the person’s job or
business

Example Page 21-5

Ordinary and necessary expenses include: Discuss these examples.


ƒ Airfare
ƒ Car rental
ƒ Costs of operating and maintaining a
vehicle
ƒ Meals

Lesson 21 - Page 5 of 14
ƒ Lodging
ƒ Taxi fare
ƒ Laundry and/or dry cleaning
ƒ Tips

What is meant by “away from home”? Page 21-5

“Away from home” has a slightly different TIP page 21-5:


meaning for military than for nonmilitary For Navy personnel assigned to
taxpayers. For service members, “home” is permanent duty aboard a ship
the duty station to which they are that has regular eating and living
permanently assigned (which can be a ship facilities, the ship is considered
or a base). It includes the entire city or to be “home” for travel expense
general area where the post of duty is purposes.
located.
TIP page 21-5
Service personnel are considered to be If the Armed Forces member
away from home if they are away from their does not claim reimbursement
permanent duty stations for a period for expenses that they are
substantially longer than an ordinary day’s entitled to, no deduction for
work. those expenses may be
claimed.
Service members may deduct business
related travel expenses incurred while
traveling away from home.

Service members who are on permanent Refer to Publication 3, Armed


duty assignments overseas are not traveling Forces’ Guide, for a complete
away from home, and cannot deduct list of “away from home”
expenses for meals and lodging. expenses.

When are travel expenses deductible? Page 21-5

For travel expenses to be deductible:

ƒ There must be a work-related


purpose for the travel
ƒ They must be deemed as the
“ordinary and necessary” costs of
traveling away from home
ƒ The expenses must be greater than
the total of any advances,
allowances, and/or reimbursements
service members received

Lesson 21 - Page 6 of 14
What are work-related travel expenses? TIP page 21-5:
TDY stands for temporary duty
Examples of work-related travel expenses and TAD stands for temporary
for members of the Armed Forces include: additional duty.

ƒ Expenses incurred while on TDY or


TAD if away from home (ship, base,
or station)
ƒ Expenses of a reservist away from
home overnight to attend drills
ƒ Meals and lodging of a reservist
temporarily called to active duty
ƒ Travel expenses, including meals
and lodging, incurred in connection
with deductible educational activities
ƒ Travel expenses incurred when
carrying on official business while on
“no cost” (to the government) orders

EXERCISES (continued): Page 21-6

Question 7: Answer 7: C. Only Major


Which of the following individuals is entitled Forrest can deduct the costs of
to deduct travel expenses? traveling overnight to attend a
A. Sgt. Bullock, who commutes from his reservists’ meeting.
home to his permanent post of duty in the
same city
B. Capt. Hinds, who takes a taxi to work
from his home to his permanent post of duty
C. Major Forrest, a reservist who is called to
temporary duty and must attend an
overnight meeting away from home
D. PFC Jenkins, who is assigned to
permanent duty aboard a ship that provides
meals and lodging

What are temporary active duty Page 21-6


reservists’ expenses?

Military reservists temporarily called to


active duty who must remain away from
home to perform their duties may claim un-
reimbursed travel expenses such as meals
and lodging. This applies:
ƒ As long as the duty occurred under

Lesson 21 - Page 7 of 14
competent orders, and
ƒ Whether or not the reservist was
compensated

To claim unreimbursed travel expenses,


reservists must:
ƒ Be stationed away from the general
area of their job or business
ƒ Return to their regular jobs once
released
Expenses are deductible only if the
reservists pay for meals and lodging at their
official military post and only to the extent
the expenses exceed Basic Allowance for
Housing (BAH) and Basic Allowance for
Subsistence (BAS).

What is the 100 mile rule? Page 21-6

Military reservists who must travel more


than 100 miles away from home and stay Note: The following discussion
overnight to attend a drill or reserve meeting covers reservists whose
may be able to deduct their travel expenses expenses may not be subject to
as an adjustment to income rather than as a the 2% limit.
miscellaneous itemized deduction. The
amount of expenses that can be deducted TIP page 21-7:
is limited to the: Military Reservists include
ƒ Federal rate for per diem (for lodging, members of the U.S. Armed
meals, and incidental expenses) Forces (Army, Navy, Marine
ƒ Standard mileage rate of 48.5 cents Corps, Air Force, Coast Guard
per mile (for car expenses) plus any Reserve), the U.S. Army
parking fees, ferry fees, and/or tolls National Guard; the U.S.
Any expense in excess of these rates and Air National Guard; or the
expenses that do not qualify for the Reserve Corps of the U.S.
adjustment to gross income deduction can Public Health Service.
be claimed only as a miscellaneous
itemized deduction subject to the 2% limit.
See “local transportation” later in this TaxWise Hint page 21-7:
lesson. On the TaxWise entry screen for
Form 2106 page 1, there is a
box at the bottom for “Minister,
QPA, FBO, RC, and Impairment
Related Work Expenses.” Enter
the portion of the amount on
Line 10 of Form 2106 that is due
to reservist travel expenses over

Lesson 21 - Page 8 of 14
100 miles. You can link from the
entry field to a scratch pad to
add up the separate items
(vehicle expenses, lodging and
50% of food) if you wish.
TaxWise will carry the “RC”
reservist expenses to line 24 on
the front of Form 1040, and the
remainder to line 21 of Schedule
A.
Note: “RC” stands for Reserve
Component of business
expenses

Example: Page 21-7

Mary is an Army Reservist. She lives in a Discuss this example to illustrate


town that is 120 miles from Base A, where the reserve component vs.
she normally reports for Reserve drills or Schedule A employee business
meetings. During 2007, she also expenses.
occasionally traveled to Base B, which was
only 40 miles from her home. Note: Most military members
Mary may claim the travel expenses she are familiar with the per diem
incurred going to Base A as an adjustment concept.
to income. Mary’s remaining expenses for
travel to Base B may qualify as an itemized Reminder: Commuting, the
deduction on line 20 of Schedule A (Form expenses of getting to and from
1040). This deduction will be subject to the your regular place of work are
2% AGI limitation. not deductible.

What is the deduction for meals? Page 21-7

U.S. service personnel can deduct the cost


of meals and business-related
entertainment incurred during business
travel away from their permanent duty
station. The deduction for meals is generally
limited to 50% of the actual expenses.
For service personnel who are fully
reimbursed by the government for meals
under an account-able plan that excludes
reimbursement from gross income, there is
no amount to deduct and, therefore, no
amount subject to the 50% limit.

Lesson 21 - Page 9 of 14
For information on using the standard meal
allowance instead of actual expenses, see
Publication 463, Travel, Entertainment, Gift,
and Car Expenses.

What are local transportation Page 21-7


expenses?

Local transportation expenses are typically


defined as the ordinary and necessary
costs incurred in getting from one place to
another to perform work-related duties while
not traveling away from home. This can
include traveling from one job to another.
However, the expenses of getting to and
from your regular place of work are not
deductible.
Allowable local transportation expenses
include:
ƒ The cost of driving and maintaining
one’s own vehicle
ƒ Travel by rental cars, bus, rail, and/or
taxi

Are car expenses deductible? Page 21-7

Service personnel who use their own


vehicles to travel are entitled to deduct
actual expenses or the standard mileage
rate to figure the deductible costs of
operating their vehicles for business
purposes. In 2007, the standard mileage
rate is 48.5 cents per mile.

Actual expenses include the cost of gas, oil,


repairs, insurance, and depreciation on the
vehicle. If a taxpayer desires to use actual
expenses instead of the standard mileage
rate, refer them to a professional tax
preparer.

EXERCISES (continued) Page 21-8

Question 8: Answer 8: C. Taxi fare to travel


Which of the following costs are considered on work-related business while

Lesson 21 - Page 10 of 14
to be a local transportation expense? not away from home is an
A. Daily meals taken during a week-long allowable local transportation
training session while on duty expense.
B. Gasoline used to drive to and from one’s
regular place of work
C. Taxi fare to travel to a local work-related
convention on a work-related topic, while on
duty
D. Elaborate lunch to treat top-ranking
military official visiting base

Are expenses related to temporary work Page 21-8


locations deductible?

Expenses incurred while commuting to work


are not deductible. However, service
members who are assigned to temporary
assignments in the same trade or business
as their regular place of business can
deduct the expenses of the daily round trip
between their home and the temporary
location, if not reimbursed by their
employer.

Service members can deduct ordinary and


necessary costs of traveling to temporary
work assignments:
ƒ Traveling from one workplace to
another within the city or general
area that is their tax home
ƒ Visiting clients or customers
ƒ Going to a business meeting away
from their regular workplace

Expenses incurred while traveling away


from home overnight are deductible as
travel expenses, not local transportation
expenses.

Example Page 21-8

Sgt. Manuel Vallejo attended a meeting of Discuss this example. It is


an Armed Forces reserve unit. The meeting meant to illustrate the difference
is considered to be a second place of between commuting to work and
business because it is held on one of Sgt. traveling to a different work
Vallejo’s regular work days. He can deduct location.

Lesson 21 - Page 11 of 14
the expense of traveling from his regular
work location to the meeting location.

Who needs to complete Form Page 21-9


2106?

If the service member has job-related travel, TIP page 21-9:


meals or local transportation expenses, or The shorter Form 2106- EZ can
other expenses which are greater than only be used by employees who
reimbursements, Form 2106 must be used received no reimbursement from
to calculate the itemized deduction. their employer, and who use the
standard mileage rate. In most
cases, military members with
Form 2106 is not required if the taxpayer is work-related travel expenses will
claiming only job-related expenses for have received reimbursement,
uniforms, professional dues or education, and will need to use the more
and no reimbursement was received. complete Form 2016.
To determine whether service members
need to complete Form 2106, consider the
following factors:
ƒ Did the service member have work-
related travel, meals or local
transportation expenses? Reminder: Taxpayers can only
ƒ Did the service member receive an claim unreimbursed expenses.
allowance or reimbursement from the
military? Refer the class to the
ƒ Did the amount of travel expenses appropriate page in the
exceed the amount of the Volunteer Resource Guide or
reimbursement or allowance? display the TaxWise process if
available.
For service members who are not required
to file Form 2106, enter miscellaneous
deductions subject to 2% of AGI directly on
Schedule A, line 21.

Example Page 21-9

Capt. Glendale traveled from his duty Discuss with the students.
station in California to Washington, DC, for
a conference. He was away for five days.
The Army advanced $700 to Capt.
Glendale for the trip. His actual expenses
were $625. When he filed his travel voucher
with the Army, he returned the extra $75.
He does not have to complete
Form 2106.

Lesson 21 - Page 12 of 14
How do I complete Form 2106? Page 21-9

Use Form 2106, Employee Business


Expense, to calculate business and job-
related deductions.
Form 2106 is divided into two parts. Part I
addresses total travel expenses; Part II
specifically covers vehicle expenses.
If the service member incurred a vehicle
expense for work-related travel, complete
Part II before entering an amount in line 1 of
Part 1:
ƒ Section A requests general
information about vehicle use. The TaxWise Hint page 21-9:
“placed in service” date is the date Once you enter the total mileage
the taxpayer began using the vehicle on line 22 of Form 2106,
for business. TaxWise will apply the standard
ƒ Section B (line 22) is for taxpayers mileage rate and carry the
who choose to use the standard amount to line 1 of the form.
mileage rate for the vehicle. You can link to a scratch pad
ƒ Sections C and D are for taxpayers from line 22 if you need to add
who are using the actual expense up mileage amounts.
method to calculate their vehicle
expenses. This is beyond the scope Remind students of the scope of
of the volunteer program – refer to a the VITA program.
paid preparer.

Part I, on the first page of Form 2106, is Demonstrate the process in


divided into 3 steps: TaxWise if available.
Use Step 1 to summarize overall
expenses.
ƒ Use Column A for all expenses other
than meals and entertainment.
ƒ Use Column B only for meals and
entertainment expenses.

Enter other job-related expenses, such


as uniforms, educational expenses, and
professional dues on line 4.

Complete Step 2 only if the taxpayer was


reimbursed and the reimbursement is not
shown as income to the taxpayer on Form
W-2 or Form 1099.

Lesson 21 - Page 13 of 14
Complete Step 3 when the employer did not
reimburse the employee in full. Line 10 of
this section shows the amount of the
deduction that can be claimed on Schedule
A, Form 1040. This amount may be reduced
when you apply the 2% AGI limit.

Once you have completed Form 2106, enter


the amount from line 10 onto line 21 of
Schedule A, Form 1040.

Taxpayer example starts on page


21-11. Have the class prepare Mary’s
business expenses.
Go through the sample interview
and review the forms.
If TaxWise is available
Remember to enter ALL of
Mary’s expenses on Form 2106,
and then enter the amount she
will claim as an adjustment in
the area for reservist expenses
on the TaxWise Form 2106
screen.

Summary Page 21-13


Provide a thorough review of
This lesson explained itemized deductions
each of the bullets in the
of special interest to the military and how to
summary using examples from
claim them.
class and your experiences.
It defines:
ƒ Ordinary vs. Necessary
ƒ Reimbursed vs. unreimbursed
ƒ Deductible vs. nondeductible
ƒ Business vs. personal
ƒ Reservist vs. active duty
ƒ Standard vs. Itemized

Lesson 21 - Page 14 of 14
Lesson 22: Business Travel Expenses

Objective
Identify deductible business-related travel expenses. Determine if claiming
standard expenses for meals and mileage will result in the best tax advantage.

As a part of this lesson students will learn how to correctly report reimbursements
the taxpayer has received and how to make sure the taxpayer has records to
substantiate expenses paid.

Introduction
This lesson will show you how to report
deductible business-related travel
expenses. To do this, you need to be able
to identify deductible expenses, determine
if claiming standard expenses for meals and
mileage will result in the best tax
advantage, make sure the taxpayer has
records to substantiate expenses paid, and
correctly report reimbursements that
taxpayer received.

Business expenses are reported on Form


2106, Employee Business Expenses, or on
Form 2106-EZ, Unreimbursed Employee
Business Expenses.

To determine if the taxpayer has business


expenses that can be deducted, use the
interview techniques and tools discussed in
the Screening and Interviewing lesson.

What qualifies as a business travel Page 22-1


expense?
Deductible travel expenses include
“ordinary and necessary business expenses
for your job,” such as transportation, meals, Note: Ordinary and necessary is
and lodging while conducting business. an important element to stress.

Lesson 22 - Page 1 of 8
Because these relate to the taxpayer’s job,
they cannot include any personal expenses,
such as sightseeing, entertaining, family
visits, or family expenses.

Examples of deductible business travel


expenses include:
x Fares for taxis, trains, airplanes, etc.
x Rental car expenses
x Costs of operating and maintaining
an automobile
x Baggage charges
x Meals and lodging
x Cleaning and laundry expenses
x Telephone expenses
x Tips and gratuities
x Other necessary and ordinary
Note: Commuting between
expenses related to travel
home and work is NOT a
business expense. Give
Lodging and transportation connected with
examples.
overnight travel away from one’s tax home
are deductible, but the expense of
commuting to and from work is not
considered a business travel expense. Also,
TIP page 22-2:
a taxpayer cannot deduct expenses for a
United States Foreign Service
family member who goes along on travel for
employees who are on
pleasure.
mandatory “home leave” are
allowed to deduct amounts paid
for travel, meals, and lodging
while on home leave.
However, amounts paid on
behalf of the taxpayer’s family
while on home leave are
personal living expenses and
are not deductible.

Tax Home Page 22-2

A taxpayer’s “tax home” is defined in the


Form 2106 and Form 2106-EZ
Instructions. In general, a taxpayer’s tax
home is his or her regular or main place of
business or post of duty, regardless of
where the taxpayer’s family resides.

Lesson 22 - Page 2 of 8
One cannot deduct expenses for travel
away from one’s tax home for any period of
temporary employment of more than 1 year.

Example Page 22-2

Jocelyn Lane’s permanent duty station is in


Korea. Her husband and children could not
accompany her and have remained at their
home in the United States. After two years
of continuous duty, she comes back to the
United States for five weeks of home leave.
She can deduct the cost of her
transportation, lodging, and meals while
traveling home, her meals and
transportation once she is home on leave,
and her transportation, lodging, and meals
while traveling back to her office in Korea.

Reimbursement Page 22-2

Taxpayers must report both business travel


expenses as well as any employer provided
reimbursement. In some cases this results
in a net expense of zero; in other cases,
excess reimbursement may be taxable
income. When taxpayers combine personal
and business travel, they must strictly
separate the expenses.

Example Page 22-2

Bob Smith traveled to a conference in


Cleveland, Ohio that lasted from
Wednesday through Friday. His employer
reimbursed him for his transportation to and
from the conference, his rental car
expenses, and his meals. He postponed his
travel home until Sunday afternoon so he
could visit a luxury spa in Coshocton, Ohio.
He may report the expenses for the
conference and the reimbursement, but he
cannot claim any costs related to visiting the
spa.

Lesson 22 - Page 3 of 8
What records must the taxpayer Page 22-3
have?

Taxpayer must keep records in order to


deduct travel expenses; this includes meals
(unless using the standard meal allowance),
entertainment, gifts, or use of an automobile
or other listed property. The records must
document the time, place, business
purpose, business relationship (for
entertainment and gifts), and amounts of
each expense. Generally, taxpayers must
have receipts for all lodging expenses
(regardless of the amount) and any other
expense of $75 or more.

Verify the deduction is allowable by asking


taxpayers to produce these records.

Are there alternative methods for


figuring some expenses? Page 22-3

Vehicle Expenses

If a taxpayer has qualified vehicle TIP page 22-3


expenses, you figure those in Part II of See the instructions for Form
Form 2106. 2106 to determine if a taxpayer
is subject to DOT hours of
There are two methods: the actual expense service.
method and the standard mileage rate.
The actual expense method figures the TIP page 22-3
deduction based on a variety of factors, See Publication 463 for details
including gasoline, oil, repairs, insurance, on how to figure deductions
rentals, and may even involve depreciation using the standard meal
or the value of a vehicle provided by the allowance, including special
taxpayer’s employer. rules for partial days or travel
and for transportation workers.
This lesson discusses only the standard
mileage rate. If the taxpayer wishes to use
the actual method, refer them to a
professional preparer.

The standard mileage method is very


simple: It multiples the miles driven for
business by a standard cost. Taxpayers

Lesson 22 - Page 4 of 8
may use the standard mileage rate only if
they meet one of these requirements:
x Owned the vehicle and used the
standard method the first year the
vehicle was put into service
x Leased the vehicle and is using the
standard method for the life of the
lease

If the taxpayer reports vehicle expenses,


regardless of the method used, you must
complete the General Information section in
Part II of Form 2106. As with other business
expenses, the taxpayer must provide
records to prove the time, place, and
business purpose of the travel.

Meals and Incidental Expenses Page 22-3

Meal and entertainment expenses are


figured separately from other business
travel expenses. They are multiplied by a
percentage: 50% for most taxpayers and
75% for those subject to Department of
Transportation hours of service.
Taxpayers may report the actual amounts
for meals, entertainment and incidental
expenses. Alternatively, they may use a
standard amount to report either
meals/entertainment or incidental expenses.
That is, either:
x $3 per day for incidental expenses
(tips, taxis, mailing, etc.), OR
x Federal M&IE rate for meals (for
rates inside the U.S., see
www.gsa.gov; for rates outside the
U.S., see www.state.gov)

In either case, the taxpayer must provide


records to prove the time, place, and
business purpose of the travel.

EXERCISES Page 22-4

Question 1: Answer 1: C. Taxpayers may


Which of the following is true for meals and report the actual amounts for

Lesson 22 - Page 5 of 8
entertainment expenses? meals/entertainment and for
A. Taxpayers may deduct meal incidental expenses or use the
expenses for family members if the standard method for one or the
travel can be proven to be primarily other.
business related.
B. Taxpayers can deduct 100% of meal Show the students the
and entertainment expenses that are not information behind the TaxWise
subject to DOT hours of service. Deductions tab in the Volunteer
C. Taxpayers may report the actual Resource Guide.
amounts for meals/entertainment and for Demonstrate this with the
incidental expenses or use the standard TaxWise software (if available).
method for one or the other.
D. All of the above. Note: Determine if a Form 2106
is needed, then determine if the
Form 2106-EZ is appropriate.

Question 2: Answer 2: False. All business


True or False: Taxpayers who can use the expenses must be supported by
standard method for calculating business records.
mileage need not produce records proving
prove the time, place, and business
purpose of the travel.

How do I report business Page 22-4


expenses?
Business expenses are reported on Form TaxWise Hint page 22-4:
2106, Employee Business Expenses, or Once you enter the total mileage
Form 2106-EZ, Unreimbursed Employee on Line 22 of Form 2106,
Business Expenses. The result from Form TaxWise will apply the standard
2106 or 2106-EZ is reported as a mileage rate and carry the
miscellaneous itemized deduction on amount to Line 1 of the form.
Schedule A of Form 1040.
Hint: You can link to a scratch
To determine if a taxpayer must file Form pad from Line 22 if you need to
2106, ask the taxpayer the questions shown add up mileage amounts.
in the chart Who Must File 2106 in the
instructions for Form 2106. When taxpayers
must file Form 2106, ask questions to find
out if they qualify to file Form 2106-EZ.

They can if they meet these requirements:


x Use the standard mileage rate (if
claiming vehicle expenses)
x Were not reimbursed by an employer
for any expense

Lesson 22 - Page 6 of 8
Form 2106 is divided into two parts. Part I
calculates total travel expenses, and Part II
calculates vehicle expenses. If the taxpayer
incurred qualified vehicle expenses, you
should complete Part II before entering an
amount in line 1 of Part 1:
x Section A requests general
information about vehicle use. The
“placed in service” date is the date
the taxpayer began using the vehicle
for business.
x Section B (line 22) is for taxpayers
who choose to use the standard
mileage rate for the vehicle.
x Sections C and D are for taxpayers
who are using the actual expense
method to calculate their vehicle
expenses. This is beyond the scope
of the volunteer program; refer the
taxpayer to a professional tax
preparer.

In Part I, you report employee business


expenses and reimbursements in two
columns and three steps. Column A lists all TIP: page 22-5
business travel expenses except The final deduction amount on
meals/entertainment, and Column B lists Form 2106 may be reduced
only meals and entertainment. when you apply the 2% AGI limit
x Step 1: Complete for all taxpayers on Schedule A.
who must use Form 2106
x Step 2: Complete only if the TIP: page 22-5
employer reimbursed the taxpayer Special rules apply to figuring
and the reimbursement is not the final amount for business
included as income on Form W-2, travel expense deductions
Box 1 for ministers, armed forces
x Step 3: Figure expenses to deduct reservists, certain state and
on Schedule A: local officials, qualified
- Subtract the amount of performing artists, and disabled
reimbursement from the employees. See
expenses Form 2106 Instructions to
- Calculate meal expenses in determine if a taxpayer will
Column B qualify under any of these
- Determine the total deduction categories.
to be entered on Schedule A

Lesson 22 - Page 7 of 8
EXERCISES Page 22- 5

Question 3: Answer 3: B. Step 2 is used


You should complete Step 2 of Form 2106 only if the employer reimbursed
when the taxpayer receives ___. the taxpayer and the
reimbursement is not included
A. All reimbursements for expenses from as income on the taxpayer’s tax
the employer return.
B. Expense reimbursements that were
not reported as income on form W-2
C. Employee business expenses that
exceeded reimbursements
D. Employee business expenses that
were less than expense reimbursements

Summary Page 22-5

When you help taxpayers calculate


business-related travel expenses, you must
identify deductible expenses. These are
affected by the taxpayer’s “tax home” and
other factors. Also, a taxpayer cannot
deduct expenses for a family member who
accompanies travelers for pleasure.

Not all taxpayers must file Form 2106; some


may file Form 2106-EZ or require neither
form. Be sure the taxpayer has proper
records for expenses, and correctly reports
any reimbursement amounts.

Lesson 22 - Page 8 of 8
Lesson 23: Credit for Child and Dependent Care

Objective
Determine a taxpayer’s eligibility for the credit for child and dependent care
expenses. Calculate the amount of the credit.

Introduction

This lesson will help you determine taxpayer


eligibility for the credit for child and dependent
care expenses and figure the amount of the
credit.

Some taxpayers may not be aware of this Stress to the students their
credit. Your time and effort may result in a knowledge will help educate
lower tax for the taxpayer. the taxpayer and may reduce
their tax.
The first step is determining if the taxpayer is
eligible for the credit. Remember to use the
interview techniques and tools you were
introduced to in the Interview lesson.

When filing Form 1040, calculate the amount of


the credit using Form 2441. Filing a Form
1040A on paper requires the use of Schedule
2.
Caution to students: Don’t
confuse this credit with the
child tax credit!

Notice that the child and dependent care credit Allow the students to look at
expense is addressed. an Intake and Interview sheet.

Ask how many of the students


have heard of the credit for
child and dependent care.

The number will vary from


group to group, but some
degree of familiarity is likely.

Lesson 23 - Page 1 of 12
What is the child and dependent care Page 23-1
credit?

This credit allows the taxpayer to reduce their


tax by a portion of their child and dependent
care expenses. The credit may be claimed by
taxpayers that, in order to work or look for
work, pay someone to take care of their:
Dependent children under age 13 or their
spouse or dependent(s) unable to care for
themselves.

The credit can be a minimum of 20% up to a Let students know that


maximum of 35% of the taxpayer’s qualified expenses will be addressed in
expenses. detail later during the lesson.

The percentage is based on the earned income


and the adjusted gross income of the taxpayer.

This credit can’t be more than the amount of


income tax on the return. In other words, it can
reduce the tax to $0 only. It will not give the
taxpayer a refund.

The Credit for Child and Dependent Care


Expense is an example of a “non- refundable” Emphasize this is a key point
credit. about this credit.

Some taxpayers receive dependent care


benefits from their employers. They may also
be referred to as flexible spending accounts or
reimbursement accounts.

Taxpayers receiving such benefits may be able


to exclude them from their income. Employer Refer students to look at
provided dependent care benefits appear in Form W-2 and locate box 10.
box 10 of form W-2.

All taxpayers who receive employer provided


dependent care benefits are required to
complete Part III of Form 2441 (Form 1040) or
Part III of Schedule 2 (Form 1040A) to
determine if they can exclude all or part of
these benefits from their taxable income.

Lesson 23 - Page 2 of 12
Now that you have an understanding of the
basics of this credit, we will turn our attention to
what resources you will need available to help
the taxpayer and then we will focus on
determining eligibility.

So, what resources will you need?

You’ll need:
ƒ Family and Dependent Information section
of the Intake and Interview Sheet.
ƒ Volunteer Resource Guide (Pub 4012) Have students locate each
ƒ Form 2441 and instructions. product.
ƒ Publication 17

How do I determine if a taxpayer is Page 23-2


eligible?
To determine eligibility, use the interview
techniques and tools.

Look at Tab G in Publication 4012. The


information and decision tree will assist you
with making the determination.

Be sure to ask the taxpayer if they paid for any


type of dependent care, for example, for a
spouse or other dependent.

Using the Volunteer Resource Guide decision


tree will help ensure you cover the five eligibility
tests the taxpayer must meet to qualify for the
credit:
ƒ Qualifying person test
ƒ Earned income test
ƒ Work-related expense test
ƒ Joint return test
ƒ Provider identification test

As we go over each test, keep in mind that the Stress this is an important
taxpayer must satisfy all five to qualify for point.
the credit.

Lesson 23 - Page 3 of 12
What is the qualifying person test? Page 23-2
A qualifying person can be any of the following: Point out that only the
ƒ A qualifying child who is the taxpayer’s custodial parent can take this
dependent and under age 13 when the care credit. If the child is not being
was provided. claimed as a dependent by
ƒ Dependents who were physically or the taxpayer because the
mentally unable to care for themselves and non-custodial parent is taking
for whom the taxpayer can claim a the exemption under the
dependency exemption. This person must special rules for children of
have lived with the taxpayer for more than divorced and separated
half the year. No age limit applies if the parents, only the custodial
qualifying child dependent is permanently parent may treat the child as
and totally disabled. a qualifying person for this
ƒ A spouse who is physically or mentally credit. For more, see
unable to care for themselves. Publication 17, Chapter 3.

Note: This test is still met if


the exemption is not claimed
because the person had
$3,400 or more of gross
Here is an example: income or filed a joint return.

Jim paid someone to care for his wife, Janet. Refer to this example in the
Janet is physically unable to care for herself. lesson on page 23-2
Jim also paid to have someone prepare meals
for their 12 year old daughter, Jill. Both Janet
and Jill are qualifying persons for the credit.
Team up the students or get
Let’s take a minute to practice asking interview two volunteers to role play the
questions. scene in the lesson,
page 23-3.

Q: Why is Dorothy’s daughter a qualifying Ask for a volunteer to answer.


person? A: Even though she is over
age 13, she meets the test
because she is unable to care
Once you’ve determined if the taxpayer had for herself.
eligible expenses for the credit, check the
appropriate box on the Intake and Interview
Sheet.

What is the earned income test? Page 23-3

The taxpayer (and spouse, if married) must

Lesson 23 - Page 4 of 12
have earned income during the year.

Earned income includes:


ƒ Wages
ƒ Salaries
ƒ Tips
ƒ Other taxable employee compensation
ƒ Strike benefits
ƒ Disability pay reported as wages

What if spouses are full time students or unable Page 23-3


to care for themselves?

The rules governing the credit treat such a State that a full time student
spouse as having earned income for any is defined as enrolled and
month they are a full time student or are attending a school for the
physically or mentally unable to care for number of hours or classes
themselves. the school defines as full
time. The spouse must be a
full time student for some part
of five calendar months
The income is considered to be $250 for each during the year.
month there is one qualifying person
in the home or $500 for each month there
are two or more qualifying persons in the
home.

If, in the same month both the taxpayer and


spouse are full time students or physically or
mentally unable to care for themselves, only
one spouse can be considered to have earned
income or either $250 or $500 for that month.

It’s time for another chance to practice asking Follow the same guidelines
interview questions. as before using the example
on page 23-4 of the lesson.

Q: Why do Dorothy and her husband meet the


earned income test?

A: They meet the test because her husband


was a full time student for at least five months
and is considered to have earned income for
those months.

Lesson 23 - Page 5 of 12
What is the work-related expense Page 23-4
test?

Expenses are considered work related only if


both of the following are true:
ƒ The expenses allow the taxpayer (and
spouse, if married) to work or look for work,
and
ƒ The expenses are for a qualifying person’s
care and to provide for that person’s well
being and protection.

There is a limit on the amount of work related


expenses that can be used to figure the credit.

The limit is $3000 for one qualifying person and


$6000 for two or more qualifying persons.

What are examples of work related expenses? Page 23-4

Some examples of work related expenses Ask for a volunteer to read


include: the Krista example on
ƒ The cost of care outside the home for page 23-5.
dependents under 13, preschool or home
daycare for example, and
ƒ The cost of care for any other qualifying
person such as dependent care,

Household expenses that are at least partly for


the well being and protection of a qualifying
person, for example, the services of a
housekeeper or cook

What expenses do not qualify as work- Page 23-5


related?

Expenses that do not qualify include amounts Point out that small amounts
paid for food, clothing, education or of these expenses can be
entertainment. included if they are incident to
and can’t be separated from
the cost of care.

These are examples of childcare expenses that


do not qualify as work related :
ƒ Education expenses to attend kindergarten

Lesson 23 - Page 6 of 12
or a higher grade.
ƒ The cost of overnight camp.
ƒ The cost of transporting a qualifying person
from the taxpayer’s home to the care
location and back.

Here’s an example: Roger takes his 10 year


old child to a private school. In addition to
paying the cost of the education, Roger also
pays an extra fee so his child can attend before
school and after school programs so he can
work. Roger can count the cost of the before
and after school programs when figuring the
credit, but not the cost of the education.

What about taxes paid for household Page 23-5


employees?

Before moving on to the next test, we will Refer to Employment Taxes


spend a few minutes addressing what happens for Household Employers in
when taxpayers pay someone to provide care Publication 17 for more
services in their home. information.

When this happens, the taxpayer may be


required to pay household employment taxes Refer taxpayers who did not
and they may be considered a work related pay employment taxes or who
expense. are unsure about these
requirements to Publication
If the employee earned less than $1,500 for the 926, Household Employer’s
year and the taxpayer did not withhold income Tax Guide or to a
tax, employment taxes are not required to be professional tax preparer.
paid and no W-2 needs to be provided.

What if the taxpayer makes payments to a Page 23-5


relative?

These payments may qualify as work related


expenses if the taxpayer does not claim the
relative as a dependent.

Do not count amounts paid to:


ƒ A dependent whom the taxpayer (or
spouse, if married) can claim as a
dependent, or
ƒ The taxpayer’s child who is under age 19 at

Lesson 23 - Page 7 of 12
the end of the year, even if he or she is not
the taxpayer’s dependent

Let’s try another practice interview. Team up the students to role


play the interview on
page 23-6 of the lesson.

Q: Why does Dorothy pass the work related


expense test?

A: The expenses are paid so that she and her


husband can work and are not paid to a
dependent relative.

What is the joint return test? Page 23-6


Generally for a married couple to claim the
child and dependent care credit, a joint return
must be filed.

However, taxpayers can be considered


unmarried if they file a separate return and:
ƒ Are legally separated on the last day of the
year, or
ƒ Lived apart from their spouse for the last 6 Point out that for a taxpayer
months of the year and paid more than half whose spouse died during the
the cost of providing a home that was the year and has not re-married a
main home of the qualifying person for more joint return must usually be
than half the year. filed to claim the credit.

Explain that they will have


already determined the
taxpayer’s filing status and
can rely on that to determine
if they pass the joint return
test.

What is the provider identification Page 23-7


test?
This test requires that the taxpayers provide
the name, address and Taxpayer Identification
Number (TIN) of the person or organization
who provided the care.

Lesson 23 - Page 8 of 12
If the provider is an individual, their TIN is their
Social Security Number. If the provider is an
organization, the TIN is their Employer
Identification Number (EIN).

If the taxpayer is unable to give complete Refer to sections Due


provider or who have incorrect information may Diligence and Provider
still be able to take the credit if they can show Refusal of Publication 17 for
they use due diligence in trying to obtain the more information.
correct information.

Returns that do not include the provider


information cannot be filed electronically.

That completes the five tests.

Here is a chance to practice what you have Have the students do the
learned. practice exercise on
page 23-7 of the lesson.
Review answers when done.

Taxpayer Scenario Page 23-8


Get two students to role play
the “Vanessa” taxpayer
scenario.

Now that it has been determined that Vanessa


meets all five eligibility tests, check the DC box Show on TaxWise main
for Zoe on the Tax Wise main information information sheet if available.
sheet.

The credit is entered in the Nonrefundable Refer to Publication 4012.


Credits section of Tax Wise. You can see this
screen on Tab 5 in the Volunteer Resource
Guide.

Taxpayer Example Page 23-9


Given them an option to do
the Bill and Helen scenario
instead of Vanessa or they
can do them both.

So far we have covered the five eligibility tests

Lesson 23 - Page 9 of 12
and used our resources to determine
taxpayer’s eligibility.

How do I determine the amount of the Page 23-10


credit?

TaxWise performs most of the credit


computation for you. On page 2 of the TaxWise Demonstrate this on TaxWise
Form 1040, link from Line 47 to bring up Form as you explain this point.
2441. Then, enter the taxpayer’s information
and TaxWise calculates the credit.

It you are preparing a paper return, Form 2441


leads you through the calculation. If instructing paper preparers
refer to Form 2441 as you
The form is divided into three parts: discuss each section. Also
ƒ Part I is for general information about the advise preparers that an
care provider Alternative Minimum Tax
ƒ Part II is where the child and dependent worksheet may be required to
care credit is calculated figure the credit.
ƒ Part III is where employer provided
dependent care benefits are entered

All taxpayers complete part I first. If there are


no employer provided benefits, complete part II
next. If there are employer provided benefits,
complete part III and then do part II.

Here’s an example: Refer students to page 23-10


to see this example.
Paula has one dependent child, Jenny, who is
now 6 years old. Paula paid $2,900 in qualified
expenses. Box 10 of her W-2 shows $1,400 of
employer provided benefits were received
during the year. Paula must have part III
completed before part II.

We should take a closer look at employer Remind the students these


provided benefits. Taxpayers may be able to benefits will be in box 10,
exclude these benefits from their income. They Form W-2.
can be paid either directly to the care provider
or to the taxpayer.

Lesson 23 - Page 10 of 12
While the taxpayer may still be able to claim
the credit, the amount of excluded benefits is
not included in work related expenses and also
reduces the dollar limit of the credit.

Remember, taxpayers who received dependent


care expenses must complete Part III of Form
2441. This is true even if they are not eligible
for the credit.

Here’s a little TaxWise help. The TaxWise Demonstrate this hint on


Form 2441 has space for two care providers. If TaxWise.
there are more than two, link from block 1(a),
Care Provider’s name to a worksheet that will
allow you to enter as many providers as you
need. To enter the TIN and the amount paid,
link from block 1(c) to a separate worksheet.

What limits apply to this credit? Page 23-11

The taxpayer’s expenses are subject to an


earned income limit. The work related
expenses use to figure the credit can’t be more
that:
ƒ The taxpayer’s earned income for the year,
or
ƒ If filing jointly, the smaller of the taxpayer or
spouses earned income for the year.

There is also a dollar limit on the amount of


work related expenses that can be used.

This limit is:


ƒ $3,000 for one qualifying person and
ƒ $6,000 for two or more qualifying persons

If the taxpayer received employer provided


benefits, the amount of these benefits excluded
from income must be subtracted from the dollar
limit.

Here’s an example: Mary has three qualifying Read the example on


children. She received $4,800 in dependent page 23 -10 of the lesson.
care benefits from her employer. Mary’s work
related expenses will be limited to $1,200
($6,000 - $4,800).

Lesson 23 - Page 11 of 12
Taxpayer Scenario Page 23-11
It’s time to put it all together and complete
Form 2441.
Use the Vanessa scenario
Remember Vanessa and her daughter Zoe? that begins on page 23 -11 of
the lesson to complete
Well, let’s do her Form 2441 on TaxWise. Form 2441 on TaxWise.

The form is completed, so be sure to double


check your entries for the care provider
information.

Again, remember that if there is an amount in


box 10 of the W-2, be sure that you completed
part III of Form 2441.

On the Intake and Interview sheet make sure


the box in Part IV Credits is check. Note
anything unusual that the Quality Reviewer
may need to know.

Summary Page 23-14

The Child and Dependent Care credit is a


nonrefundable credit that allows taxpayers to Have students read the
reduce their tax liability by a portion of the summary paragraphs on
expenses. page 23-14.

The maximum expenses amounts are $3,000


for one qualifying person and $6,000 for two or
more qualifying persons.

A taxpayer must satisfy the five eligibility tests.

Lesson 23 - Page 12 of 12
Lesson 24: Education Credits

Objective
Determine if a taxpayer qualifies for an education tax credit.

Introduction

This lesson will help you determine if a


taxpayer qualifies for an education credit.

You will get some practice asking probing


questions based on information on the
intake and interview sheet.

It is important to ask the taxpayer if they are


aware of these credits and you may need to
give a short explanation of what they are.

You may have discussed education


expenses when you talked to the taxpayer
about the Tuition and Fees Adjustment.
Note: Remind students that
TaxWise will not run the
You will want to be sure to check which,
calculations and automatically
either the adjustment or credit, will result in
choose the best deal. You will
the lowest amount of tax.
have to do both and keep the
best option.

Show or refer to Intake and


Interview sheet, part VII.

In determining the education credits the


taxpayer can claim be sure to use the When available, give page
interview techniques and tools you learned reference for Publication 17.
in the Screening and Interviewing lesson.
The decision tree in Publication 17 will help Remind students that the
you with framing questions. TaxWise screens referenced are
found at Tab 5 in
Publication 4012.

Lesson 24 - Page 1 of 11
What are Education Credits? Page 24-1

Education credits, like other tax credits, can


help reduce the amount of tax due. Stress to students that
education credits are non-
In the case of these credits, the amount is refundable credits and can only
based on the qualified education expenses help reduce tax to $0.
the taxpayer paid during the tax year.

We will discuss two different education


credits; the Hope Credit and the Lifetime
Learning Credits.

There are some general rules that apply to


both credits as well as rules specific to
each.

Who can take an education credit? Page 24-1

An education credit can be claimed by a


taxpayer for themselves, spouse and/or
dependents (claimed on the tax return) who Let the students know that
were enrolled at or attended an eligible eligible educational institution
educational institution during the tax year. will be defined later in the
lesson.

What basic requirements must the taxpayer Page 24-2


meet?

In order to claim an education credit, all of


the following must be true:
x They can’t be claimed as a dependent
on someone else’s return
x They aren’t filling as Married Filling
Separately
x Their adjusted gross income (AGI) is
below $114,000 if Married Filling Jointly
or below $57,000 if Single, Head of
Household or Qualifying Widow(er)
x They were not a non-resident alien for
any part of 2007 or if they were, they Remind students again that all
elected to be treated as a resident alien must be true.
x There must be a tax liability (not already
offset by other credits) on the return

Lesson 24 - Page 2 of 11
Advise the student of other
If any are not true, an education credit can’t possible options such as the
be claimed. Tuition and Fees adjustment or
deduction on Schedule A
or C-EZ if the education is work
related.

How do I handle dependents? Page 24-2

If all the basic requirements have been met,


ask the taxpayer for names of the people
they wish to claim a credit for. Be sure to
verify that each person is either the
taxpayer, spouse or a dependent being
claimed on the return.

When it comes to dependents, keep the


following in mind:
x If a student is claimed as a dependent
on another person’s return, only the
person who claims the student as a
dependent can claim the credits for the
student’s qualified expense
x If no one else actually claims the student
as a dependent on their return, the
student can claim the education credit
on his/her tax return.
x If someone else (other than the
taxpayer, spouse or dependent) makes
a qualified tuition payment directly to the
eligible educational institution on behalf
of the student, the student is considered
to have paid the expenses.
x If the taxpayer is claiming the student as
a dependent, any expenses paid or
treated as paid by the student are
considered as paid by the taxpayer. Ask a student to read the
example at the bottom of
page 24-2.

What is an eligible institution? Page 24-2

You’ve heard the term eligible educational

Lesson 24 - Page 3 of 11
institution during this lesson and it’s now
time to define this term. Remind the student the taxpayer
will need to supply this
An eligible institution is any college, information. The school should
university, vocational school or other post- be able to tell the student if it is
secondary educational institution eligible to an eligible institution. If the
participate in a student aid program taxpayer doesn’t know, neither
administered by the U.S. Department of do we.
Education.

What are qualifying expenses? Page 24-3


You will need to get the details on each
person’s expenses. Ask for documentation
such as receipts or Form 1098T, Tuition
Statement, issued by the school.

The following are examples of qualifying


expenses:
x Tuition and fees that are required for Stress the term required with the
enrollment or attendance at an eligible students.
educational institution
x Related expenses that are required to
be paid to the institution as a condition
of enrollment or attendance. These can
include required course related fees,
books, supplies and equipment, but only Note: If books can be
those that must be purchased from the purchased at any bookstore,
school as a condition of enrollment. from a fellow student or taken
from the library, then the amount
is not required to be paid to the
institution and would not be a
qualified expense.

This is an important point to


stress because many taxpayers
will be confused.

What expenses do not qualify? Page 24-3

The following expenses do not:


x Room and board, insurance, medical
expenses (including student health
fees), transportation costs or other
similar personal, living or family

Lesson 24 - Page 4 of 11
expenses
x Course related books, supplies,
equipment and nonacademic activities
which are not required to be paid to the
institution as a condition of enrollment or
attendance
x Any course of other education involving
sports, games or hobbies, unless the Have students read the three
course is part of the student’s degree examples that begin at the
program or (for the Lifetime Learning bottom of page 24-3 and
Credit) helps the student acquire or continue at the top of page 24-4
improve job skills in the student course material.

Ask if there are any questions


on what they have read.

Are any amounts excluded from qualified Page 24-4


expenses?

Now that you have identified the individuals


claiming the credit and their qualified
expenses, you will need to determine if the
student received any untaxed educational
benefits during the year.

Such benefits may include:


x Pell Grants
x Employer provided educational
assistance
x Veterans’ educational assistance Note: This does not include gifts
x Tax free portions of scholarships and or inheritances.
fellowships
x An other nontaxable payments receives An example would be a tuition
as educational assistance refund due to the student
dropping a class.
x Refunds of any of the qualified
expenses paid on behalf of a student
Refer to example on page 24-4.
If any such benefits were received, the
amounts must be subtracted from the
qualified expenses paid.

Let’s take a look at Form 1098T.

Most students will receive this form from the


Remind the students to verify
educational institution. You should review

Lesson 24 - Page 5 of 11
this form carefully, just as you would a W-2. with the taxpayer that the
amount in box 1 or 2 is the
The most frequently completed boxes will amount actually paid during the
be: year.
x Box 1 showing payments received for
qualified tuition and related expenses
x Box 2 showing amounts billed for
qualified tuition and related expenses
x Box 8 showing if the student was at least Read the example at top of page
half time 24-5 in student guide. Point out
x Box 9 showing if the student is a this is an example of reducing
graduate student expenses by nontaxable
amounts received.

What about payments for the next academic Page 24-5


year?

A common cause of concern and confusion


comes about because an academic year Have a student read the second
and a calendar year do not always match in example shown on page 24-5.
terms of when payments are made.

The next example clarifies this situation.

What rules apply to each credit? Page 24-5

It was mentioned at the beginning of this


lesson that there were two education
credits, Hope and Lifetime Learning. Give students 3-5 minutes to
review the table. Ask them to
Turn to Publication 17, Chapter 35 to find note similarities and differences.
the table comparing the two credits. Once time is up, ask some
students to identify a similarity or
Part of your role is to help taxpayers a difference.
understand the features of each credit and
assist them in identify the credit(s) that suit
their situation.

Time for a TaxWise hint. From line 49 of


the 1040, link to Form 8863, Education Demonstrate this on TaxWise.
Credits. Enter each student’s name, SSN
and qualified expenses as appropriate.
TaxWise will calculate the credit.

We have covered a lot of important


information so far about the education

Lesson 24 - Page 6 of 11
credits. Let’s look at the specifics on who
can take the Hope Credit.

Hope Credit Page 24-5

Taxpayers can take the Hope Credit for a There are five questions, the
student if they can answer yes to these first three must all be yes and
questions: the last two must be no in order
x As of the beginning of the tax year, was to claim this credit.
the student still a college freshman or
sophomore?
x Was the student enrolled in a program
that leads to a degree, certificate or
other credential?
x Was the student taking at least one-half
the normal full-time workload for the
course of study for at least one
academic period beginning during the
year?

And no to these:
x Was the Hope Credit claimed for the
student’s expenses in more than one
previous tax year?
x Has the student been convicted of a
felony for possessing or distributing a Point out that if all the Hope
controlled substance? Credit conditions are not met,
the taxpayer may be able to take
the Lifetime Learning Credit for
all or part of the student’s
qualified expenses.

At this point we have covered every thing


about the Hope Credit except how much?
Note:
The Hope Credit can be up to $1650 per 1st 1,100(100%)= 1,100
eligible student. The credit is 100% of the 2nd 1,100(50%)= 550
first $1,100 and 50% of the second $1,100 Total = 1,650
up to the amount of tax. Remember, non-refundable
credit can only bring the tax
down to $0.

Lesson 24 - Page 7 of 11
Lifetime Learning Credit Page 24-6

This credit can be taken if the taxpayer and


the expenses meet the basic requirements
discussed earlier. The student need not be
enrolled at least half-time or be a degree
candidate. The felony drug conviction
restriction of the Hope Credit does not
apply.

This credit can be up to $2000 per tax


return depending on the amount of expense
and tax. The credit is 20% of the first
$10,000 of eligible expenses for all students
up to the amount of tax on the return.

If there is only one eligible student on the


return and that student has more that
$8,250 in qualified expenses, the Lifetime
Learning Credit may result in a larger tax
credit for the taxpayer even if the student is Have students do the exercises
eligible for the Hope Credit. on page 24-6 in the
Student Guide. Review the
answers when done:

A 1: Bob qualifies for either the


Hope or the Lifetime Learning
Credit. Select the credit that
provides the greatest reduction
in tax due.
A 2: Lifetime
A 3: Lifetime

Can a taxpayer take multiple Page 24-6


credits?
x Do not figure the education credits
based on expenses already taken on
Schedule A or C-EZ
x Do not take both a Hope and a Lifetime
Learning Credit for the same student in Read the example at the bottom
the same year of page 24-6.
x Do not take the Hope Credit for the
same student for more than two tax
years.

Lesson 24 - Page 8 of 11
To determine the amount of the credit you
will need to apply your knowledge and let
TaxWise help you with making an accurate
claim.
Form 1040 line 6b is blank.
The program detects if the taxpayer is
entered as a student but can be claimed as
a dependent by someone else.
This is where your knowledge
TaxWise will not catch other errors, such as and skill becomes important.
taking more than one benefit for the same
taxpayer.

How do I determine the amount of Page 24-7


the credit?
Remind students that the total
The credit is figured on form 8863, amount of the credit goes on
Education Credits. There are separate form 1040, line 49.
sections on the form for the Hope Credit
and the Lifetime Learning Credit and a line
to total them. Open TaxWise to the Form 8863
and go over the form as you talk
At this point you will have reviewed the about the steps.
qualifying students and expenses and
determined which credit will give the
taxpayer the largest reduction in tax.
That’s step 1.

Enter each qualifying student and SSN.


This takes care of step 2.

Step 3 has you entering each student’s Remind students that the
qualifying expenses. amount entered should be
qualified expenses reduced by
Do not enter expenses in excess of the limit any untaxed benefits.
for the credit.

Q: What is the expense limit for the Lifetime A: $10,000.00


Learning Credit?

Q: How about the Hope Credit? A: $2,200.00

Step 4 has you find the totals for each

Lesson 24 - Page 9 of 11
section, apply the limits, transfer the
amounts to part III of the form, apply the
income test and do the calculations. Advise paper preparers that an
Alternative Minimum Tax
The good news is, TaxWise does this step worksheet may be required to
for you. figure the credit.

Let me point out an area of caution. If you


find that a taxpayer claimed a credit in a
prior year and were refunded part or all of
the expense used to claim the credit, they
may have to repay some or all of the credit.
This is beyond the scope of the volunteer
program. Refer the taxpayer to Publication
970 and advise them to consult a
professional.

Taxpayer Example Page 24-8


Here’s a chance to practice. Get two students or pair up the
class and have them do the
sample interview.

Which education benefit is better Page 24-8


for the taxpayer?
Taxpayers have several options when it
comes to using education expenses to
reduce taxes. They are: Remind students to use their
x Business expenses on Schedule C-EZ knowledge to select the option
x Tuition and Fees Adjustment that is best for the taxpayer and
x Itemized deduction on Schedule A if do not claim multiple deductions
employee related for the same expense.
x Hope or Lifetime Learning Credit

You will probably follow this sequence as


you prepare the return.

Taxpayer Scenario
In an earlier lesson, on adjustments to Page 24-9
income, we met Vanessa and determined
that she was eligible for the Tuition and Ask for two volunteers to do the
Fees adjustment. Now we need to consider sample interview.
the education credits.

Lesson 24 - Page 10 of 11
Quality Review Page 24-9
Reviewing your work is always important. If
you completed Form 8863 make sure that
the name(s), SSN(s) and amounts are
correct. Verify that only one benefit has
been claimed for each taxpayer and no
benefit has been claimed for an expense
paid with a non taxable item such as a
scholarship.

Summary Page 24-10


Use the knowledge gained in this lesson to Have students read the
help taxpayers determine which education summary paragraphs on
benefits are best for them. page 24-10.
Remember, one of your roles as a volunteer
is to help taxpayers maximize the benefits
that they are entitled to under the tax law.

Lesson 24 - Page 11 of 11
Notes
Lesson 25: Child Tax Credit

Objective
Determine a taxpayer’s eligibility for the child tax credit and the additional child
tax credit. This credit is unique because it can be both nonrefundable and
refundable.

Introduction

This lesson is going to help you determine


taxpayer eligibility for the child tax credit
and the additional child tax credit.

You will see that this credit is unique in that


it can be both non refundable and
refundable.

In TaxWise the child tax credit is entered in


the non refundable credits section and the
additional child tax credit is entered in the
payments section.
Remind students to use the
interview techniques and tools
they learned in Lesson 2,
Screening and Interviewing.
Tab G in the Publication 4012 has interview
tips for this topic.

What is the child tax credit? Page 25-1

As was mentioned a moment ago, the child


tax credit has two parts, kind of a dual
personality.

The child tax credit portion is a Point out that the non refundable
nonrefundable credit that allows a taxpayer portion can only reduce tax
to claim a credit against their tax of up to liability.
$1000 per qualifying child.

Lesson 25 - Page 1 of 10
Note: Form 8812 must be
The additional child tax credit affects completed to claim the
taxpayers who are not able to claim the full additional child tax credit
amount of the child tax credit. If the
taxpayer is able to take the additional child Remind the students not to
tax credit as well as the child tax credit, the confuse these credits with the
result may be a refund even if the taxpayer child and dependent care credit.
owes no tax.

Who can claim the child tax credit? Page 25-1

The taxpayer must have at least one


qualifying child to claim the credit.

To be a qualifying child for the purposes of Note: If adopted child, see


this credit, the child must: exception to citizen test in
x Be under 17 at the end of the year Publication 17 or Form 1040
x Be a U.S. Citizen, U.S. National or Instructions.
resident of the United States
x Not have provided over half of their Refer students to page 25-1 of
own support for the tax year their student guide.
x Have lived with the taxpayer for more
than half of the tax year
x Be the taxpayer’s
- Son or daughter or a
descendant of any of them
- Stepson, stepdaughter,
adopted child or a descendant
of any of them
- Brother, sister, stepbrother,
stepsister, or a descendant of
any of them
Ask a volunteer to read the
- Eligible foster child (any child
example at top of page 25-2.
placed with the taxpayer by an
authorized placement agency
Ask for show of hands, yes/no.
or by order of the court)
Page 25-2
Does the child have to be the taxpayer’s
dependent?

Generally the taxpayer must claim the


dependency for the child in order to claim
either of these credits.

Taxpayers may still be able to claim the


Point out to students that to
credit if their qualifying child is not their

Lesson 25 - Page 2 of 10
dependent because of either of the claim a nondependent child as a
following: qualifying child for the purposes
x The taxpayer (and spouse if Married of the child tax credit only, Form
Filing Jointly) can be claimed as a 8901, Information on Qualifying
dependent on someone else’s return Children Who Are Not
or Dependents.
x The taxpayer’s qualifying child is
married and files a joint return for the
tax year ( other than a joint return Display TaxWise and select
filed as a claim for refund and no tax Form 8901 from the list of forms.
liability would exist for either spouse Complete the information for the
if they had filed separate returns) nondependent child. TaxWise
will check the CTC block on
Let’s take a look at how TaxWise handles Form 8901 if the child meets the
this. age, relationship and residency
tests. The qualifying
nondependent child will be
included in the Child tax credit
calculation on Form 8812. The
nondependent will not appear on
Are there any questions or comments on the main information screen.
this information?
Respond as needed.

Are there special rules for children of Page 25-2


divorced, separated, or never married
parents?

In most cases the custodial parent may Custody for this purpose means
claim the dependency exemption for the the child lives in the parent’s
qualifying child. main home.

The noncustodial parent may be entitled to


claim the dependency exemption for the
child and as a result the child tax credit and
the additional child tax credit if:
x The custodial parent provides a This can be a divorce or
signed written declaration to the non separation agreement, Form
custodial parent that the custodial 8332 or similar statement
parent will not claim the child as a
dependent or Note: A custodial parent’s
x If the divorce or separation release of the dependency
agreement went into effect before exemption will also release the
1985 and if the non custodial parent child tax credit and the
provides at least $600 for the support additional child tax credit to the
of the child. noncustodial parent. The

Lesson 25 - Page 3 of 10
noncustodial parent must attach
Form 8332 or similar statement
to their return each year the
exemption is claimed.
Would someone read the example on 25-3?

What is the amount of the credit? Page 25-3


It was mentioned earlier that the maximum
child tax credit is $1000 per qualifying child.
However, the amount actually claimed
depends upon the taxpayer’s tax liability,
modified adjusted gross income and filing
status.

The credit amount may be reduced if:


x The tax liability from line 46, Form
1040 less the majority of the Note: Modified AGI, generally, is
nonrefundable credits is less than the the same as the AGI from line
maximum child tax credit or 37, Form 1040 or line 21, Form
x The modified adjusted gross income 1040A. See Publication 17 for
is above the amounts shown based more information.
on the taxpayer’s filing status
- Married Filing Jointly-
$110,000
- Single, Head of Household or
Qualifying Widow(er) -
$75,000
- Married Filing Separately -
$55,000

Generally the worksheet in the Form 1040


instructions is used to figure the amount of
the credit.

However, if the taxpayer claims:


x The residential energy efficient
property credit
x Adoption credit
x Mortgage interest credit
x District of Columbia first time home
buyers credit or

They are excluding income from Puerto


Rico, claiming the foreign earned income
exclusion, filing Form 4563 (exclusion of

Lesson 25 - Page 4 of 10
income for residents of American Samoa) or
their AGI is more than what we just talked
about, the worksheet in Publication 972,
Child Tax Credit, must be used to figure the
credit.
Read or have volunteers read
the two examples at the bottom
of page 25-3 & top of page 25-4.

What is MAGI? Page 25-4

Remember, is the taxpayer’s tax liability is This will be discussed later in


zero, they can’t take the credit because the lesson.
there is no tax to reduce. They may be able
to take the Additional Child Tax Credit.

Here’s a chance to test some of our


knowledge.

Let’s complete and review Exercises 1 thru A1: A, Paul and Marie are not
3 on page 25-4. eligible for the maximum credit
and will have to use Publication
972.
A2: Yes, Jack is a qualifying
child for the child tax credit.
A3: C, Nick who is Single with a
modified AGI of $70,000 and a
tax liability of $5,000 is eligible
to claim the maximum amount of
$1,000 per qualifying child.

How do I determine taxpayer Page 25-5


eligibility for the credit?
We’ve learned the rules, so now the issue is
how to use them.

This is where the interview techniques and Show Part II of Form 13614 and
tools you learned in the Screening and point to sections as you go over
Interviewing lesson get put to use. the information.

Begin by reviewing the Family and


Dependent Information section of the Intake
and Interview sheet.

Lesson 25 - Page 5 of 10
Using the sheet, verify that the child: Remember the special rules for
x Is under 17 on or before December divorced, separated or never
31 married parents.
x Lived with the taxpayer for at least 6
months of the year.
x Meets the relationship criteria
x Is a U.S. Citizen, U.S. National or Point out that based on the
resident of the United States. information entered into
Dependents/Nondependents
section of the Main Information
Sheet, TaxWise automatically
checks the CTC box.
This section may be incomplete or the
taxpayer may be unsure of how to respond.
In these situations, use your Volunteer
Resource Guide which contains helpful
questions to ask the taxpayer.

How do I calculate the child tax Page 25-5


credit?
If a paper return is being prepared, before
calculating the credit, use the interview tip
for the credit found at Tab G in the
Volunteer Resource Guide. This will help
you determine if the worksheet in
Publication 972 must be used or if you can
use the worksheet in the Form 1040
instructions.

How is the credit calculated in TaxWise? Page 25-6

That was paper, now for TaxWise. Note: If you have a question
TaxWise will automatically calculate the about the amount that shows on
credit if you have: line 53, Form 1040 link to
display a completed worksheet.
x Correctly completed the
This may help understand the
Dependents/Nondependents section
results of the calculation.
of the main information sheet and
x Correctly completed the tax return
through line 51 (Form 1040) or line
31 (Form 1040A)
Page 25-6
Taxpayer Scenario
Display or refer to the completed
We are going to go back and visit our
Part II, Form 13614 for Vanessa.
taxpayer, Vanessa Franklin.

Lesson 25 - Page 6 of 10
Notice that the information indicates that Ask for two volunteers to do the
both children are qualifying children for the interview at top of page 25-7.
credit.

Vanessa’s tax liability on line 46 is $915. Display Form 1040 lines 46 –53
Remember that she took the child and on TaxWise.
dependent care credit in the amount of
$420. Since the credits are applied against
tax in order she has a $495 ($915-$420=
$495) tax liability remaining. Since the
remaining liability is less than the $2000 of
child tax credit, she can only take an
amount equal to the remaining tax, in this
case $495 on line 52, Form 1040.

Here is how you might explain this to Have the same volunteers
Vanessa. continue the interview at top of
page 25-8.
Let’s take a moment to review Vanessa’s
Tax Credit Worksheet. It is very similar to Display or refer to worksheet on
the worksheet in TaxWise. page 25-8

What is the additional child tax Page 25-9


credit?
Up to this point we have focused on the non
refundable part of the child tax credit, but
what about the other part, the additional
child tax credit?

The refundable additional child tax credit


can occur when the taxpayer’s tax liability is
less than the allowable nonrefundable child
tax credit.

This portion of the credit allows a claim of


up to $1,000 per qualifying child after
subtracting the allowable amount of non
refundable credit claimed.

The credit is generally based on the lesser


of:
x 15% of the taxpayer’s taxable earned
income that is over $11,750 or
x The amount of unused child tax
credit

Lesson 25 - Page 7 of 10
Q: Why would there be any unused child
tax credit?
A: The tax liability is less than the allowed
credit.
Read the example in middle of
page 25-9 to illustrate.

Point out to take the Additional


Child Tax Credit the earned
income must be more than
$11,750.

Are there any exceptions? Page 25-9

Taxpayers with three or more qualifying


children and earned income of less than
$11,750 may qualify for the credit if they:
x Had social security and/or Medicare
taxes withheld from their pay and/or
x Were self employed and paid self
employment tax and/or Point out that the amount of
x Paid tax on tips not reported to their EITC is a factor in this
employer. calculation on Form 8812.

Once eligibility has been established, Form 8812, Additional Child Tax
complete Form 8812. If TaxWise is being Credit
used the system will verify eligibility and
calculate the credit amount which will Note: If you want to view the
appear on line 68 of the payments section calculations, link to bring up the
of Form 1040. completed Form 8812.

Take a moment to read and complete A: Yes, Jose and Yolanda are
Exercise 4 at the top of page 25-10. eligible for the additional child
tax credit. They were eligible to
claim the child tax credit, but
since their tax liability is zero
there is no benefit to claim.
Even though their AGI was
below $11,750 they had social
security and Medicare withheld.

Taxpayer Scenario Page 25-10

It is time to go back and visit Vanessa Show her return on TaxWise


Franklin.

Lesson 25 - Page 8 of 10
Remember that Vanessa did not use the
entire amount of the non refundable child
tax credit to offset her tax and her earned
income was more than $11,750.

We know that she is eligible for the


Additional Child Tax Credit and that she has
an adjustment to income for half of her
Self-employment tax on line 27 of Form
1040 in the amount of $170.

Form 8812 instructions will guide you to


Worksheet B in the Form 1040 instructions.

This worksheet is used to determine the


earned income amount for figuring this EITC is covered in a later
credit as well as the earned income tax lesson.
credit (EITC).
Show on TaxWise or refer to
Let’s take a look at Vanessa’s Form 8812. page 25-11.

Her additional child tax credit is $1502 and


will be shown on line 68 of her 1040.

When addressing the Child Tax Credit, a


complete interview with the taxpayer is
critical in order to correctly identify
qualifying children.

Quality Review Page 25-11

Once the CTC block had been checked on Note any unusual situations on
the Main Information Screen or Form 8901 the intake and interview sheet.
has been completed, TaxWise will compute For example, if a person is listed
the credit. When doing a paper return be in the family and dependent
sure to use all appropriate worksheets. section but can’t be claimed as
anyone’s dependent, make a
Be sure to note any unusual situations on note if the non dependent child
the Intake and Interview Sheet to provide is eligible for the child tax credit.
Quality Review with a clear path to an
accurate return.

Lesson 25 - Page 9 of 10
Summary Page 25-12
The child tax credit is a non refundable
credit that can reduce a taxpayer’s tax
liability.

Generally an eligible child must be claimed


as a dependent. There are two situations
where the taxpayer may have a qualifying
child who can’t be claimed as a dependent.
In these situations, Form 8901 must be
completed.

If the taxpayer can’t use or benefit from the


$1000 per qualifying child maximum, they
may be eligible for the additional child tax
credit which is a refundable credit.

Lesson 25 - Page 10 of 10
Lesson 26: Miscellaneous Credits

Objective
Calculate and report the different nonrefundable credits.

Introduction

In this lesson we will be covering the Note: This lesson contains


following nonrefundable credits: basic and intermediate tax law
x Foreign tax credit topics. The basic course
x Credit for the elderly or the disabled includes the Credit for the
x Retirement savings contributions elderly or the disabled and the
credit Retirement savings contribution
x Residential energy credit credit. All the other
miscellaneous credits covered in
x Alternative motor vehicle credit
this lesson are part of the
x Mortgage interest credit
intermediate course.
Many of your taxpayers will not be aware of
these credits and may be eligible for one or Have the students open
more of them. Use your interview Publication 17 and find the
techniques and tools you learned earlier to chapter on Other Credits.
help you determine if any of these credits
are applicable.

What does the term nonrefundable credit Have a student read from
mean? Publication 17, Nonrefundable
credits.

Respond to inquiries.
It is important to know that these credits are Refer students to that section of
applied against tax in the order they are the form as a visual aid.
listed on lines 47 – 55 of Form 1040. Caution: The order of credits
listed on Form 1040 is subject to
change based on pending
legislation.

Lesson 26 - Page 1 of 12
What is the Foreign Tax Credit Page 26-1
(FTC)?

Taxpayers who paid income, war profits or


excess profits taxes to any foreign country
or U.S. possession may be able to take a
credit against U.S. tax for tax paid to
another country.

Generally to claim this credit, Form 1116


has to be filed. Form 1116 is outside the Point out the exception to this
scope of the volunteer program, but out of scope rule: Certain
under certain conditions a taxpayer can International/Military sites.
claim the credit without using the Form
1116. You may help these taxpayers.

You will want to look at box 6 of


Form 1099 INT or Form 1099 DIV for any
foreign tax that may have been paid.

It was mentioned earlier there were some Additional references: For more
conditions, when met, did not require the information you can refer to the
completion of the Form 1116. Form 1116 Instructions and
Form 1040 Instructions.
Turn to your Volunteer Resource Guide and
find the tab that says TaxWise
Nonrefundable Credits. Find the page with Compare the TaxWise version
Form 1116. This is the Form 1116 in of Form 1116 and the paper
TaxWise which looks different than the Form 1116.
paper version of Form 1116 from IRS.

The paper version of the Form 1116 does


not have the simplified election. Refer to the
Form 1040 instructions for more
information.

A taxpayer should consult a paid


professional tax preparer if:
x You cannot determine if the foreign
tax paid is eligible for the simplified
limitation election or
x The taxpayer is required to file Form
1116. Have a student read the
example on page 26-2.

Lesson 26 - Page 2 of 12
Here is what you would do in TaxWise:
x Add up all the qualified foreign tax
paid shown on Form(s) 1099 INT If TaxWise can be displayed,
and DIV. TaxWise Schedule B demonstrate, otherwise have
statement does not have a place to students follow along on page
enter foreign tax paid on interest or 26-2.
dividends, so you will have to
remember to make these entries if
there is foreign tax paid.
x From the line for foreign tax credit of Caution: In the 4012 the
TaxWise Form 1040, link to open TaxWise example is from tax
TaxWise Form 1116. year 2006 and foreign tax credit
x In the Volunteer Resource Guide is shown on line 47. The line
under the TaxWise tab “TaxWise number for foreign tax credit for
Nonrefundable Credits”, look at tax year 2007 may be different
TaxWise Form 1116 and note the based on tax law changes.
entry space where you enter the
foreign tax paid.
x By using TaxWise Form 1116 and
not entering it directly on Form 1040,
TaxWise will apply the limitations
and enter the credit on the line for
foreign tax credit on Form 1040.

If doing a paper return enter the amount Remember, in TaxWise, from


directly on the line for foreign tax credit. Be any Form 1040, use the help
sure to remember the $300/$600 feature to bring up or display
limitations. instructions for that line.

Lesson 26 - Page 3 of 12
Assign exercise questions 1 – 3.
Take a few minutes to check your Review answers with students
understanding of what has been covered so when done.
far. Q1: True. The $300 limitation
applies to whether or not a
taxpayer has to complete Form
1116. A taxpayer does not have
to file Form 1116 if the total
foreign taxes paid are less than
or equal to $300 or $600 if
Married Filing Jointly
Q2: No. Clyde needs to
complete Form 1116 because
his foreign tax paid exceeds
$300. Clyde will need to seek
the assistance of a paid
professional tax preparer.
Q3: Yes. If the foreign taxes for
a married couple who file a joint
return are less that or equal to
$600, the couple is not required
to complete Form 1116. Judy
and Mark do not have to
complete a Form 1116 because
their foreign taxes are less than
$600.

Are there any questions on this credit? Respond as needed.

Credit for the Elderly or the Page 26-3


Disabled
Refer to Form 1040 and identify
This credit is calculated on Schedule R. the line for credit for the elderly
This credit can also be calculated on or disabled.
Schedule 3 of Form 1040A, but for TaxWise Caution: The line numbers on
always use Form 1040. Form 1040 for credits may
change due to late legislation.

So, who qualifies for the credit?

Lesson 26 - Page 4 of 12
Individuals who qualify are:
x Under age 65, retired on permanent
and total disability, receiving taxable
disability income and who have not
reached the mandatory retirement
age their company has set or
x Age 65 or older
Ask for a volunteer to read the
Tip on page 26-3

In addition to being a qualified individual,


their total income must be within certain Have a student read “qualified
limits. individual”

Find the Credit for the Elderly or the


Disabled chapter in Publication 17 and then
find “qualified individual.”

Now, take a look in the Volunteer Resource


Guide on tab Credits. Find the page titled
Credit for the Elderly or the Disabled.
There you will find the income limits.

Very few taxpayers qualify for this credit.


Even those who meet the personal
qualifications end up ineligible due to the
fact that, for this credit only, the taxpayer
must include nontaxable social security,
veteran’s benefits or other excludible
pension, annuity or disability benefits. For
most taxpayers, their social security
benefits alone exceed the limit.

As was mentioned, Schedule R is used to


calculate the credit and has three parts:
x Part I, Filing Status and Age
x Part II, Statement of Permanent and This ensures that taxpayers
Total Disability under 65 have a completed
x Part III, Figure the Credit Physician’s statement that
proves their disability.

Lesson 26 - Page 5 of 12
In TaxWise the information from the Main
Information sheet and income information
entered on the return is used to:
x Determine whether a taxpayer may
be eligible for the credit
x Complete most of the Schedule R if
the taxpayer is eligible

If Schedule R pops up on the TaxWise


forms tree:
x From the credit for the elderly or As long as you entered these
disabled line on the TaxWise form items in the income section of
1040, link to open part III of Form 1040 line 20a and linked
Schedule R to the social security and RR tier
x On line 13a, TaxWise automatically one benefits worksheet.
enters the nontaxable social security
benefits and nontaxable portion of
railroad retirement benefits
x On line 13b, you may need to enter
the taxpayer’s nontaxable pensions,
annuities or disability benefits that
were excluded from income

If the taxpayer appears to meet the income


requirements, TaxWise automatically: Have a student read the
x Completes the rest of the form TaxWise hint at bottom of
x Transfers the amount of the credit to page 26-4
the proper line of the Form 1040
x Attaches the entire Schedule R to
the return
Assign exercise question 4 and
review with class when done.
It’s time for another knowledge check.
Q 4: D, Someone who still
engages in substantial gainful
activity and has not yet retired
on permanent and total disability
is ineligible for the credit.

Taxpayer Example Page 26-5


When the class is done ask if
Take a few minutes to read the Taxpayer
there are any questions or
Scenario about Albert on page 26-5 and
comments on this credit.
continuing at the top of page 26-6.

Lesson 26 - Page 6 of 12
Retirement Savings Contributions Page 26-6
Credit
Caution: Line numbers may
This credit is calculated on Form 8880 and change due to late legislation.
is reported on line 53 of Form 1040.

This nonrefundable credit may be claimed


by a qualifying taxpayer if they made a
contribution to a qualified plan.
Point out that this is a very rare
It the contribution is tax deferred, the double benefit.
taxpayer gets this benefit as well as a credit
against tax.
Have the students turn to the
So, who can get this credit? Volunteer Resource Guide
under the tab “Credits” and have
them find and review the
flowchart for the qualifications
for the Retirement Savings
Contributions Credit.

Have the class find the chapter


The term qualified plan was mentioned a and list. Ask a volunteer to read
few minutes ago. A list of plans that qualify a few of the examples from the
are listed in Publication 17 in the chapter list.
Other Credits.

There is still the issue of knowing if the


taxpayer has made a qualifying
contribution. Except for a contribution to a
traditional IRA or a Roth IRA the other
qualifying plan contributions will be listed on
the Form W-2 in box 12 and followed by the
following codes: D, E, F, G, H, AA, BB, or
S.

Refer the class to the volunteer


Military personnel may have an amount in Resource Guide tab titled
box 14 coded Q and/or E. If the amount TaxWise Income. Have them
qualifies, the box qualifies for Form 8880 look at the Form W-2. Point out
will be checked. that as long as the information
was entered correctly, TaxWise
will do the credit calculation.

Lesson 26 - Page 7 of 12
You may want to write these codes on a
Form W-2 for future reference.
Ask a student to read the tip at
Remember, you asked the taxpayer about the bottom of page 26-6.
expenses for an IRA or other retirement
account during the intake and interview
process.

If there were contributions made to a Roth


or a traditional IRA, deductible or not, in
TaxWise you should:
1. Link from line 32 of Form 1040 to
open an IRA worksheet
2. Enter IRA contribution on line 20 of
the worksheet
3. Close the worksheet

Eligible contributions are reduced by the


following distributions received during the
testing period:
x Any distribution, that is
included in the taxpayer’s
gross income, from a qualified
retirement plan or from an
eligible deferred
compensation plan
x Any distribution from a Roth
IRA that is not a qualified
rollover distribution

So, what is the testing period? It includes:


x The tax year, and
x The two preceding tax years, and
x The period between the end of the Ask a student to read the
tax year and the due date of the TaxWise hint at the bottom of
return, including extensions. page 26-7.

Have the class read the first


example on page 26-7
What about married filing jointly?

Lesson 26 - Page 8 of 12
Are there any questions on that example? Respond to inquiries.

The next example relates to reducing the Ask for a volunteer to read the
eligible contribution. second example on page 26-7.

Have the students read the TIP


The credit is calculated using Form 8880. on page 26-7.

Form 8880 will appear in the forms tree on Ask a student to read the
the left with a red exclamation point and will TaxWise hint at the bottom of
have to be completed prior to return page 26-7.
completion.

This credit can be as low as 10% or as high


as 50% of a maximum annual contribution
of $2,000 per person depending on filing
status and adjusted gross income.

Time for another knowledge check. Assign exercise question 5 and


review when completed.
Q5: B, Sybil qualifies for the
credit because her adjusted
gross income is under $52,000,
which is the threshold limit for
Married Filing Jointly. For a
taxpayer who is single,
Qualifying Widow(er) or is
Married Filing Separately, AGI
must be less than $26,000. For
Head of Household less than
$39,000.
Are there any questions or comments about
this exercise?

Taxpayer Example Page 26-8


Take a few minutes and read the taxpayer When students are finished,
scenario on page 26-8 have them look at the entries on
the Form 8880 on page 26-9
and discuss.

Lesson 26 - Page 9 of 12
OK, that’s three down and three to go.

Residential Energy Credits Page 26-9


A recent tax law change created
nonrefundable credits to improve energy Point out that manufacturers of
efficiency of taxpayer’s main homes. These energy efficient items like
purchases, made during 2007, will provide insulation or storm windows
tax benefits on the 2007 tax return. These commonly alert their customers
provisions will also apply for purchases about product eligibility for the
made in 2008. credit.

Credits for new home builders are also


available, but are outside the scope of the
volunteer program.

Remember the basic rule: The


improvements must be made to the
taxpayer’s main home in the U.S.
Have a student read the Tip at
the top of page 26-10.

Have the students read Form


5695 Part I and Part II on page
26-10.

Ask for a volunteer to read both


TaxWise hints on page 26-10.

Are there any questions or concerns about Respond as needed.


this credit?

Alternative Motor Vehicle Credit Page 26-10

The next credit we will cover may be more


familiar to you. It is the Alternative Motor
Vehicle Credit.

Lesson 26 - Page 10 of 12
Taxpayer’s may be able to claim this credit Have the students read the
of a qualifying vehicle place in service for last 3 paragraphs on
business or personal use after 2005. The page 26-10. When finished
vehicle must meet certain requirements and point out the manufacturer will
be a new: provide certification that the
x Advanced lean burn technology vehicle is a qualifying vehicle
vehicle and information about the
x Qualified alternative fuel vehicle phase-out percentage.
x Qualified fuel cell vehicle
x Qualified hybrid vehicle

Form 8910 is used to claim this credit.

Ask a student to read the


example on page 26-11 and
then review the entries on the
Form 8910 on page 26-11.

Mortgage Interest Credit Page 26-12

The final credit we will consider is the


Mortgage Interest Credit.

This nonrefundable credit is available to


taxpayers who hold a qualified mortgage
credit certificate (MCC) under a qualified
state or local government program.

Here is how it works. The taxpayer deducts


the mortgage interest they paid on
Schedule A, if itemizing, minus the amount
of the credit calculated on form 8396. The Have the class read the TIP on
credit amount is claimed on line 54 of Form page 26-12
1040.

Remember, the certificate must be for the


main home and the interest cannot have
been paid to certain connected parties such
as relatives. Have the students read the
example on page 26-12.

Lesson 26 - Page 11 of 12
In order to calculate the credit must have
the actual paper titled “Mortgage Credit Have the students read from the
Certificate”. The amount of the credit is on TaxWise Hint to the end of page
the certificate. 26-12.

Let me ask you; is anyone who has If any hands are raised, ask one
purchased a home eligible for this credit? for the answer.

The answer is no, only those who have


been issued a certificate by a state or local
government.

This topic is introduced as an awareness


topic. You may need to refer taxpayers
wanting to claim this credit to a paid Remind the class that the total
preparer of all nonrefundable credits is
reported on line 56 of Form
1040.

Have students read the


TaxWise Hint on page 26-12.

Summary Page 26-13

In this lesson we have covered: Have students read the


x Foreign Tax Credit summary paragraphs on pages
x Credit for the Elderly or the Disabled 26-13 and 26-14.
x Retirement Savings Contribution
Credit
x Residential Energy Credits
x Alternative Motor Vehicle Credit
x Mortgage Interest Credit

Your taxpayers may not be aware of these


credits. Your job as a volunteer tax
preparer will be to use your knowledge and
the intake and interview process to
determine if taxpayers are eligible to claim
one or more of these credits.

Lesson 26 - Page 12 of 12
Lesson 27: Other Taxes

Objective
Determine the additional taxes that apply to each taxpayer’s situation.

Introduction
After you’ve subtracted your tax credits, Refer to other taxes section on
determine whether there are any other the Form 1040. Review lines
taxes you must pay. that will be discussed in this
lesson.
“Other taxes” are separate from the income
tax figured from the tax tables or using the Note: Pay attention to the level
Tax Computation Worksheet. They include: at which each line is classified.
ƒ Self-employment tax, You may need to skip to certain
ƒ Social security and Medicare taxes on sections if you are teaching a
tip income, basic class.
ƒ Additional taxes on IRAs and other
qualified retirement plans, Stress the fact that the students
ƒ Advanced Earned Income Credit must be certified to prepare a
payments, and return including additional taxes
ƒ Household employment taxes on IRAs and other qualified
retirement plans, if not refer
This is a critical step in completing an taxpayers with this issue to a
accurate tax return. more experienced volunteer or a
professional tax preparer.

Note: Household employment


taxes are beyond the scope of
the volunteer program.
Taxpayers who must file
household employment taxes
may need the assistance of a
professional tax preparer.

Self-employment Tax Page 27-1

Self-employment tax (SE tax) is social


security and Medicare tax collected from Note: Self-employment tax is
individuals who work for themselves. tied into Business Income or
Loss. If you are teaching a

Lesson 27 - Page 1 of 5
SE taxes must be paid when: Basic class, skip this section
and go to taxes on unreported
The taxpayer has income as a church tip income on Page 27-2.
employee of $108.28 or more.
The taxpayer receives net earnings from
self-employment income in the amount of
$400 or more (excluding church employee
income).

To figure and report this tax you complete


Schedule C-EZ, Net Profit from Business.
TaxWise will then calculate the SE tax on
the net profit.

What about taxes on unreported Page 27-2


tip income?
Note: This section applies to
Social security and Medicare taxes are due basic taxpayers since many
on tip income of more than $20 per month “simple” returns belong to those
from any one job. in the service industry. If you are
certified at the basic level and
An employer may “allocate” tips to an find you are uncomfortable with
employee if the employee worked in a this topic, refer the taxpayer to a
restaurant, cocktail lounge, or similar more experienced volunteer.
business and reported tips that were less
than the employee’s share of 8% of food
and drink sales. If the employer allocates
tips to employees, the amount is reported
on Form W-2, in Box 8.

This amount is to be included on Form


1040.

Social security and Medicare taxes are not


withheld on allocated tips. The employee
pays the social security and Medicare taxes
by completing Form 4137.

If the employee received $20 or more in


unreported cash and charge tips in any
month from any job, the employee must
report that income on Form 1040 and pay
the social security and Medicare taxes on
that income. But, if the employee received
less than $20 in tips in any month from any
job, they are not required to report them to

Lesson 27 - Page 2 of 5
the employer. But these amounts do need
to be included on Form 1040. They will not
be subject to social security or Medicare
taxes and do not have to be included on
Form 4137.

Here is an example:

Carla waits tables at a friend’s café. Her


friend/employer reports all tips that
customers add to their credit card tabs, but Review example on Page 27-3.
she leaves it up to Carla to keep track of her
cash tips. Carla keeps a record, but doesn’t
report her cash tips to her employer, so they
are not included on her Form W-2. Carla
includes the unreported tips as income on
Form 1040, line 7. Carla also uses Form
4137 to calculate and pay the social
security and Medicare taxes on those tips.
Note: Identify which tips go on
Let’s look at the Form 4137, Social Security each line and the steps to
and Medicare Tax on Unreported Tip compute the tax due.
Income.
Note: TaxWise will allow you to
link to the Form 4137 and the
How do I enter unreported tips into context sensitive help will
TaxWise? provide you directions on
completing the form.

Have the participants do the


practice exercise questions on
page 27-4 & 5 of the lesson.
Review answers when done.

What about taxes on IRAs and Page 27-5


other qualified retirement plans?
Traditional IRAs and other “qualified plans”
allow individuals to defer paying taxes on Note: If you are teaching a basic
money they contribute and on its earnings class, skip over this section and
until the funds are distributed. go to Advance Earned Income
• If a distribution is taken before the Credit Payments on Page 27-6.
individual reaches the age of 59 ½ and is

Lesson 27 - Page 3 of 5
not rolled over into another qualified plan or Note: IRA contributions or
IRA (and no other exception applies), or distributions, pensions, and
• If minimum distributions are not withdrawn annuities are covered in the
when required, or Retirement Income – IRAs and
• If excess contributions are not removed by Pensions lesson.
the due date of the return (including
extensions), Note: Remind students if they
• Then the taxpayer must pay income tax are not certified above the Basic
due and an additional tax of 10%. Level, refer taxpayers with these
• Refer to the Intake and Interview Sheet, issues to a more experienced
Part IV, question 7. If the answer is “Yes”, volunteer or to a professional tax
ask the taxpayer for any Form(s) 1099-R preparer.
that reports these payments.

Advance Earned Income (AEIC) Page 27-6


Payments from Form W-2

Some taxpayers arrange to receive a


portion of their EIC in advance as part of
their paycheck throughout the year, rather
than all at once when they file their tax
return. Note: All students need to be
aware of AEIC as it relates to
To receive advance EIC payments, the the Earned Income Credit that
taxpayer must have, or expect to have, a many of our low income clients
Qualifying Child and submit a Form W-5, qualify for.
Earned Income Credit Advance Payment
Certificate to their employer.

The employer will include a portion of the


Earned Income Credit in the employee’s
regular pay. Farm workers are excluded.
The amount of advance EIC is reported on
the employee’s Form W-2, in Box 9.

Now let’s review the examples:


Have a student volunteer to
Claire lives with her 2-year-old, and knows read.
that she would qualify for EIC in 2007. She
arranges to receive a portion of the credit as
part of her paycheck during 2007, rather
than waiting to receive the full amount after
filing her 2007 return.

When the volunteer helped Claire prepare

Lesson 27 - Page 4 of 5
her tax return, they reported the AEIC
amount of $550 in the Other Taxes section.
They reported the EIC amount she qualified
for (again, $1776) in the Payments section.
As a result, her tax return reflected the
advance payment of her EIC and she is
allowed the remaining amount as part of her
2007 refund.
Check your answers on
Let’s do the exercises on page 27-7. page 27-9.

Total Tax Page 27-7


OK, now that we (and/or TaxWise) have
figured out the amounts of the other taxes
lines 58 through 62, the total is reported on
Line 63.

Taxpayer Scenario Page 27-7


Let’s have two students role play the Assign students do the practice
Taxpayer Scenario with our taxpayer exercise questions in this
Vanessa Franklin, on page 27-8 to see how lesson. Review answers when
the volunteer handled her “other taxes”. done.

Summary Page 27-9


After you’ve subtracted your tax credits, Remind students TaxWise will
determine whether there are any other fill in the entries automatically.
taxes you must pay.

“Other taxes” are separate from the income


tax figured from the tax tables or using the
Tax Computation Worksheet. They include:
ƒ Self-employment tax,
ƒ Social security and Medicare taxes on
tip income,
ƒ Additional taxes on IRAs and other Optional: If demonstrating a
qualified retirement plans, comprehensive lesson from the
ƒ Advanced Earned Income Credit Publication 678-W, show how
payments, and the “other taxes” were
ƒ Household employment taxes calculated.

Lesson 27 - Page 5 of 5
Notes
Lesson 28: Foreign Tax Credit

Objective
Determine which taxes and types of foreign income are eligible for the Foreign
Tax Credit. Accurately compute the credit using Form 1116.

Introduction

In this lesson you will learn how to assist


taxpayers file a claim for the Foreign Tax
Credit.

This credit applies to taxpayers who have


paid or accrued taxes to a foreign country
on foreign source income and who are
subject to U.S. tax on the same income.

To help these taxpayers, you must


determine which taxes and types of foreign
income are eligible for this credit, accurately
compute the credit using Form 1116 and
explain to taxpayers which documents they
must provide to a paid tax professional or
military legal assistance officer who can
complete the tax return.
Remind the students to use the
Foreign tax paid or accrued and the Foreign techniques and tools learned in
Tax Credit are not specifically listed on the the Screening and Interviewing
Intake and Interview Sheet so you will need lesson and part VII form 13614.
to ask taxpayers if they paid any tax to a
foreign country.

What is the Foreign Tax Credit? Page 28-1

Let’s take a look at the why and what of the


Foreign tax credit.

U.S. citizens and residents must compute


their tax on their world wide income. At
times this may result in tax being paid twice

Lesson 28 - Page 1 of 10
on the same income. Once to the country
where the income was earned and then to
the U.S.

The Foreign Tax Credit was created to Remind students that this is a
avoid this double taxation. This credit non-refundable credit.
allows a dollar-for-dollar reduction in U.S.
tax for the foreign tax paid.

There may be some cases where not all


foreign taxes paid on foreign source income
can be used to compute the Foreign Tax
Credit.
Note: Non qualifying taxes may
It is usually to the taxpayer’s advantage to be deductible on Schedule A as
claim the Foreign Tax Credit and in general, other taxes paid. Refer taxpayer
if the credit is chosen, you must include all to a professional preparer.
qualified foreign taxes.

What qualifies taxpayers for the Page 28-2


credit?
We have taken a look at the why and the
what of the credit. Our next step is to look Show on screen or refer to page
at how the taxpayer qualifies for the credit. 28-2

A taxpayer must meet the following


requirements:
x Have income from a foreign country
x Have paid taxes on that income to
the same foreign country
x Not have claimed the Foreign Point out that if the income is
Earned Income Exclusion on the excluded from U.S. tax the credit
same income can’t be claimed because there
would be no double taxation.
Also, the foreign tax must:
x Be paid to a foreign country on
income derived from that country
x Be similar to the U.S. income tax
Note: Economic benefit is
x Provide no economic benefit to the
discussed further.
taxpayer paying the tax

Lesson 28 - Page 2 of 10
In general, foreign taxes paid on the
following qualify for the credit:
x Wages
x Dividends
x Interest
x Royalties
x Annuities

There are foreign taxes for which a taxpayer


can’t claim a credit. They include:
x Taxes on excluded income
x Taxes on foreign oil-related income
x Taxes on foreign mineral income
x Taxes for which the taxpayer can
only take an itemized deduction
Read or ask for a volunteer to
read the example at bottom of
page 28-2.

Read the example at the top of


Are there any questions on either of these
page 28-3.
examples?

EXERCISES:
Question 1 and 2 on page 28-3 Assign the exercises.

Ask for volunteers to read the


question and their answer.

A1: C is the answer. Interest is


an allowable source and is the
only foreign source income.

A2: No is the answer. An


inheritance does not qualify as
income from a foreign country.
Under U.S. tax law, an
inheritance in not considered
income and is not taxable so
Are there any questions about the exercise there would be no double
or what has been covered so far? taxation.

What is “economic benefit?” Page 28-3

A few minutes ago it was mentioned that Refer students to Publication


the foreign tax paid cannot provide a

Lesson 28 - Page 3 of 10
specific economic benefit for the taxpayer 514 for detailed information on
and count toward the Foreign Tax Credit. economic benefit.

Can anyone imagine what this might mean? Call on 1or 2, if any hands go
up.
Economic benefit means that the tax cannot
be a payment that results in an individual
receiving:
x Goods
x Services
x The right to use certain properties
that are not available to others who
are subject to the same generally
imposed income tax, or to the
general population under the same
terms Ask for a student to read the
example at top of page 28-4

Country Restrictions

Taxes paid to some foreign countries do not


qualify for this credit. These restricted
countries are countries:
x The U.S. has designated as
repeatedly providing support for acts
of international terrorism
x With which the U.S. has not
diplomatic relations

At this time income taxes paid to the


following countries are not eligible for the
credit: Note: This list can change so be
x Cuba sure to check for updates. For
x Iran example, Iraq was on the list,
but was removed effective June
x Libya (Presidential waiver granted for
27, 2004.
qualified income taxes incurred after
December 9, 2004)
x North Korea
x Syria
x Sudan

Foreign income earned in sanctioned


countries is subject to U.S. tax. A separate Point out that this is beyond the
Form 1116 must be completed for foreign scope of the volunteer program.
income from such a country.

Lesson 28 - Page 4 of 10
Let’s do exercise questions 3 and 4 on Assign exercise and review
page 28-5. when done.

Read the question and ask for


volunteers to give their answer.

A3: No, Adele cannot take a


Foreign Tax Credit for the taxes
she paid on income she earned
. in Iran. The income is taxable in
the U.S. since she is a U.S,
citizen.
A4:
Q – dividend taxes
NQ – foreign oil related income
tax
Q – interest income tax
NQ – real estate tax
Q – wages from a foreign
country
NQ – taxes paid on income
earned in Syria

Display the form on TaxWise if


available.

What types of income qualify for Page 28-5


the credit?

It’s time to get a look at Form 1116.

Look at the top of the form. You will see


that taxpayers are asked to indicate the
type of foreign income they received.
Tip: A separate Form 1116
Two of these fall within the scope of the must be used for each type of
volunteer program: income and each form can be
x Passive category income used for income for up to three
foreign countries.
x General category income

Passive category income includes:


Example: a taxpayer who lives
x Dividends
in a foreign country and pays
x Interest taxes on interest income could
x Royalties

Lesson 28 - Page 5 of 10
x Rents claim the credit and check box
x Annuities a, Passive category income on
x Gain from the sale of property that the 1116.
produces income or non-income
producing investment property

Note: Passive category income


General category income consists of wages may qualify as general category
earned in a foreign country that an income if the foreign
individual has not excluded or excludes only government taxes it at a rate
a part of under the Foreign earned Income higher than the highest U.S. tax
Exclusion. It also includes foreign income rate.
that does not come under any other
category on the Form 1116. Read the example mid page on
28-6.

Some passive category income can be


included in general category if it is taxed by
a foreign government at a rate higher than
the highest U.S. income tax rate.
Have a student read the
In 2007 the highest income tax rate is 35%. example at the bottom of page
28-6.

Assign Questions 5 and 6 on


It’s time for more exercise questions. page 28-7. When done, review
with class.

A5: Interest income is – A;


Dividend income is – B (high
taxed income is considered
general category).
A6: A, since 17% (the tax rate
Bernard paid) is not more than
35% (the highest U.S. income
tax rate) Bernard’s income falls
under passive category income.

Taxpayer Example Page 28-7

Now, let’s take a look at what you will need


to consider when determining if a foreign

Lesson 28 - Page 6 of 10
paid tax is eligible for the credit.

You will need to ask questions to


determine:
x Was the income foreign source
x What type of tax was paid to the
foreign government
x Will the taxpayer receive some kind
of economic benefit from the
payment of this tax

Here is an opportunity to practice these Ask the students to pair up and


types of questions. have them do the sample
interview on page 28-7.

Do I have to file Form 1116? Page 28-8

We have talked about the use of Form 1116


to report the foreign tax credit. If three
conditions are met, the taxpayer can take
the Simplified Limitation Election. This
election lets the taxpayer report the foreign
tax on line 51, Form 1040.
Point out that all three of these
The total qualified foreign taxes must be: must be met.
x $300 or less ($600 or less if Married
Filing Jointly),
x Derived from passive income
(interest, dividends, royalties etc.)
and
x Reported on Forms 1099-INT/1099-
DIV
If TaxWise is available
Here is a look at how you might handle this demonstrate the example.
on TaxWise.

If the taxpayer can take the Simplified


Limitation Election, enter the amount of the
Foreign Tax from forms 1099 on line 51,
form 1040. If there are multiple 1099s use
a scratch pad to total the amounts. If you
link to the form 1116, enter the total foreign
tax paid in the box in the Simplified
Limitation Election section at the top of the
form.

Lesson 28 - Page 7 of 10
How do I complete Form 1116? Page 28-8
The taxpayer may not qualify for the
election which means the 1116 must be
completed.

The amount of the credit is the portion of


U.S. income tax based on gross taxable
foreign income. There are some expenses
that can be deducted on the tax return to
reduce foreign gross income, but some of Point out that if the taxpayer has
the situations are complex and outside the these types of deductions they
scope of the volunteer program. should be referred to a
professional preparer.
Here are some examples:
x Expenses directly related to the
foreign income such as employee
business expenses
x Investment Interest Expense
x Foreign Losses such as those from
selling foreign assets or a loss from a
business or partnership

Let’s take a look at how to complete Demonstrate this using


Form 1116. TaxWise.

For the top portion remember to use a Note: Also, up to 3 countries per
separate 1116 for each type of income. form.

On part I, line 1 enter all foreign income


taxed by both the foreign country and the
U.S. Enter all deductions such as expenses
and losses on that income.

Next, for part I, line 3a if the taxpayer is not


itemizing, enter the standard deduction or
the total medical expense, real estate tax
and charitable gifts from Schedule A.
Point out that TaxWise will not
automatically fill this field.
TaxWise will show the correct
amount to the left of the entry
field for line 3a, but the amount
Now, moving on to part II. must be entered manually.

Check the appropriate box to indicate

Lesson 28 - Page 8 of 10
whether the foreign tax was actually paid
during 2007 (paid) of if the tax was billed in Note: A taxpayer using the
one year but paid in another (accrued). cash basis can choose to use
either the cash or the accrual
method to determine the credit.
But if the accrual method is
chosen, the taxpayer must
continue to use the accrual
method for this credit on all
future returns.

Next comes Part II, lines j – s. Report taxes Point out that the amount of tax
in both foreign currency and U.S. currency withheld should be shown under
amounts unless taxes on passive income the related type of income.
were reported in U.S. currency.
Note: Refer to the Worldwide
Income lesson for an
explanation of conversion rates.

Note: In TaxWise to attach a


statement explaining these
entries, link from the box on the
right.
Finally comes part III and IV.

The credit is figured in part III and part IV is Note: If the taxpayer has a
only needed if the taxpayer had more than carryback or carryover, refer the
one 1116 because their income fell into taxpayer to a tax professional.
more than one category.
Note: TaxWise performs the
calculations for you in parts III
and IV.

Summary Page 28-9

Here are some key things to remember


about the Foreign Tax Credit.
x The taxpayer, income and taxes
must all meet specific requirements
x The credit is computed and reported
on Form 1116
x Part I of the form is used to figure the
taxable income from foreign sources
in each income category
x A separate Form 1116 must be
completed for each category of

Lesson 28 - Page 9 of 10
income
x Foreign Tax Credit is reported on line
51, Form 1040

The Foreign Tax Credit and The Foreign Remember, foreign tax paid on
Earned Income Exclusion are different. excluded income cannot be
Taxpayers can choose the approach which used to claim the credit.
results in the lowest tax paid overall.

Lesson 28 - Page 10 of 10
Lesson 29: Payments

Objective
Identify the types of payments and credits that apply to taxpayers who qualify for
volunteer tax return preparation assistance.

Introduction
The “Payments” section of the tax return
lists payments or withholdings made during Refer to payment section on the
the year and refundable credits for which Form 1040.
the taxpayer may qualify.
Review lines that will be
By the time you reach the payment section discussed in this lesson.
you should have the taxpayer’s income
sources and tax withholding or payment Refer to the Publication 4012,
information. This information taken from Tab 6, Other Tax Payments.
x Federal income tax withheld from
Form(s) W-2 and Form(s) 1099
x 2007 estimated tax payments and
amounts applied from the 2006 return

You must be able to identify the types of


credits the taxpayer may be entitled to such
as:
x Earned income credit
x Additional child tax credit

Amounts paid with a request for extension


to file are also included in the part of the
return.

How do I report federal income tax


Page 29- 2
withheld?

Who is familiar with form W-4, W-4P, and Provide an overview of the pay
W-4V? as you go and federal income
tax withholding system. Explain
purpose of the withholding
forms.

Lesson 29 - Page 1 of 4
Let’s look at the Income section in
Publication 4012, Tab 2 and review the
different forms that include income tax Note: You may refer students to
withholding. the Understanding Taxes on
IRS.gov for additional insights
into the “pay as you go” system.

Let’s look at an example on Page 29-2 and


compare the forms Freda received with
those in listed in Publication 4012.
Review the TaxWise hint.

What about estimated taxes and Page 29-2


amounts applied from 2006?
Taxpayer that have income from self-
employment, dividends, interest, capital
gains, rent, and royalties should make
estimated tax payment, it their taxes due
exceeds certain limits. If estimated
payments are not paid when they are
required, a penalty could be imposed.

Bob’s example on Page 29-2 explains the


impact of not paying estimated taxes. Let
review the example.

So, how do you determine who needs to


make estimated tax payments?

As stated in your text, taxpayers who meet


the following conditions should have paid
estimated tax for 2007:

1. After subtracting withholding and credits


on their 2007 return, they still owed
$1,000 or more, and
2. Their withholding and credits did not
cover at least:
x 90% of the tax to be shown on
their 2007 tax return, or
x 100% of the tax shown on their
2006 tax return (if that return
covered all 12 months)

Lesson 29 - Page 2 of 4
Let’s take a look at Gloria’s situation on
page 29-3.

Gloria planned ahead, but some taxpayers


do not. Discuss the information on page
29-3 after discussing Gloria’s
If the taxpayer should have paid estimated example.
taxes but did not, explain the requirement
so they can avoid penalties in the future.

Taxpayer Example Page 29-4

Ok, let’s check-out Ernie’s situation. Team up students to role play


the interview on Page 29-4 of
the lesson.

What about amounts paid with an Page 29-4


extension to file?

Taxpayers can get an automatic 6-month


extension of time to file by filing Form 4868,
Application for Automatic Extension of Time
To File U.S. Individual Income Tax Return.
This form extends the time to file until
October 15th. This is only an extension to
file, not an extension to pay – if taxpayers
do not pay the tax due by the regular due
date (April 15 in 2008) they will owe interest
and may be charged penalties.
Ask for a volunteer to read the
Let’s look at Bernice’s situation to get an
example on Page 29-4.
understanding of why an extension may be
required.
Provide examples based on
your experience for taxpayers
that file for extension.

Discuss TaxWise information on


Taxpayers may file the extension on paper
Page 29-5 in their student guide
or electronically. Let’s review how you can
and also use the information in
file an extension for a taxpayer using
Publication 4012, Tab 6.
TaxWise.

Lesson 29 - Page 3 of 4
Also be prepared to discuss
completing Form 4868 using the
paper form.

Total Payments Page 29-5


The entry required on Form 1040, Line 70 is
not within the scope of the VITA/TCE Explain how to figure the total
Program. Examples of the forms and the payments using the information
types of payments to enter on Line 70 are on Page 29-6.
shown on Page 29-5.

Taxpayer Scenario Page 29-6

Let’s see where we stand in the Payments Team up students to role plays
area for our taxpayer Vanessa Franklin. the Taxpayer Scenario.

Optional: Demonstrate the


payment section for the
comprehensive problem from
Publication 678-W.
Summary
Explain why the payment
The proper completion of the payment
section is critical to the accuracy
section of the taxpayer’s return will
of the tax return.
determine if the taxpayer receives a refund,
break even or owe additional federal taxes.

Lesson 29 - Page 4 of 4
Lesson 30: Earned Income Credit

Objective
Determine eligibility for the Earned Income Credit and calculate the amount of
the Earned Income Credit

Introduction

During your interview with the taxpayer, as


you complete page 2 of the intake sheet
you will come to part VIII, Earned Income
Tax Credit Determination – EITC eligibility.

You will need your Volunteer Resource


Guide , Tab H for interview tips and Read these questions to the
decision trees to answer questions 1 and 2. class.

Nationwide, there are a lot of errors made in


determining EIC amounts.

By using your tools including the 4012


common errors can be avoided.

The most common errors are:


x Determining who is a qualifying child
x Incorrect reporting of earned income for
EIC purposes
x Social Security numbers not matching
the names of the qualifying persons.
Have the students read What is
the EIC? on page 30-1

How does a taxpayer qualify for Page 30-2


the EIC?
There are general sets of rules for claiming
the Earned Income Credit:

Lesson 30 - Page 1 of 8
x General EIC requirements
x EIC without a Qualifying Child
x EIC with a Qualifying Child
Point out that certain
Let’s look at the general requirements first. requirements apply to everyone
Open your 4012 to Tab H and find the who claims the EIC.
interview tips for EIC General Eligibility.

Have a student read the caution


Take a look at the interview tips and the then point out that it relates to
seven steps in 4012, Tab H. step 1.

Have the class read the first TIP


Q: Which step does this tip relate to? on page 30-2.
A: This tip relates to step 2.
Call on one of the students to
answer.
Q: Which step does this tip relate to?
A: This tip relates to step 6. Have the class read the second
TIP on page 30-2.
This credit is called the Earned Income
Credit, so what is earned income?

What rules apply to everyone? Page 30-2

Turn in 4012 to Summary of EIC Eligibility


Requirements and lets review Part A Rules
for Everyone and Part D Earned Income
and AGI Limitations.

What is “earned” income for EIC Have the students find the
purposes? Earned Income Table under the
EIC tab in 4012 and review the
Several types of income need clarification. examples for what is earned
Disability Benefits: income for EIC purposes and
Benefits that the taxpayer receives under what is not earned income.
an employer’s disability retirement plan are
considered earned income until the
taxpayer reaches minimum retirement age.
This age is usually the age at which a
pension or annuity can be received if there
is no disability.

Generally a Form 1099 R is issued with a Note: The major factor with
code 3 (disability) in box 7. Once you disability income is age.

Lesson 30 - Page 2 of 8
confirm the taxpayer is under minimum
retirement age for the company, report the
taxable amount on line 7. Ask a student to read the
TaxWise Hint at the bottom of
page 30-2

Review the tips on page 30-2.

What about combat pay? Review the tips and cautions on


There is special treatment given to combat page 30-3 as they relate to
pay. Read “What about Combat Pay” and combat pay.
the TIP on page 30-3

What about self employment income? Remind students that they must
be certified for certain levels of
Self employment tax is paid on the net of training to prepare Schedule C-
self employment income and the expenses EZ. Also address the tip on that
incurred to earn that income. page regarding expenses.

What about household employee Have the students read the


income? paragraph about household
employees and discuss.

Earned income not qualifying for the EIC Page 30-4

Congress has established special treatment


for income received for work while an Point out that this includes work
inmate in a penal institution. Such income is performed in a work release
not considered earned income for the program or while in a halfway
purpose of the EIC. house. You must indicate
income earned by inmates for
their work on the Schedule EIC
Worksheet.
.
Remind the class: If you
correctly enter all fields of the
W-2 into TaxWise, the software
will automatically compute the
EIC with and without nontaxable
combat pay, and will choose the
method that results in the
highest EIC for the taxpayer.

Assign exercise Q1 and Q2.

Lesson 30 - Page 3 of 8
Let’s try a quick knowledge check. Review with class when done.

Q1 No

Q2: No his investment income is


above the limit.

Page 30-4
What are the rules for taxpayers
with Qualifying Children?
For EIC purposes, a child is a qualifying Have the students review the
child if the child meets all the tests we will interview tips in 4012 and
look at next. compare them with the steps
listed under “What are the rules
Turn to Tab H in 4012, this time looking for for taxpayers with Qualifying
Interview Tips – EIC with a qualifying child. Children” on page 30-4 and 30-5
through Step 6.

Step 5, the residency test has some special


considerations listed at the top of page 30-
5. You will want to be aware of these
situations and may want to note them in
your resource guide.

Step 6 raises the issue that a qualifying


child can be the qualifying child of more
than one person. Take a moment to look at
how the IRS applies the tie-breaker rules.
You will find them at Tab H. Review the example and then
ask for a volunteer to read the
TIP on page 30-5
When using TaxWise, if there is the Point out that TIP 1 relates to
smallest chance the child will be a qualifying step 1, the second TIP relates to
child for EIC, be sure and check the EIC step 2 with a child and the third
box next to the child’s name on the Main TIP relates to no children.
Information Sheet. If they do not qualify, the
software will not allow the EIC.

What are the rules for taxpayers Page 30-5


without Qualifying Children?
Turn to Tab H in 4012 and find the Interview Review the rules including the
Tips – EIC without a Qualifying Child. example and the last tip on 30-5.

Lesson 30 - Page 4 of 8
Assign exercise questions 3-9
We have covered the issues relating to who and review as you go. Ask for
qualifies for the EIC, so it’s time to check volunteers to answer questions
our understanding. and ask them to state which
interview tip was used.

Would someone read question 3? A3: Yes, she meets all the
eligibility tests to be a Qualifying
Child
A4: Yes, Lisa is a descendent of
Sam’s stepson and meets the
other eligibility requirements
A5: None of the children under
Mira’s care are qualifying
children for EIC.
A6: Yes, both children meet the
relationship, age and residency
tests.
A7: No, with just one qualifying
child, the married couple’s
income would be over the limit.
A8: Yes, Margie meets the
general eligibility requirements
and Aimee meets the Qualifying
Child rules.
A9: No, the residency test is
failed. Aimee is the qualifying
child of Laura. If you are filing a
paper return, be sure to write
Aimee’s information on
Schedule EIC.

Point out the TIP at the bottom


of page 30-6.

Let’s go back to part VIII of the Intake and


Interview sheet.
Have the students answer
If the taxpayer answers yes, make sure “Based on the interview, is the
their answer is not because their EIC was

Lesson 30 - Page 5 of 8
changed due to an error on their tax return. taxpayer qualified for the EIC?”
is answered after you have
collected all the facts using the
interview tips under the EIC tab
of the resource guide

Taxpayer Scenario Page 30-7

Take a few minutes to read “Taxpayer Pair students up and have them
Scenarios” on page 30-7 including a review conduct the sample interview on
of the Family and Dependent Information. page 30-8 using the facts on
page 30-7 and the interview tips
Based on the facts gathered, the answer to under Tab H of the volunteer
question 2, part VIII of Vanessa’s intake resource guide.
and interview sheet is Yes.

Are there any questions or comments over Respond as needed.


what has been covered so far?

How is the correct Earned Income Page 30-9


Credit amount calculated?
Remind the students to look for
Now that we have completed the any worksheets or tips
qualification step, we are moving on to the mentioned in the reading in the
calculation step. resources they have available.

Take a few minutes and read “How is the Respond as needed.


correct EIC amount calculated down thru
Combat Pay Election.

Are there any questions on what you have


just read?
This reading begins at the
Next, please read “Where are the EIC bottom of page 30-9.
tables and how do I use them”. Continue up
to “Class Exercise A”.
Make sure every one has the
We are going to use the EIC tables in just a correct tables open.
moment. Please double check that the
heading on your page says Earned Income
Credit (EIC) Table. It is common to mistake
the Tax Tables for the Earned Income
Credit tables.

Lesson 30 - Page 6 of 8
Look at the end of the lesson for the blank Read the first sentence under
forms to use for Exercise B. “Class Exercise B” on page 30-
10 to the class and then guide
the students through the
process of finding the credit
amount and how the tables are
used. Review when finished.

Tell students that Vanessa’s


completed Schedule EIC and
worksheet follow on page(s) 30-
12, 13 and 14.

How do I compute the Earned Page 30-10


Income Credit using TaxWise?

You have seen the process of calculating Have the students read “How do
the EIC amount by hand, but most of you I compute the Earned Income
will be using TaxWise to prepare the Credit using TaxWise?” stopping
returns. at the bottom of page 30-10.

Take a look at how TaxWise computes the


EIC. Note: If possible demonstrate
this on TaxWise.

As was noted in the Caution, with any form,


read and answer the questions carefully. Remind the class about the
Always double check that there are no red potential for EIC errors
checkmarks by the Schedule EIC mentioned at the beginning of
Worksheet on the forms tree. If there are, the lesson.
go back to the form and correct the
situation. Bottom of page 30-10

Let’s revisit combat pay for a moment.


Have students read from
This is an area where accuracy is important. “Advance EIC in box 9 of W-2”
As long as you made all the W-2 entries to “Do I need to attach Schedule
correctly, including box 12 code Q and the EIC or Schedule EIC
taxpayer qualifies for EIC, TaxWise will worksheets to the return?”
determine if it is better to include the
combat pay for EIC purposes or not.

Lesson 30 - Page 7 of 8
Summary Page 30-19
The EIC is a refundable credit designed for
low income working people. It has the
potential to create large refunds for those
who qualify.

EIC is based on filing status, number of


qualifying children, earned income and
adjusted gross income.

Careful, consistent and accurate use of the


Intake and Interview sheet and the
Interview Tips in 4012 will get you the
information you need to correctly fill out the
EIC worksheets. This attention to detail will
help avoid most of the common errors that
occur in computing EIC.

Taxpayers receiving advance earned


income credit payments, shown in box 9 of
Form W-2, are required to file a tax return.

Lesson 30 - Page 8 of 8
Lesson 31: Refund/Amount of Tax Owed

Objective
Determine the taxpayer’s refund or the amount owed and where to report these
items on the tax return. Identify what information is needed from taxpayer to
have a refund directly deposited to bank account.

Introduction

We have discussed taxes, payments, and


credits in previous lessons. This lesson will
help you pull all these together and
determine the taxpayer’s refund or amount
owed. We will discuss how and where to
report these items on the tax return. We will
also learn how to request direct deposit of a
refund and what to advise a taxpayer about
payment of a balance due.
Refer students to either a copy
Refund and amount due are reported on of Form 1040 or show them the
lines 73 through 77 of Form 1040. second page of Form1040 in
TaxWise.

Refunds Page 31-1


For a visual reference, direct
participants to view F1040
Instructions, page 5 or Volunteer
Resource Guide, Tab 6, Form
1040, Page 2-Other Taxes and
The taxpayer’s total tax appears on line 63
Payments during explanation of
of Form 1040. The taxpayer’s total
calculations.
payments, (including refundable credits),
appears on line 72. If payments (line 72)
Note: If the payments made
exceeds total tax (line 63), the overpayment
exceed the amount of tax
is reported on line 73 (line 72 minus line 63)
liability, TaxWise automatically
shows the amount of the
overpayment on line 73.

Lesson 31 - Page 1 of 7
Taxpayers can choose to apply any portion Note: See Calculating the
of their overpayment to estimated tax refund page 31-1, 2
payments for the following tax year.
Tell students estimated tax
If a taxpayer opts to receive a refund of the payments will be discussed in a
full overpayment, carry the amount on line later lesson.
73 to line 74a.
TIP: TaxWise will do this
If a taxpayer wants to apply a portion of the automatically.
overpayment to next year’s taxes, enter the
amount to be applied to the following year
directly on line 75. Calculate the remaining
amount to be refunded to the taxpayer (line Note: TaxWise will automatically
73 minus line 75) and enter it on line 74a. calculate the remaining amount
to be refunded and show it on
line 74a.
Taxpayers may receive their refund as a
check or direct deposit(s) to up the three Check or Direct Deposit Options
bank accounts. Before we take a look at the Student Guide, page 31-2
procedures, let’s take a moment to talk
about what difference it might make to the
taxpayer.

Notice that there is a 7-day period between


the dates the direct deposit will be sent or a Review Volunteer Resource
check mailed. Add mailing time, plus the Guide, References Tab, IRS
time before the taxpayer deposits or cashes e-file Refund Cycle Chart page.
the check. You can see that the taxpayer Advise using the chart to let
will have their money a couple of weeks taxpayers know when to expect
earlier with direct deposit. There are also their refunds.
more security issues with mailed checks,
which can be stolen, lost, or destroyed. Encourage students to promote
direct deposit at their sites.

First let’s look at what information you will Refer to F1040 Instructions,
need to request a direct deposit. page 5, or TaxWise F1040,
page 2 screen.

Q: Look at line 74. What three pieces of A: routing number, account


account information does it ask for direct number, and whether the
deposit? account is checking or savings

Lesson 31 - Page 2 of 7
Now let’s take a look at the tools you will Designate students to read in
have at the site for identifying this Publication 4012, Finishing the
information. Return Tab, Pointers for Direct
Deposit of Refunds page.

It is important that you consult this page of


your Publication 4012 every time you enter
account information.
Stress that incorrect account
You should always see a voided check as information could result in a
proof of account, enter the numbers and delayed refund check mailed to
then double and triple check the numbers. the taxpayer or, even worse, the
refund deposited to the wrong
account.

Taxpayers can choose to divide their direct Direct depositing the refund to
deposited refund among up to three more than one account
accounts. Use Form 8888, Direct Deposit of Student Guide, page31-2.
Refund, to list the RTN and account number
for each deposit. Show Form 8888, on TaxWise, if
available, Student Guide, page
31-4, or in the appendix of the
Student Guide.

Note: that Form 8888 is not


required if the refund is to be
deposited into a single account.

If the refund is increased due to a math Remind students no bank


error, the additional amount will be account information should be
deposited into the last account listed on entered on the TaxWise Main
Form 8888. If the refund is decreased, the Information Sheet if Form 8888
deposit will be reduced first to the account is used.
shown on line 3 of Form 8888, next to the
account shown on line 2, and finally to the Stress that because IRA
account shown on line 1. contributions are limited and
may be deducted on the return,
generally an IRA account should
not be listed last.

Complete Exercises on 31-3. Discuss answers.

Lesson 31 - Page 3 of 7
Taxpayer Scenario Page 31-3

Now let’s take a look at how our taxpayer Designate students to read the
Vanessa Franklin would like to have her Sample Interview on Student
refund distributed. Guide, page 31-4. Note that
Vanessa’s account information
is included in the appendix in the
Student Guide.

Q: When would the best time to advise the A: Ideally prior to arriving at the
taxpayer of what information he/she will site to ensure he/she has
need to have his/her refund directly necessary information in hand.
deposited?

The needed information is listed at the top Have students find the banking
of Form 13614. If a taxpayer has the Information bullet above
account information to do a direct deposit or F13614, Part I.
split direct deposit, you may want to note it
in this section when you start your interview.

Amount Owed Page 31-5 to 31-7

If the payment total is less than the amount Refer to F1040 Instructions,
of tax, calculate and report the balance due page 5, or TaxWise F1040,
on line 76 (line 63 minus line 72) of Form page 2 screen.
1040.

Explain to taxpayers that the tax return will


be e-filed now and they must submit their
payment of taxes due no later than April 15.

There are three payment options: Designate student to read in


x Check or money order 4012, Finishing the Return Tab,
x Direct debit from the taxpayer’s bank Balance Due Returns page
account aloud.
x Credit card

Let’s read about them. Emphasize the following after


each section:

Send check or money order –


payment by April 15, 2008.

Note: Credit card – the credit


card company will charge a fee.

Lesson 31 - Page 4 of 7
Refer to the TaxWise
instructions for Electronic funds
withdrawal/direct debit – 1) debit
may be scheduled on any date
through April 15, 2008; 2) on this
page every time; 3) double
check account information, as
you would for direct deposit.

What if the taxpayer cannot pay? Page 31-5

Allow time to read What if


taxpayer cannot pay? and
complete exercises.

Note that Form 9465 is available


on TaxWise

Q: What would you advise a taxpayer who A: If the tax return is not filed by
wanted to hold off on filing the return until April 15, 2008, you will be
he/she could pay? subject to a failure to file
penalty. The penalty is
calculated on the balance due
amount and lateness of the
return. Since you have a
balance due, it is especially
important that you file your
return on time.

Complete Exercise 3 page 31-6. A. C – use of credit card.

Taxpayer Example Page 31-6


Designate students to read the
Sample Interview.

Estimated Tax Penalty Page 31-7


Remember to stress the need to pay by the
due date to avoid late payment penalty and
interest. Review example.

Lesson 31 - Page 5 of 7
Taxpayers are required to pay their federal
income taxes, through withholding or
making estimated tax payments, as they
receive income. A taxpayer may owe a
penalty for underpayment of estimated tax if
the amount owed with the return is $1,000 Refer to Pub. 17 for further
or more and more than 10% of the total tax information.
liability shown on the return. There are
some situations when the penalty may be
waived.

The estimated tax penalty may be


calculated on Form 2210 or IRS will figure
the penalty. Because it is complicated,
volunteers should not complete it. Let the
taxpayer know that a penalty may be owed
and if so, the IRS will send them a notice.

TaxWise may automatically generate a


Form 2210 if it appears the taxpayer may Review the TaxWise Hint in
owe an estimated tax penalty. If this occurs, Student Guide, page 31-7
enter $1 on the Form 2210 line that asks for
“2006 tax”. This will cause TaxWise to Show TaxWise Form 2210
calculate a $0 penalty. IRS will still calculate screen, if available.
the penalty, if owed, and send a notice to
the taxpayer.

Third Party Designee Page 31-8

For taxpayers who want to allow a friend, Emphasize that VITA/TCE


family member, or any other person to volunteers may not be
discuss their 2007 tax return with the IRS, designated as a “Third Party
the “Yes” box of the Third Party Designee Designee.”
area of the return can be checked.
Refer to F1040 Instructions,
You will also need to enter the name, phone page 5. or TaxWise Main
number and any five numbers the designee Information Sheet.
chooses as their personal identification
number (PIN).

Lesson 31 - Page 6 of 7
Quality Review Page 31-8
You should double and triple check routing
number and account numbers for direct
deposit and electronic funds withdrawal.

Request the taxpayer to also verify the


information.

Summary Page 31-9


In this lesson, we have discussed refunds
and amounts owed and shown you some Designate students to read the
tools to use to handle them. summary aloud.

Q: Where will you find instructions for A: Volunteer Resource Guide,


requesting a direct deposit of a refund? Finishing the Return Tab,
Pointers for Direct Deposit of
Refunds page.

Q: When should you refer to this page A: Every time a taxpayer


requests a direct deposit.

Lesson 31 - Page 7 of 7
Notes
Lesson 32: Quality Review of Tax Return

Objective
Explain the steps involved in the quality review process for federal tax returns.

Introduction
The goal of the volunteer program is to
provide high quality service that includes
accurate tax return preparation.

Quality review will help ensure that the tax


return has been completed accurately
based on the supporting documents
supplied by the taxpayer and the complete
intake and interview sheet

Sites may use various methods for


conducting quality reviews. Your part is to
ensure that every return you prepare
receives a quality review.

This lesson will explain the steps involved in Review the What do I need box
the quality review process for federal tax on page 32-1 with the class.
returns. Make sure students have the
forms and publications listed.

How do I conduct a quality review Page 32-1


of a return?

To perform a quality review you will need to


use Form 8158, Quality Review Sheet (or
approved alternative form) and the tools in
your Volunteer Resource Guide,
Publication 4012.

Lesson 32 - Page 1 of 10
There are three generally accepted
methods of quality review:
• Designated quality reviewer – an Point out that using a
experienced designated reviewer designated reviewer is the
• Peer review – preparers review each preferred method.
other’s work
• Self-review – volunteers review their
own work

The Quality Review Sheet is a list of items Have the students take out the
that must be verified when reviewing tax Form 8158 and review the items
returns. listed.

Reviewing these items prevents common Stress that it is important to


errors from occurring such as overlooking check returns for accuracy;
income or credits. review social security numbers,
double check math, verify
amounts transferred from
schedules and tax tables.

The first step in the review process is to


verify that the Intake and Interview Sheet is
completed and perfected. Once that is
finished you are ready to proceed with
reviewing the return.

It is important to perform the review with the Remind the class to always
taxpayer right after completing the return include the taxpayer in the
and before it is signed. quality review process.

Use the questions on the Quality Review


Sheet to ensure the information shown in
the return is accurate.

When using TaxWise, incorporate the Tax


Return Summary screen in this process by
reviewing the highlights of the summary
with the taxpayer.

If you find errors on the Tax Return


Summary screen, you will correct them
when you run a diagnostic on the return.

Lesson 32 - Page 2 of 10
For the quality review, use a printed copy of
the Quality Review Sheet to review the tax
return.

Check each box, as appropriate, as you


verify each question. If items are incorrect
or incomplete, ensure that corrections are
made to the return.

If there are errors, make the necessary


changes on the tax return and notate the
Intake and Interview Sheet.

Once this has been done, perform another


quality review.

If the return is error free, it is ready for


taxpayer(s) signature(s) based on the
completed review.

Taxpayer Scenario Page 32-2

Through out this course we have been Have the students find Vanessa
preparing a tax return for Vanessa Franklin. Franklin’s source documents in
Her return has been completed and now it the appendix.
is time to perform the quality review. Using
the source documents in the appendix and
the Quality Review Sheet, do a quality
review of Vanessa’s return to determine if
the return is correct and complete
Advise the class to follow the
suggestions on page 32-2 under
Taxpayer Scenario. Allow 10
minutes.

Discuss and respond to


inquiries.

Lesson 32 - Page 3 of 10
How do I complete the Sign Here Page 32-3
section of a paper Form 1040?

When a paper return is filed, the taxpayer(s) Remind students both spouses
must sign and date the return in the Sign must sign and date a Married
Here section of the Form 1040. Filing Joint Return.

A return is not considered to be valid and


refunds are not issued unless the return is
signed.

Your Volunteer Resource Guide has Have students find the Finishing
instructions on signature procedures. the Return tab in the Volunteer
Resource Guide and spend 5
minutes reviewing the signature
information. Remind students
Publication 17 also contains
information on the signature
process.

Do I have to enter a site number? Page 32-3


The IRS captures a wide range of
information from tax returns. One of those
items is the Site Identification Number or
SIDN. This allows the IRS to track the
returns that were prepared at volunteer
program sites.

As a volunteer you will want to ensure that Stress that this is the only
the SIDN has been entered in the box information entered in the Paid
“Preparer’s SSN or PTIN.” Preparer’s Use Only section.

The SIDN will be provided to you. Sites Have students look at the Paid
using paper forms will have forms with the Preparer’s section on page 32-3
SIDN pre-printed or you may be given a to see the location of the SIDN.
stamp or labels with the number.

Sites using computers should have the


SIDN entered on the computer so it prints
automatically when the return is printed.

Lesson 32 - Page 4 of 10
Regardless of method, you must be sure
that the SIDN is entered correctly on the tax
return.

Let’s take a moment to do a knowledge Review the questions and


check. Please do Exercise Questions 1 and answers with the class.
2 at the top of page 32-4. A1: Both spouses must sign,
even if only one spouse had
income.
A2: Form 8158 Quality Review
Sheet.

How do taxpayers sign an e-file Page 32-4


return?
It’s time to turn our attention to signing an e-
file return.

New for 2007, Form 8453 will no longer be


used as a signature document. All Point out that this is a major
electronically field returns will use the self- change because in the majority
select PIN or practitioner PIN method to of cases, no paperwork at all will
sign the tax return. be sent to the IRS.

Once you have verified that the taxpayer


information is correct on the Tax Return Point out that depending on your
Summary screen you are ready to obtain site’s procedures, taxpayers
the taxpayer’s electronic signature. may use the Self-Select PIN or
the practitioner PIN method.

We will take a look at Self-Select PIN first.

This allows the taxpayer to electronically


sign the return by entering a five digit PIN in Point out that zip codes are an
TaxWise. It can be any five numbers the easy solution.
taxpayer chooses. The number cannot
begin with zero or be all zeros.
Stress to the class that this PIN
is not registered with the IRS,
not issued by the IRS and the
taxpayer does not have to
memorize it.

Lesson 32 - Page 5 of 10
There are some rules regarding who is
eligible to use a self-select PIN.

Taxpayers must have a copy of their


previous year’s tax return so you can verify
their identity and enter their adjusted gross
income (AGI) from the prior year into
TaxWise.

Taxpayers may elect to use their prior year


PIN for authentication in lieu of the prior
year AGI.

If you are filing a return that requires Examples are Form 8283,
attachments other than Form W-2, Noncash Charitable
Form W-2G or Form 1099R, Form 8453 is Contributions or Form 8332,
used only to transmit supporting paper Release of Claim to Exemption
documents to the IRS. for Children of Divorced or
Separated Parents.

How does the taxpayer create a Page 32-5


self-select PIN?

Take a few minutes to look at the self-select


PIN process under the Finishing the Return
tab of the Volunteer Resource Guide and Ask for a student to answer the
find the answer to the question: Can question.
taxpayers who file joint returns use the PIN?

We mentioned that a self-select PIN can be


any five digits that do not start with zero and
are not all zeros.

Turn to the Self-Select PIN Guidelines in


the Volunteer Resource Guide and take a
few minutes to become familiar with the
guidelines.

Are there any questions about this Respond to inquiries.


information?

If you are using TaxWise, after the return is


completed, run an initial diagnostic to
identify any errors.

Lesson 32 - Page 6 of 10
Next go back to the Main Information Sheet
and see if the return qualifies for the self-
select PIN. If the return qualifies and the
taxpayer agrees to the electronic signature,
complete the information on the Main
Information Sheet.

TaxWise will verify all of the information and


automatically fill in the line. “Does this
income tax return qualify to use the PIN?”

If the return qualifies, taxpayers will need to Note: You are not authorized to
enter their PIN. enter a PIN for taxpayers who
choose to use the self-select
PIN process. They must enter
their PIN themselves.

Once this has been done, run diagnostics.

The other PIN method is the Practitioner


PIN.

The Practitioner PIN allows the preparer to Tell the class that more
sign the return on behalf of the taxpayer. information is available under
The taxpayer(s) must give permission for the Finishing the Return tab of
this by signing Form 8879. the Volunteer Resource Guide.
Have the class take a few
minutes to find and review the
information.

Completing the Return in TaxWise Page 32-5


We are ready to move on to completing the
return in TaxWise.

After the return has been signed, perform


the following steps in TaxWise:

• Run diagnostics on the return


• Create the e-file
• Verify that the site number appears
on the Main Information Sheet
Have student take a few minutes
to look at Finishing the Return in
the Volunteer Resource Guide.

Lesson 32 - Page 7 of 10
The phrase “run diagnostics” has been
used several times so let’s take a look at
how it is done.

Simply select the Diagnostics button on the Point out that there are other
TaxWise main toolbar. A box will pop up ways to run diagnostics in
and show the diagnostic information. TaxWise:
Review warnings to see if any changes are • Hit the F10 key twice
needed. while you are in the
return. The first hit closes
If there are any electronic filing errors, click the form you are in; the
on the red text to open the form where the second hit runs the
error occurred, make corrections and rerun diagnostic.
diagnostics. Repeat this process (get the • Right-click on the
red out) until there are no more errors. TaxWise screen and
choose Diagnostics
• Press Ctrl-D

The next step is to create the e-file.

Once the return contains no electronic


errors, the “e-file” button becomes available.

Click on the button to create the IRS


electronic return file. If you change the
return after you create the e-file, you will
need to rerun diagnostics and select the e-
file button again.

Are there any questions or comments on Respond as needed.


what we have just covered?

Earlier, the importance of the SIDN was


discussed. If the defaults in TaxWise are
set correctly it should automatically appear
on the Main Information Sheet on TaxWise
and Form 8879, if applicable. The SIDN
should appear at the bottom of page 2 of
the printed Form 1040. If the SIDN does
not appear, manually enter the correct SIDN
and notify your site coordinator.

Your site coordinator can go into the


TaxWise settings and add the SIDN.

Lesson 32 - Page 8 of 10
Of course you will need to print the return. Tell the class not to use the print
To do this, just click the print button on the button while in the diagnostics
TaxWise main toolbar. screen. This will print only the
diagnostics screen.

We have reached the final steps in


conducting the quality review.

Once the return has gone through the


quality review process, assemble the return
and ensure that all the necessary
documentation is complete.

If the taxpayer has not used the self-select Remind students for joint returns
PIN, print two copies of Form 8879 and both spouses must sign,
have the taxpayer(s) sign both copies. otherwise the return will not be
transmitted.

It’s time for one more knowledge check. Assign exercise questions 3 and
4. Review with the class when
finished.
A3: Yes, she will enter 0 for the
prior year AGI to use self-select
PIN or she can sign the 8879.
A4: Designated quality reviewer,
peer review, self-review

Taxpayer Scenario Page 32-7

To wrap thing up, do the sample interview Ask for volunteers or have the
on page 32-7 class divide into groups of two.

Review and discuss the


taxpayer scenario.
Summary

In this lesson we looked at the steps


involved in the quality review process for
paper and electronic returns.

To perform a quality review use Form 8158,


Quality Review Sheet, Intake and Interview
Sheet, and the tools in the Volunteer
Resource Guide.

Lesson 32 - Page 9 of 10
You may find it helpful to think of the
questions in the Quality Review Sheet in
terms of how they relate to sections of the
tax return.

Be sure to have the taxpayer(s) sign the


Form 8879 when the practitioner PIN
method is used. This provides the
authorization for the tax preparer to sign the
return on behalf of the taxpayer.

Lesson 32 - Page 10 of 10
Lesson 33: Concluding the Interview

Objective
Learn how to prepare a return for filing. Determine and tell the taxpayer which
forms to keep. Explain what to tell the taxpayer if a balance is due. Effectively
conclude the interview with the taxpayer.

Introduction

In this lesson you will receive insights and


information for concluding your interview
with the taxpayer.

Using the interview techniques and tools Emphasize the need for active
discussed in the Screening and Interviewing listening and paraphrasing with
lesson, such as active listening and building every taxpayer. This will ensure
rapport, share the following with the understanding
taxpayer:

• Which records/documentation they should Emphasize the points (or


keep and why “bullets”) listed. Part of the
• What documentation about them is whole tax preparation
maintained at the site – why, how long, etc. experience is to educate the
• Information they need if they overpaid taxpayer through the entire
their taxes (i.e., refund due dates, reducing process.
the number of exemptions to avoid
overpayments, etc.)
• Information they need if they owe
additional taxes (i.e., payment due dates
and estimated tax payments, reducing the
number of exemptions to avoid additional
payments, etc.)

These are important tasks to accomplish


even after the tax return is complete, quality
checked, and ready to file. The way that
you conclude the interview can impact the
taxpayers’ attitude toward the taxpaying Making sure the taxpayer has a
experience and their satisfaction with the positive experience is important.
volunteer tax return assistance program.

Lesson 33 - Page 1 of 9
It can also make next year’s tax preparation
easier for taxpayers.

How do I prepare the packet for


filing? Page 33-1

Most volunteer tax assistance sites use


TaxWise software to create, quality review, Emphasize that every taxpayer
and e-file tax returns. Even so, each must receive a complete copy of
taxpayer must retain a paper copy of their his/her return before he/she
return. leaves.
Follow the steps in the Finishing the Return
Tab in your Volunteer Resource Guide to
prepare the packet. In general,
1. Use TaxWise to print the entire return,
including all forms, schedules, and
attachments
2. Make sure the taxpayer(s) name(s) and
social security number(s) are legible on
every sheet
3. Assemble the packet:
- Start with Form 1040 on top Point out the sequence
- Place each form, schedule, and numbers. An example can be
attachment in the proper sequence, based found in the student guide.
on the sequence number shown in the
upper right corner.

Who keeps the records? Page 33-2


Advise the taxpayer to keep a copy of the Emphasize the importance of
following documents for at least three the taxpayer keeping a copy for
years: his/her records for three years.
ƒ Form 1040 with all forms, schedules, and Also emphasize how helpful it is
attachments for him/her to bring it back next
• All other tax-related documents, including year.
Form(s) W-2 and Form(s) 1099
• If applicable:
- Form 8332, Release of Claim to
Exemption for Child of Divorced or
Separated Parents
- Original Power of Attorney
If Publication 730, Important Tax Records
Envelope is available, place the taxpayer’s
copies into that envelope.

Lesson 33 - Page 2 of 9
Record any important information on the
front of the envelope for the next year’s
volunteer preparer. Tip: If your site does not have
storage capability or will not be
Remind the taxpayer to bring the envelope open after April 15th, make
back to the site next year. storage arrangements with your
local IRS Territory contact.
The site will not keep copies of taxpayers’
paper-filed returns or any other taxpayer- Emphasize the site only keeps
related documentation. the data needed to electronically
For e-file returns, the site will keep the file the return
following data confidential and in a secure
location until December 31 of the current In some cases, a Form 8453 will
year: need to be sent to the IRS with
• A master backup disk containing all one or more attachments. If the
electronically transmitted returns Form 8453 is sent, one copy
• One copy of Form(s) W-2 and/or Form(s) 1099 should be retained with the other
showing federal tax withheld items listed here.
• A copy of the IRS Acknowledgement Report
for transmitted federal returns
• A copy of the Declaration Control Report
(DCR) for transmitted returns may be kept

What should I tell the taxpayer Page 33-2


about refunds or balances due?
For taxpayers who are due a refund:
Emphasize that this is not a
• Review the 2008 E-file Refund Cycle guaranteed date, but a
Chart in your Volunteer Resource Guide scheduled date for their refund.
and provide the expected date they may
receive it. (The cycle chart will provide you
with dates for direct deposit and paper
checks). Make sure the taxpayer realizes
that this is not a guaranteed date, since
delays can occur.

For taxpayers who have a balance due: Show a sample of Form 1040-V.
• Remind them to send Form 1040-V to the Explain each of the bullets to the
appropriate address if they wish to mail a taxpayer. Educating the
payment; for e-file returns, Form 1040-V, taxpayer is an important part of
Payment Voucher, will be generated by the providing a complete, quality
e-file software when the tax return results in return preparation experience.
a balance due.

Lesson 33 - Page 3 of 9
• Remind the taxpayer that payment must
be made by April 15, 2008 in order to avoid
penalties and interest.
• If the taxpayer is requesting an installment Show a sample of Form 9465.
agreement, remind them to submit Form
9465, Installment Agreement Request, as TIP: Form 9465 can be e-filed.
soon as possible.
• If the taxpayer can pay a portion of the Explain that they may be
amount owed by the due date, they won’t charged interest and penalties
be charged interest and penalties on that on the remainder of the unpaid
portion. balance.

How can the taxpayer avoid a Page 33-3


balance due next year?
There are several ways to pay taxes during
the year in order to avoid having a balance
due when the return is filed.

For taxpayers whose income is mostly from


wages or pensions suggest that they adjust
their withholding.

If most income is from self-employment or


investments, they should consider making
or increasing their estimated payments.

A combination of increased withholding


and estimated tax payments may work best
for some taxpayers.

How can the taxpayer adjust their Page 33-3


withholding?
Taxpayers receiving wage income can Briefly go over Forms W-4,
provide a new Form W-4, Employee’s W-4P, and W-4V.
Withholding Allowance Certificate to their
employer to adjust their withholding.

By decreasing the number of allowances


claimed on Form W-4, the amount withheld
from each paycheck will increase.

Lesson 33 - Page 4 of 9
Taxpayers can also use Form W-4 to
request an additional dollar amount to be
withheld.

Withholding from pension income is


voluntary, not automatic as it is for wages.
As a result, many retirees do not have tax
withheld from their retirement payments and
are unpleasantly surprised by a balance
due at the end of the year.

Taxpayers can request withholding from


pension and annuity payments by
submitting Form W-4P, Withholding
Certificate for Pension and Annuity
Payments to the payer.

Withholding can be requested from certain


government payments, such as social
security and unemployment compensation,
by submitting Form W-4V, Voluntary
Withholding Request to the paying agency.

The IRS Web site has a helpful withholding


calculator at www.irs.gov – keyword:
calculator. More information can be found
in the Form W-4 instructions, or in
Publication 919, How do I Adjust My Tax
Withholding?

When should the taxpayer make Page 33-3


estimated tax payments?
Estimated tax is the amount a taxpayer
expects to owe for the tax year after
deducting any tax credits or federal
withholding.
Taxpayers with significant income that is
not subject to withholding (such as interest,
dividends, capital gains or self-employment
income) will often find they need to make
estimated tax payments.

Lesson 33 - Page 5 of 9
Estimated tax payments are generally
required if both of the following conditions
are met – the taxpayer expects:
1. To owe $1,000 or more in tax after
subtracting federal income tax withheld and
credits from taxable income
and
2. The tax withheld and credits to be less
than the smaller of:
a) 90% of the tax to be shown on their tax For awareness only:
return for this year, or Refer to Publication 17 for the
b) 100% of the tax shown on their tax return special rules for farmers,
for last year fishermen, and higher income
taxpayers.

The decision tree in Publication 17 can help Ask students to locate this
determine if the taxpayer should make decision tree in their
estimated tax payments. Publications 17.

Look at the example in the middle of page Have a student read the
33-4. example and discuss as
needed.

How is estimated tax figured? Page 33-4


Use Form 1040-ES, Estimated Tax for
Individuals to compute the amount of If a taxpayer overpays his/her
estimated tax that should be paid over the estimated tax, he/she can
year. This form includes worksheets to help receive a refund. However, if the
the taxpayer estimate their income and tax taxpayer underpays the
liability for the year. The current year’s tax estimated tax, he/she may be
return can be used as a starting point, but charged a penalty.
any anticipated changes should also be
taken into account. Taxpayers may also
have to adjust their payments during the tax
year if a change in income or the tax law
will affect their tax liability.
Estimated tax payments are due four times
a year. If any due date falls on a Saturday,
Sunday, or legal holiday, the payment is
due the next business day. Each due date
covers a specific time period:

(See chart in Text)

Lesson 33 - Page 6 of 9
Most of the taxpayers you will assist will pay
their estimated tax in four equal
installments. However, a taxpayer can
choose to make payments for each period
based on the actual amount of income
received during that period. If the taxpayer
does not pay enough each payment period,
they may be charged a penalty even if they
are due to receive a refund when the tax
return is filed. Generally, the simplest and
safest procedure is to make sure that each
payment is at least one-fourth of the prior
year’s total tax, less tax withheld during the
period.

How is estimated tax paid? Page 33-5

Estimated tax payments can be sent


electronically to the IRS by direct debit Always invite questions from the
payment from the taxpayer’s checking or taxpayer so that he/she feels
savings account, by credit card, or by check comfortable with the process.
or money order with a payment voucher
from Form 1040-ES. Each voucher is
inscribed with its due date. Remind
taxpayers to be sure to use the correct
voucher for each payment.

Advise taxpayers to write their social


security number and “2008 Form 1040-ES”
on the check or money order (payable to
the “United States Treasury.”)
For more information, see the
Form 1040-ES instructions.

How do I close the contact? Page 33-5


Before you conclude the interview, show as
much concern and interest as you did at the
beginning of the interview.

• Explain what will happen next.


• Ask the taxpayer, “Do you have any
questions?”
• Advise the taxpayer how to get answers to
questions that come up later.

Lesson 33 - Page 7 of 9
• If the taxpayer seems interested in
learning more about tax preparation,
encourage them to consider volunteering.
Provide them with contact information or
take their contact information, depending on
your site’s procedures.
• Thank the taxpayer for using the service.

Does the taxpayer have to do Page 33-5


anything else?
If the return will be e-filed, give the taxpayer
a brief explanation of how the process
works:

• The site coordinator or designee will


transmit all the e-file returns.
• The next day, the site coordinator or
designee will receive an acknowledgement
for each successful e-file, or a reject notice
if there was a problem with the electronic
file. The most common problem is a name
or social security number that does not
match IRS records.
• If the e-file is rejected, the site coordinator
or designee may need to contact the
taxpayer to resolve the problem. Make sure
that you have all the contact information
needed to reach the taxpayer if there are
any questions.
If the return is not being e-filed, the
taxpayer must mail the signed copy of the
tax return, along with copy B of all Form(s)
W-2, and one copy of any Form 1099 that
shows federal withholding. The taxpayer will
need another copy of the return and
Form(s) W-2 if filing a state return. Make
sure the taxpayer knows the correct
address for mailing the return. Remind the
taxpayer that the return must be
postmarked by the filing deadline of April
15, 2008.

Lesson 33 - Page 8 of 9
Taxpayer Scenario Page 33-6

Here is one more opportunity to practice Have two students do a role play
interview skills. using the sample interview on
page 33-6 or divide the class in
groups of two for this activity.

Summary Page 33-6


Concluding the interview properly ensures
that each taxpayer has a complete record of
the return, understands what will happen
next, and knows how to get answers to
questions that come up later. If you handle
the interview well, it can help taxpayers
develop a more positive attitude toward the
tax preparation experience, which can Ask if there are questions and
foster greater accuracy in returns and respond to any inquiries.
timeliness in filing.

Lesson 33 - Page 9 of 9
Notes
Lesson 34: Military Finishing and Filing the Return

Objective
Determine where and when to file a federal tax return for a United States service
member. Determine who qualifies for a deadline extension. Determine who
qualifies for special tax benefits.

Introduction

This lesson will help you determine special


filing concerns of United States service
members. To do this you need to determine
where and when to file a federal tax return,
who qualifies for a deadline extension, and
who qualifies for special tax benefits.

What type of identifying Page 34-1


information should service
Refer to TIP on page 34-1:
members place on their returns? If the postal service does not
deliver to the taxpayer’s street
What type of identifying information should address and the taxpayer has
service members place on their tax returns? a post office box, enter the
Members of the Armed Forces should enter post office box number on
their names, social security numbers, and the line for the present home
permanent home addresses on their return. address.
However, taxpayers who are due a refund
and do not want it mailed to their permanent
home address should enter a current Ask for a volunteer to answer
address on the return. A military person question number 1.
living overseas should use an APO or FPO
address.
Answer Q1: False
Exercises: Q1 page 43-1 Members of the Armed Forces
True or False? Members of the Armed should include their name, social
Forces don’t need to include their social security number, and permanent
security numbers on their tax return. home address on their return.
 True  False

Lesson 34 - Page 1 of 15
What action should a service member who
has moved take?
Refer to TIP at the bottom of
Taxpayers who changed their mailing page 34-1. Direct Deposit is fast,
address during the year should notify the simple, safe and secure and
IRS of the change on Form 8822, Change removes concerns about mail
of Address. delivery.

Taxpayers who move after filing a tax return


should fill out and mail Form 8822 to the Call the class’ attention to the
IRS service center for the state where their image of Form 8822 on
returns were previously filed. The service page 34-1.
centers addresses are listed on page 2 of
the form.

Exercises (cont’d) page 34-2 Q2:


Tony, who is due a refund, filed his tax Have the class look at Question
return from his home address in Florida on 2 in the exercise box on page
March 12. On March 30 he was transferred 34-2 as well as the Form 8822.
to Puerto Rico. Where should Tony submit
his Form 8822, Change of Address?
A. To the IRS service center for Florida Answer A2 - Because he
B. To the IRS service center for Puerto already filed his return from his
Rico previous address, Tony should
C. Either of the above submit Form 8822 to the service
center for his previous address.
Form 8822 page two middle
column uses the terminology: “IF
your old home mailing address
was in . . .”

Where and when should service


members file their returns? Page 34-2

Where should I file the return?


Members of the Armed Forces should send Consider showing the students
their federal returns to the service center for www.irs.gov page for where to
where they currently live. If the military file.
member is stationed overseas and has an
APO or FPO address, file the paper tax Note: If you e~file this is all
return with the IRS Service Center in Austin done by computer.
Texas, 73301-0215 (USA).

When should I file the return?

Most individual tax returns cover a calendar

Lesson 34 - Page 2 of 15
year, January through December.

Calendar-year taxpayers who live in the


United States or Puerto Rico should file
their individual tax returns by April 15 of the Note: If you have an individual
following year. who has a fiscal (not January to
December) tax year – send
them for professional help.

Refer to TIP on page 34-2.


If April 15 falls on a weekend or
holiday, then the due date is the
next business day.
Taxpayers who have a balance due can
pay by check, money order, electronic funds
withdrawal, or credit card.

What can service members do if they are Options:


unable to pay the tax due? The Form 9465 Installment
Taxpayers who cannot pay the tax due with Agreement request can be e-
their tax return should attach Form 9465, filed with the tax return. Show
Installment Agreement Request. the TaxWise version to the
students.
The IRS will try to arrange an installment
payment agreement that reflects the Refer the students to the image
taxpayer’s ability to pay the tax owed. of the Form 9465 on page 34-3.
However, taxpayers should pay as much as
possible with their return to reduce the Consider showing the class the
amount of interest and penalties that will be Online Payment Agreement at
added to the unpaid balance. www.irs.gov - show the page to
the students if you have internet
Taxpayers can now complete an Online access.
Payment Agreement (OPA) application via
the Internet at www.irs.gov. This application
will allow the taxpayer or an authorized
representative (Power of Attorney) to self-
qualify, apply for an installment/payment
agreement, and receive immediate
notification of approval. Discuss exercise 3 with the
students.
Exercise Q3 on Page 34-3 A3: The correct answer is
True or False? Taxpayers who attach Form FALSE.
9465, Installment Agreement Request, to
their tax return will avoid interest charges on Note: The most relevant part of
any tax balance they cannot pay by the due the answer is, “Interest will be
date. charged on the unpaid tax.” The

Lesson 34 - Page 3 of 15
taxpayer who files on time will
not be charged the failure to file
penalty.

What are the extension


requirements for taxpayers within Page 34-3
the U. S.?

Taxpayers can receive extensions of time to


file their returns. Different rules apply to
taxpayers who live in the U.S. and those
who live outside the U.S. Deadline
extensions are also available to members of
the Armed Forces who served in a combat
zone.
The IRS will charge interest on taxes not
paid by the due date, even if an extension
of time to file is granted. The only exception
Remind students that this is a
is when the combat zone extension applies.
change from the prior 4 month
extension.
How does a taxpayer get an automatic
If available, show how the Form
extension?
4868 can be e-filed with the
Taxpayers living in the United States can
TaxWise software. Show the
receive an automatic six-month extension of
class the image on page 34-3.
time to file their federal tax returns.
Refer to TIP on page 34-3:
To get the automatic extension, taxpayers
See Publication 3, Armed
must file Form 4868, Application for
Forces Tax Guide, for
Automatic Extension of Time To File U.S.
extensions of deadlines and
Individual Income Tax Return, by the due
deferrals of taxes due that may
date for their tax return (usually April 15).
apply to members of the Armed
Calendar-year taxpayers who take the
Forces.
extension will have until October 15 to file
their tax return.

Taxpayers cannot use the automatic six-


month extension if they:
ƒ Choose to have the IRS figure their
tax, or
ƒ Are under a court order to file their
Refer to TIP on page 34-4:
returns by the regular due date
For more details on penalties,
refer to filing information in
Publication 17.

Lesson 34 - Page 4 of 15
Will the taxpayer owe interest and/or
penalties?

Although taxpayers are not required to pay


their tax due when submitting Form 4868, Remind students that an
they will owe interest on any tax not paid by extension of time to file does not
the original due date. Interest will be extend the time to pay the taxes
charged from the due date to the date of owed.
payment.

In addition, taxpayers may be charged a


late-payment penalty if the amount of tax
paid before the due date (from withheld
taxes or estimated tax payments) is less
than 90% of the actual tax owed.

If Form 4868 is filed late, the request for an


extension will be denied, and the IRS will
inform the taxpayer that the request was
denied.

Exercises (continued) Q4 page 34-4:


Which of the following calendar-year A4: B. To get the extension,
taxpayers can receive an automatic six- taxpayers must file Form 4868
month extension? by the return’s due date.
A. Avery, who filed Form 4868 in
February and chose to have the IRS Remind students that taxpayers
figure his taxes should pay the balance owed by
B. Benton, who filed Form 4868 on April the due date of the return to
15 and did not include any tax payments avoid penalty and interest
C. Calvin, who filed Form 4868 on April charges.
20 and included a tax payment that was
over 90% of what he owed
D. None of the above

How does the taxpayer file the return?

When the tax return is actually filed, any


payment that was submitted with Form
4868 should be added to the total on:
x Line 10 (total payments), Form
1040EZ
x Line 43 (total payments), Form
1040A
To the left of the line, enter “Form 4868”

Lesson 34 - Page 5 of 15
and show the amount paid in order to
receive credit for the payment.

Enter the amount on line 69 (Amount paid


with request for extension to file), if filing
Form 1040.

What are the extension


requirements for taxpayers outside Page 34-4
the U.S. and Puerto Rico?

Extension requirements for taxpayers who


live in the United States differ from those
who live outside the U.S.

Who qualifies for an Automatic Two-Month


Extension?
Discuss the requirements with
U.S. citizens and resident aliens are the students.
allowed an automatic two-month extension
to file their return if they:
x Are living outside the U.S. and
Puerto Rico on the due date of the
return, and their main place of
business or assigned tour of duty is
outside the U.S. and Puerto Rico
x Are in military or naval service on an
assigned tour of duty outside of the
United States and Puerto Rico for a
period that includes the entire due
date of the tax return

Although calendar-year taxpayers in this


situation don’t have to file until June 15,
they will owe interest charged from the April
15 due date to the date the tax is paid. In
this instance, Form 4868 is not required.

What must a taxpayer attach to their return?


Taxpayers using the automatic two-month
Advise students that only a
extension must attach a statement to their
statement showing the
return stating that they meet the
requirements are met must be
requirements.
attached to the return.

Lesson 34 - Page 6 of 15
What is the extension rule for married
taxpayers?

For married taxpayers who file jointly, only


one spouse needs to meet the
requirements to take advantage of the
automatic extension to June 15.

For married taxpayers who file separately,


only the spouse who meets the
requirements qualifies for the automatic
extension. If both spouses meet the
requirements, each may take advantage of
the extension.

How can a taxpayer request an additional


extension?

Taxpayers who live outside the U.S. and


Puerto Rico and whose main place of
business or assigned tour of duty is outside
the U.S. and Puerto Rico can also request
an additional extension by:
x Filing Form 4868 by the automatic
extension date of June 15 and
checking the box on line 8
The due date will then be extended to
October 15.

Exercises Q5 page 34-5


Which of the following calendar-year A5: The answer is A & C. For
taxpayers has until June 15 to file a tax Weston and Sheila, who file
return? jointly, only one spouse needs to
A. Weston, who files a joint return with meet the requirements to take
his wife, Sheila. She was stationed in advantage of the automatic
the Philippines from January through extension. Dwayne’s due date is
May, and they paid their taxes by credit automatically extended to June
card on April 2. 15.
B. Lilly, who began working for a
company in Mexico in January, but
whose main home is still in Texas. She Refer to the TIP on page 34-5:
filed Form 4868 on April 10. Traveling outside the United
C. Dwayne, who was stationed in South States and Puerto Rico on the
Korea from February through July. due date does not qualify the
D. None of the above taxpayer for an automatic two
month extension.

Lesson 34 - Page 7 of 15
Exercises (continued) page 34-5
Q6: A6: A. April 15
Pvt. Franklin, a U.S. citizen, is a calendar-
year taxpayer. What would the due date be
for him to file a return if his assigned tour is
in Puerto Rico?
A. April 15
B. June 15
D. June 16

What are the tax options for


combat zone participants? Page 34-6

For members of the Armed Forces serving


in a combat zone or qualified hazardous
duty area, the deadline for filing tax returns,
paying taxes, filing claims for refunds, and
taking other actions with the IRS is
automatically extended.

The deadline for taking action with the IRS


is extended 180 days after the later of:
x The last day in a combat
zone/qualified hazardous duty area
x The last day of any continuous
hospitalization for injury from service
in a combat zone or qualified
hazardous duty area

If a taxpayer entered the combat zone or


qualified hazardous duty area before the
period of time to take action began, the
deadline is extended by the entire period of
the time to take action.

Generally, spouses of individuals who


served in a combat zone are entitled to the
same deadline extension. There are two
exceptions:
x Any tax year beginning more than
two years after the date the area
ceases to be a combat zone
Demonstrate the concept to the
x Any period the qualifying individual is students.
hospitalized in the U.S. for injuries

Lesson 34 - Page 8 of 15
incurred in a combat zone.
Use the formula:
In these instances, the extension does not
apply to a spouse. 180 days
+ days of the filing period the
Taxpayer missed

Example page 34-6 Add the total number above to


Captain Kristina Jones entered a combat the date the taxpayer left the
zone on December 1, 2005. She remained combat zone.
there through March 31, 2007, when she
departed for the U.S. She was not injured
and did not return to the combat zone. Her
deadlines for filing 2005, 2006, and 2007
returns are:
x 2005 tax return deadline is January
12, 2008. This deadline is extended
by 287 days (180 plus 107) after the
Captain’s last day in the combat
zone. The 107 additional days are
the number of days in the 3½ month
filing period that were left when she
entered the combat zone (January 1
– April 17, 2006).
x 2006 tax return deadline is January
12, 2008; the deadline is extended
by 287 days (180 plus 107)
x 2007 tax return deadline is not
extended because the 180-day
extension period after March 31,
2007, ends on September 27, 2007
(which is before the start of the next
filing period, January 1 – April 15, A7 page 34-6: The answer is -
2008). The deadline for filing a claim for
the taxpayer’s 2005 tax return is
IRS Publication 3, Armed Forces Tax Guide 180 days plus the number of
will provide additional information for days remaining for the taxpayer
combat zone extension of deadline. to take action when they entered
the combat zone.
Exercises (continued) page 34-6
Question 7: The deadline for 2005 is
If a taxpayer served in a combat zone from extended 286 days (180 plus
December 30, 2005, through May 31, 2007, 106) after they leave the combat
and was not injured, what would the zone to March 13, 2008. The
deadline be for filing a claim for a refund on 106 additional days are the
their 2005 tax return? number of days left in the 3-year

Lesson 34 - Page 9 of 15
period for filing the refund claim
that were left when the taxpayer
entered the combat zone on
December 30th (December 30,
2005 – April 15, 2006).

(CZ) Combat Zone Extension


calculation:

180 CZ extension
+106 days for the filing season
the taxpayer was away
=286

Add this total to the day the


taxpayer leaves the combat
zone to get the due date.

Refer the students to IRS


Publication 17 Individuals
Serving in the combat zone
(page 11 in the tax year 2006
version).
What are other tax options for
combat zone participants? Page 34-7

Other options or time that can be counted


for taxpayers in a combat zone or qualified
hazardous duty area are: Discuss options available with
x Missing status such as missing in students.
action or prisoner of war time counts
as time served
x Support personnel including Red
Cross, accredited correspondents,
and civilian personnel acting under
the direction of the Armed forces
x Hospitalization outside the U.S. and
up to five years in the U.S. as a
result of an injury

What are rules for reservists called


Page 34-7
to active duty?

Reservists called to active duty or regular


military members not in a combat zone may

Lesson 34 - Page 10 of 15
still qualify to defer the payment of back
taxes by:
x Serving their initial period of service
(the period of active duty following
recall to active duty from an inactive
reserve or national guard unit or for
regular military, the period following
induction or first enlistment)
x Showing that the ability to pay back
taxes has been materially impaired
because income has dropped as a
result of going into military service

What are rules for deferment? Page 34-7


Military members who have a current
payment agreement or receive a notice
requesting payment must make a written
request for deferment. The IRS will review
each request and advise the taxpayer in
writing of its decision.

Can other parties assist with a tax Page 34-7


return?

If a taxpayer wants a third-party designee to


discuss a tax return with the IRS, the “Yes” Refer students to screen shot of
box in the third party designee area of the Third Party Designee section at
return must be checked. Also, the taxpayer the bottom of the page.
must provide the designee’s name, phone
number, and any five numbers the designee
chooses as a personal identification
number.

A power of attorney Form 2848 may also be


used to grant authority to an individual to
represent the taxpayer before the IRS and
to receive tax information. A copy must be
attached to the return. Note: This is in Publication 17
as well. Right hand column,
Use caution when allowing a representative page 21 in the tax year 2006
to sign for someone. See Signatures in the version under the heading
Filing Information chapter in Publication 17 “Spouse in a combat zone”.
for more information.

If it is not possible to obtain a signature for

Lesson 34 - Page 11 of 15
a joint return from a spouse serving in the
combat zone, a signed authorization to act
on the taxpayer’s behalf can be accepted. Note: The final return is the one
for the year in which the
The IRS also accepts a written statement taxpayer dies.
explaining that the spouse is serving in the
combat zone. The statement must be
signed by the spouse who is not serving in
the combat zone, and attached to the
return.

What are the tax forgiveness Page 34-8


provisions for decedents?

Special tax-forgiveness provisions apply to


individuals who die:
ƒ While serving in a combat zone or Discuss with students the
from wounds incurred while serving Special tax-forgiveness
in a combat zone, or provisions available for anyone
ƒ From wounds or injuries incurred in a in charge of a deceased person.
terrorist or military action while
working for the U.S. government

If an individual died after the tax year, but


before the return for that year was filed, the
return for the tax year is not the final return;
it is a regular return. The return for the year
the taxpayer died will be the final tax return. TaxWise Hint: Type the date of
death of the taxpayer or spouse
in the appropriate box. If you
For example, for a taxpayer who died in have not previously done so, go
February 2007, the 2006 tax return due to Name Line 2 in the U.S.
April 15, 2007 is not the final return. The address area at the top of the
final tax return will be the 2007 Form 1040 Main Information sheet and
due April 15, 2008. enter the name of the person
filing the return for the deceased
The final tax return is due at the same time person.
the decedent’s return would have been due
had the death not occurred.

This may be the surviving spouse if the


filing status is Married Filing Jointly, or a
personal representative such as an
executor, administrator, or anyone who is in
charge of the deceased taxpayer’s property.

Lesson 34 - Page 12 of 15
For information on signing a joint return if
one spouse has died or cannot sign the
return, see Publication 17 Index, keyword:
Signatures.

Discuss with students the


The combat zone tax forgiveness provision provisions that apply if the
applies for the year of death and for any taxpayer is serving outside the
prior year ending on or after the first day combat zone.
that the individual served in a combat zone.
Any forgiven tax liability that has already
been paid, will be refunded.

The tax forgiveness provision also applies


to those taxpayers serving outside the
combat zone if the service:
ƒ Was in direct support of military
operations in the zone, and
ƒ Qualified the member for special
military pay for duty subject to hostile
fire, imminent danger, and/or terrorist
actions.

What are the tax forgiveness Page 34-8


provisions for military or terrorist
actions?
The decedent’s income tax liability is
forgiven if at death, he or she was a military
or civilian employee of the United States
who died because of wounds or injury Remind students that a taxpayer
incurred: who died because of military or
x While a U.S. employee, and terrorist action liability is forgiven
at death.
x In a military or terrorist action

The forgiveness applies to the tax year in


which the death occurs and/or any prior
year in the period beginning with the year
before the year in which the wounds or
injury occurred.

Lesson 34 - Page 13 of 15
EXERCISES Q8 page 34-9 Discuss the answer with the
Exercise 8: students.
Mr. Tim Morris, a civilian employee of the A8: The answer is:
United States, died in 2007 as a result of 2004, 2005, 2006, 2007
injuries he suffered during a terrorist attack
in 2005. What years are Mr. Morris’ income
liabilities forgiven?
A. 2004 through 2007
B. 2005 through 2007
C. 2004 through 2007

What are the rules for filing a Page 34-9


return for decedents?
Refer to Publication 3 for more
The personal representative must file the information on decedent returns.
final income tax return for the year of death
and any returns not filed for preceding
years. A surviving spouse may have to file
the returns for the decedent.
Refer to TIP on page 34-9.
To make a claim, the decedent’s Only the decedent’s part of the
representative must file: joint tax liability is eligible for the
x Form 1040EZ, Form 1040A, or Form refund or tax forgiveness.
1040 for each year an income tax
return has not yet been filed Look up information on signing a
x Form 1040X Amended U.S. joint return if one spouse has
Individual Income Tax Return for died or cannot sign the return, in
each year an income tax return has Publication 17 Index, keyword:
already been filed. Signatures.

Summary Page 34-9

ƒ Armed Forces members should send


their tax returns to the service center Review summary topics with
for where they currently live. students.
ƒ This lesson will help you determine
special filing concerns of U.S.
Service Members.
ƒ Most members of the Armed Forces
send their federal returns to the
service center for where they
currently live
ƒ Most taxpayers who live in the U.S.
or Puerto Rico should file their

Lesson 34 - Page 14 of 15
individual tax returns by April 15
ƒ Taxpayers who changed their mailing
address should notify the IRS of the
change on Form 8822, Change of
Address
ƒ Taxpayers who cannot pay the tax
due with their tax return should
attach Form 9465, Installment
Agreement Request
ƒ Extension rules vary depending on
whether the taxpayer lives in the U.S.
or outside the U.S.
ƒ The income tax liability of a member
of the Armed Forces is forgiven if a
member dies as a result of service in
a combat zone or from a terrorist or
military action outside the U.S.
ƒ The terrorist or military action
forgiveness also applies to an
individual who is a U.S. employee at
death and dies from wounds or
injuries incurred in a terrorist or
military action regardless of where
the action occurred
ƒ Only the decedent’s part of the joint
income tax liability is eligible for the
refund or tax forgiveness.

Lesson 34 - Page 15 of 15
Notes
Lesson 35: Amended Returns

Objective
Determine how to amend a 2007 return that was originally created using
TaxWise at your volunteer site.

Introduction
The focus of this lesson is to help you Make sure the students have
determine how to amend a 2007 return that copies of Form 1040X and
was originally created using TaxWise at instructions.
your volunteer site.

There are other reasons, but two common


reasons a taxpayer may need an amended
return are:

x Forms W-2 or 1099 were received


after they filed their original return.

x They may have claimed their


personal exemption, but later
discovered that their parents were
entitled to claim them.

Before preparing an amended return,


examine the original return and look for the Tell students they will have to
error. Ask the taxpayer to explain what conduct a probing interview
happened. Be sure that the original return using page 2 of Form 13614.
is, in fact, incorrect.
Point out that they can prepare
an amended return using
TaxWise, but amended returns
can’t be filed electronically.

Lesson 35 - Page 1 of 6
When is an amended return Page 35-1
required?

Returns are not usually amended for math Tell the students if their site
errors. The IRS corrects computation errors e-files returns, math errors are
and normally writes the taxpayer and asks usually non-existent.
for a missing schedules or forms.

If a taxpayer comes to your site with a letter


from the IRS asking for information, do not
amend the return, advise the taxpayer to
contact the IRS as directed in the letter.

Can anyone tell me why a tax return will Listen for the responses on
require amending? page 35-1 of the text and make
sure each bullet is covered.
Please read the TIPs on page 35-1. Any
questions? An injured spouse claim is filed
using Form 8379, not Form
1040X

Read the example on


page 35-2.

Getting Started Page 35-2


Let’s move on, to get the process underway Note: If the federal return has
you will need the taxpayer’s copy of the to be amended, often the state
original return and the information that return must be amended as well.
needs to be changed.

Whatever the issue, go over the intake and


interview sheet and use the 4012 along with
Publication 17 to make sure that what the
taxpayer wants to change is correct.

Determine if the taxpayer received any Ask a student to read the


correspondence from the IRS making second bullet point on the
changes to the return or if the taxpayer middle of page 35-2.
amended the return for another issue.

You will need to know this in order to


correctly amend the return.

Lesson 35 - Page 2 of 6
Form 1040X Page 35-2
Before we get started in TaxWise, let’s look
at the Form 1040X. Have the students look at the
upper left corner for the revision
This form is not year specific, but you want date.
to be sure you are using the latest version
of the form.
Note the sentence under the
VITA/TCE clients are calendar year Form 1040X header.
taxpayers. They report income received Read it to the class.
from January 1 through December 31 and
claim allowable deductions paid during the
same period. If you were doing the 1040X Point out that if the original
by hand you would put 2007 after calendar return is on the computer,
year. TaxWise will enter the date for
you.
The 1040 X has three columns:
x Column A is used to show the original or
IRS adjusted figures from the original
return or previous amendment
x Column C is used to show the corrected
figures
x The differences between the figures in
columns A and C are reflected in column
B.

Part I of the form (on page 2) Exemptions is


used only if you are adding or taking away
an exemption.

Part II, also on page 2 is the Explanation of Note: Explanations should be


Changes. Use this section to explain clear and easy to understand.
specific changes being made to the return For example, “taxpayer received
and the reasons for the changes. another W-2 after they filed
original return” or “taxpayer
meets the qualifications to file as
Head of Household instead of
The instructions for Part II have the Married Filing Separately”
reminder that names and social security
numbers need to be included on any
attachments filed with the form.

Are there any questions on what we have Respond as needed.


covered so far?

Lesson 35 - Page 3 of 6
What are the time limits on Page 35-3
amending a return?

There are some time limits involved with


filing an amended return.

A statute of limitations on refunds being


claimed on amended returns exists.

In general, if a refund is expected on an Point out returns filed before the


amended return, taxpayers must file the due date, without regard to
return within three years from the due date extensions, are considered filed
of the original return or two years after the on the due date.
date they paid the tax, whichever is later.
Have a student read the
example on page 35-3.

Time periods for claiming a refund are Pub. 17 has the definition. Have
suspended for a period when a taxpayer is the class research and read it in
financially disabled. These circumstances the pub.
will be very rare occurrences.
Point out that if the taxpayer
There are a few exceptions to the three appears to qualify for an
year rule. Claiming a bad debt for worthless exception to the three year time
securities is one. There are also some limit, they should refer the
Military issues. taxpayer to a professional tax
preparer.

If the taxpayer is due a refund: Page 35-4


x Advise them to wait until the original
return is processed, usually 2 – 4 weeks
after filing the original
x Advise the taxpayer they can cash the Remind the class that this
original refund check (if any) while interest is taxable and will need
waiting for any additional refund to be reported as income.
x Interest will be paid on a refund on an
amended return from the due date of the
original return or the date the original
return was filed, whichever is later, to
the date the amended return is filed.
x It usually takes 8 – 12 weeks to process
an amended return.

Lesson 35 - Page 4 of 6
The advice is different if the taxpayer owes
money on the amended return.
x Form 1040X should be filed and any
taxes due paid by the April due date to
avoid any interest and penalties
x See Form 1040X Instructions for how to
include all the correct information on the
check or money order

It is very important to tell the taxpayer that


even if they cannot pay the balance due in
full by the April due date, file the amended
return anyway.
Point out that the interest rate
The IRS will calculate the interest and send can change every 3 months.
a bill.

Interest is calculated based on the amount


of tax owed and for each day the balance
due is not paid in full.
Review the answers when done.
Let’s take a few minutes and complete the A1: No, it is not too late. John
exercises at the bottom of page 35-4. mailed the amended return
before April 15, 2010, within the
three year period allowed.
A2: Yes, it is too late. The post
. mark must be three years from
the due date of the return
(extended to the next business
day). The IRS will disallow
because it is considered to have
been received more than three
years after the due date of the
original return.

Completing the Amended Return Page 35-5


in TaxWise
If TaxWise is available, work
through each point under
“Completing the Amended
Return in TaxWise”

If TaxWise is not available,


remind the class that it is
presumed that you have the

Lesson 35 - Page 5 of 6
original return in TaxWise, and
ask for students to read each
point.

It is very important to note that the Refund


or Amount You Owe section of the 1040X
must be filled out carefully.

Take a look at line 19, Overpayment, if any,


shown on original return. This means the
original refund gets entered here. However,
if the IRS adjusted the refund, enter that
amount instead of the original amount.

Assembling and Submitting Form Page 35-5


1040X

The last thing to look at is how to assemble


the return for mailing and for the taxpayer’s
records.
x From TaxWise, print two copies of the
1040X and any state form. One will be
to mail, the other for the taxpayer
x Have the taxpayer(s) sign and date the
front page of the 1040X (do the same for
any state return)
x Attach all additional or corrected Form(s)
W-2 or 1099 that the taxpayer received Make sure that any additional
after their original filing withholding has been included.
x Attach any additional forms or schedules
needed to explain the changes.

For mailing addresses while still in the


1040X in TaxWise, Go to TaxWise Help to
display the 1040X instructions. Otherwise, Discuss processing time and
look in the paper 1040X instructions. interest and penalty possibilities.

Summary
Page 35-6
Let’s review when a return can be
amended, how to send it to the IRS and the
impact of the amended on the taxpayer’s
refund and state return.

U.S. GOVERNMENT PRINTING OFFICE: 2007–629–017 Lesson 35 - Page 6 of 6


Notes
Notes
Notes
Notes
Notes
Notes
Technical Updates
Tax law changes implemented after this product was published may cause various forms,
tables, and worksheets to change. The supplemental changes (if any) are normally available in
mid-December on www.irs.gov (keyword: Community Network).
Technical updates are also conveyed in Volunteer Quality Alerts during the filing season on
www.irs.gov. Also, consult your course facilitator and/or site coordinator.

Provide America’s taxpayers


top quality service by helping
them understand and meet
www.irs.gov
their tax responsibilities and
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Counseling for the Elderly (TCE) training materials are used with the permission of UTS. The
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properly safeguarded.
All persons, scenarios and addresses appearing in this product are fictitious. Any resemblance to
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VITA/TCE - 2007 FACILITATOR'S TRAINING GUIDE -
Community
Network
...It’s Your Resource

Visit the Community Network on IRS.gov where


Facilitator’s Training Guide
you’ll find Web pages created specifically for
IRS partners and volunteers. These pages are
Volunteer Tax Return Preparation Programs
your one-stop resource to help you serve
taxpayers in your community.
Tax Year 2007 Courses
On IRS.gov, search keyword
Community Network, where you’ll find: For Use in Preparing Tax Year 2007 Returns

x Training Materials
x Asset Building Strategies
x Volunteer Opportunity Information
x Partner Opportunity Information
x Tips on helping taxpayers in these categories:
- Disabled
- Military
- Low-income

Publication P4555 (Rev. 2007)


- Older Americans
- Employees
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- Native Americans
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for the most up-to-date
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