Facilitator’s Training Guide

Volunteer Tax Return Preparation Programs Tax Year 2007 Courses For Use in Preparing Tax Year 2007 Returns

Publication 4555 (2007) Catalog Number 50820G

Visit www.irs.gov for the most up-to-date tax products and information.

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.

Department of the Treasury Internal Revenue Service www.irs.gov

IRS

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

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 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 SPEC Office of Education and Product Development.
Confidentiality Statement

All tax information received from taxpayers in your volunteer capacity is strictly confidential and should not, under any circumstances, be disclosed to unauthorized individuals and should be properly safeguarded. All persons, scenarios and addresses appearing in this product are fictitious. Any resemblance to persons living or dead is purely coincidental.

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Topics
Notes to Facilitators Teaching Methods Facilitator Prerequisites and Classroom Set-Up Training Resources from the IRS Proof Copies of Forms and Tables Courses and Content Exhibit 1 – Content and Courses Exhibit 2 – Income Lessons (by Form 1040 Entries) Testing and Certification Student and Facilitator Evaluations Appendix A - Basic Curriculum Presentation Times Appendix B - Advanced Curriculum Presentation Times Appendix C - VITA/TCE Class Numbers for Evaluations 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 x x x Acquire hands-on experience and a true understanding of the tax preparation process; Learn how to use the technical reference materials and quality tools available at the site; Acquire an understanding of tax law and how to apply it in various tax situations; and 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.
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In order to successfully convey the information in this guide, we recommend the following prerequisites for each facilitator:
x x x x Two hours of preparation time for every hour of instruction Certification in the course being taught Basic computer skills and TaxWise software knowledge Access to the Internet and e-mail
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Classroom Set-Up
Classes should be 20 students or less. Classes that incorporate TaxWise e-filing software should ideally have:
x x x x x A computer for each student A facilitator station with computer and projector Table space for documents Storage disks or CDs for students to save their work One assistant per five students (ideally)
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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 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 Lessons 8 through 16 Course All courses All courses All courses All courses All courses All courses Military and International See Exhibit 2, Income Topics by Course All courses (Basic should only cover Tuition and Fees Adjustment) Military All courses All courses (except Basic) Military International All courses All courses All courses All courses (Basic should only cover Elderly or Disabled and Qualified Retirement Savings) All courses International All courses All courses All courses All courses All courses Military All courses

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

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 x Successful completion of the IRS paper test or retest 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 x 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. Do not fold, staple, or photocopy. 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)
Estimated Minutes 15 15 15 15 60 30 30 90 15 15 15 45 30 30 30 30 30 60 Publication 4491 Welcome & Introductions Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6 Lesson 8 Lesson 13 Lesson 15 Lesson 17 Lesson 19 Lesson 23 Lesson 24 Lesson 25 Lesson 26 Lesson 29 Lesson 30 Part VIII Part I Part I, III Part I, III Part II Part IV Part IV Part IV Part V Part III Part VII Part V & VII Part II Part VIII Form 13614 Publication 4012 Tabs Publication 678-W (From Pages 6 & 7) Form 1040

Page 3, Tab 1 and 14 Pages 4-6, Tab 1 and Cover 4 Tab A Tab B and 1 Tab C and 1 Tab C and 1 Tab D and 2 Tab D and 2 Tab D and 2 Tab E and 3 Tab F and 4 Tab F and 5 Tab G and 5 Tab G and 5 Tab G and 5 Tab 6 and 13 Tab H and 6

All All All All All except 1, 6, 8, D, 15 All A, C, 11 A, C, 9, 15, E A, B, 7, C, D All A, B, 5, 8, C, 11, 14, E A, 3, B, C, 10, D All except 1, 3, 8, 12, D, 13, 15 A, 4, 5, 6, C, 10, 11, 12, D, E All, C & 12 ES pmts A, 2, B, 5, 10, 11, 13

Lines 1-5 Lines 6a-6b Lines 6c-6d Lines 7-11 Line 19 Lines 21-22 Lines 23-37 Lines 39-44 Line 47 Line 49 Line 52 & 68 Lines 48, 50, 53 & 54 Lines 64-71 Line 66 Lines 73-77 & Third Party Designee Sign Here & Paid Preparers Use Only

30 60

Lesson 31 Lesson 32

Tab 13 Tab 13

All All

30 30 180

Lesson 33 Lesson 35 State Returns (Optional) Testing Guidelines (Using Form 6744) Review Test Closing & Evaluation Form 13222

Tab 13 Tab 13

All

15 240

15

Notes to Facilitators – Page 9 of 12

Appendix B – Advanced Curriculum Presentation Times & Reference Materials (excluding breaks and lunch)
Estimated Minutes 15 15 15 45 60 30 30 165 60 90 105 30 30 30 75 15 45 30 30 30 30 15 30 Publication 4491 Welcome & Introductions Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6 Lesson 8 Lesson 9 Lesson 10 Lesson 11 Lesson 13 Lesson 14 Lesson 15 Lesson 17 Lesson 19 Lesson 20 Lesson 23 Lesson 24 Lesson 25 Lesson 26 Lesson 27 Lesson 29 Form 13614 Publication 4012 – Tabs Publication 678-W (From Pages 6 & 7) Form 1040

Part I

Part I, III Part I, III Part II Part IV Part IV Part IV Part IV Part IV Part IV Part IV Part V Part III Part VI Part VII Part V & VII Part II Part VII Part IV

Page 3, Tab 1 and 14 Pages 4-6, Tab 1, Cover 4 Tab A Tab B and 1 Tab C and 1 Tab C and 1 Tab D and 2 Tab D and 2 Tab D and 2 Tab D and 2 Tab D and 2 Tab D and 2 Tab D and 2 Tab E and 3 Tab F and 4 Tab F and 4 Tab F and 5 Tab G and 5 Tab G and 5 Tab G and 5

All All All All All except 1, 6, 8, D, 15 All B, 8, C,11, 13 C, 9, 12 B, 6, C, 9, 10, 12 A, C, 11 B, 6, C, 9, 12 A, C, 9, 15, E A, B, 7, C, D All B, 6, 8, C, 9, D A, B, 5, 8, C, 11, 14, E A, 3, B, C, 10, D All except 1, 3, 8, 12, D, 13, 15 A, 4, 5, 6, C, 10, 11, 12, D, E B All, C & 12 Estimated Payments A, 2, B, 5, 10, 11, 13 All

Lines 1-5 Lines 6a-6b Lines 6c-6d Lines 7-11 Line 12 Line 13 Lines 15-16 Line 19 Line 20 Lines 21-22 Lines 23-37 Lines 39-44 Line 40 Line 47 Line 49 Line 52 & 68 Lines 48, 50, 53 & 54 Lines 58-62 Lines 64-71

Tab 6 and 13

120 30

Lesson 30 Lesson 31

Part VIII

Tab H and 6 Tab 13

Line 66 Lines 73-77 & Third Party Designee Sign Here & Paid Preparers Use Only

60 30

Lesson 32 Lesson 33

Tab 13 Tab 13

All All

30 180 15 240 15

Lesson 35 State Returns (optional) Testing Guidelines (using Form 6744) Review Test Closing & Evaluation Form 13222

None

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

What is the purpose of this 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 mentioned a moment ago. We want, more importantly, you want to prepare complete and accurate tax returns for the taxpayers that visit you site.

Page 1-1

Emphasize that an accurate return means tax law is applied correctly and the return is free from error.

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. You get there by obtaining information from the taxpayer during the screening and interview process and from their supporting information. 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. My goal is to teach you the process for completing accurate returns. At the conclusion of our time together, you should become a certified VITA/TCE volunteer and provide expert quality service to taxpayers visiting a site. How will you know if I reached my goal? First, through the testing and certification process used to gauge your initial understanding of the return preparation process. The second measure will be the results of the quality review of returns you prepare at the site. Explain that they will have two opportunities to take the test and that Form 6744 in their training Kit contains both the Test and Retest. Encourage on-line testing via Link & Learn Taxes. Refer the student to the inside cover of their student text.

Stress that students need to know how to use their materials and acquire an understanding of tax law and how to apply it to get the answers they need to prepare an accurate return.

State, if they gain an understanding of tax law and follow the process, they should complete an accurate return

Lesson 1 - Page 2 of 8

As I mentioned earlier, you do not have memorize a lot of information in this course. We will use a process based approach to training which includes the following components: x x x x Screening and interviewing taxpayers (Intake and Interview Sheet) Understanding and applying tax law Using references, resources and tools Conducting quality reviews

each and every time.

Encourage the students to reinforce their training and tax law knowledge using Link & Learn Taxes.

Respond to each inquiry.

Are there any questions?

Page 1-2 What is included in this guide?
Well, let’s get started by making sure we have the products we need for training. Yes, we will use all these products. By the way, don’t be intimated by the size of the products. Five different courses are covered in this material. I will be teaching the _ (state the course being taught)__ course. Beginning in Lesson 8, we will follow the 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 x Tips, Cautions and TaxWise® Hints to help you with key points of each lesson x Concise explanations of basic tax law relevant to taxpayers with low to moderate incomes x Exercises that will give you the chance to check your understanding Complete the checklist -- What Do I Need? on page 1-1 with the students. Each product is described in the Notes to Facilitators - page 1-2 of this publication.

Introduce the five icons in Chapter 8, page 8-1. .

Encourage the students to read the information in the margin on each page of their text; even if you do not cover it in class.

Point out that during the course,

Lesson 1 - Page 3 of 8

x x

An on going scenario of a taxpayer, Vanessa Franklin Instructions for completing a return using TaxWise software

they will continually use the information being taught to complete Vanessa’s tax return. Explain that integrated process and process based training are interchangeable phrases

Earlier, I used the term process based training (PBT). Some of our returning volunteers may recognize PBT as integrated training. Can anyone state the four components of the PBT process?

See the four bullets on page 1-1 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 page 1-3.

Before we discuss your responsibilities as a volunteer, I would like to make sure we all are on the same page about what you will get out of this course. 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.

Show the students Form 13222.

What are your responsibilities as a volunteer?
In order to assist taxpayers at a VITA/TCE site, you must be certified. When you take your certification test, you must sign a Volunteer Agreement (Form 13615).

Page 1-3
Ask the student to turn to Form 13615 in their Test/Retest book Form 6744. 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 agreeing to all the bulleted information on page 1-3. Some taxpayers will insist that you accept a token of their appreciation, but let me state again, you should never accept payment of any kind from a taxpayer for return preparation or any tax related assistance. As noted, this does mean that you cannot receive compensation from your Site Sponsor. So, now you know what you’re agreeing to do as a volunteer-- correct?

form. Explain to the students the importance of providing quality service and upholding the ethical standards of the VITA/TCE program. Emphasize the last two standards, to never solicit or accept payment for services. (This includes a jar for donations for the purchase of supplies, tips, etc.) 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. You are protected by the Volunteer Protection Act of 1997. You must however, act with in the scope of your volunteer responsibilities and any harm you cause must not be willful or criminal misconduct.

Encourage the students to do an Internet search on the Volunteer Protection Act of 1997 or provide them a copy to review on their own time.

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 and responsibilities as a volunteer tax preparer revolve around trust. Taxpayers trust that all the information you receive from them is protected from disclosure. Let’s discuss what you can do to maintain this trust.

Point out that “There are some people who will try to defraud the government by filing false tax returns.” Stress to the students, when in doubt about what they should do in any situation to consult their Site Coordinator.

Page 1-5 What type of returns can I prepare?
You are probably wondering about the types of returns you can prepare, and the answer, as you might expect, is not everything. For specific information about the scope of the VITA/TCE Program and each of the five courses visit the web site on the back cover of your training guide. Restate the course you will be teaching and the topics you will cover. Emphasize that they must not assist taxpayer with tax situations beyond the scope of their training, experience and certification. Ask students if they have any questions or concerns. Provide your SIDN (if available) and suggest that they write it in their Publication 4012.

We will discuss this topic in more detail in 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
Respond to any issues raised. Display/circulate Form 13645, Wallet Card (if desired).

Will you receive notification of your certification?
I have used the term certified volunteer several times; let’s review the information on page 1-5 for a better understanding of the certification process.

Page 1-6
Lesson 1 - Page 6 of 8

Are there other materials available to assist you?
Your Site Coordinator is responsible for ensuring that you have all of the technical materials and other resources you need to perform your duties. As explained earlier, you should take your Publications 17 and 4012 to the tax preparation site with you. Please write your notes in these two publications (where possible). Publications 4491 and 678-W are not allowed at the tax preparation site (even as reference tools). In addition to your Site Coordinator, IRS tax experts are available to assist you on the VITA Hotline.

Allow the students some time to read the bullets on page 1-6.

Encourage the students to visit the “Community Network” for electronic copies of the products and additional information. See the back cover of their student text.

Discuss the VITA Hotline information on page 1-6 and show them the location of the number on the inside back cover of Publication 4012.

Page 1-6 How to acquire tax software?
I have mentioned TaxWise a few times, so, what is TaxWise? Use the information in the text or refer the students to page 3 of 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. Your facilitator and/or Site Coordinator will provide you with the information and passwords required for logging into the program for training and/or tax preparation purposes.

Bring their attention to the caution on page 1-6. Point out that it does not only apply to Government equipment, but hardware and software as well 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.

Summary
Let me welcome you once again to the VITA/TCE Program. Before we move into the techniques for screening and interviewing taxpayers, let’s review some of the critical points covered in this lesson.

Page 1-7
Provide a thorough review of each of the bullets in the summary using examples from class and your experiences. 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 and interviewing techniques that will ensure that taxpayers receive quality service and accurate return preparation assistance. You will become acquainted with techniques and tools to assist you during the initial screening of taxpayers for program eligibility. The same tools and 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. Complete the checklist—What Do I need? on page 2-1 with the students.

Inform the student that they must conduct a probing interview before assisting taxpayers with their return.

What is included in the intake and interview process?
When each taxpayer arrives at your site, they should be given an intake document (IRS Form 13614 or an IRS approved product) to complete. During the screening process, the intake document is reviewed by a “screener or the actual volunteer preparer” to determine if the taxpayer is eligibility for assistance and if they have all the necessary documentation.

Page 2-1
Note: If Form 13614 will not be used at your site, you will need to change the references in this lesson. Refer student to Form 13614 in the Volunteer Resource Guide or other approved product.

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 and interview process by reviewing each of the bullets on page 2-1. Remind the class that these are minimum expectations. If 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 x x x Build rapport Ask effective questions Use active listening Overcome communication barriers Inform the class that they will practice these techniques throughout the class.

Where do I find the tools to assist me with this process?
As I previously stated, all volunteer tax preparation sites must gather taxpayer information using an intake and interview sheet, such as Form 13614. 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 page 1 of the intake and interview sheet. The individual preparing the return “the volunteer preparer” will conduct the probing interview to validate the information provided by the taxpayer and the annotations made by the screener (if

Page 2-1
Display a blank Form 13614 or direct students to the form in the introductory section of the Volunteer Resource Guide .

Note: Advise the volunteer not to write on any of the taxpayer’s personal documents or take them out of the taxpayer’s sight.

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 original information the taxpayer provided on the intake and interview sheet. Stress the importance of annotating changes to the 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 important resources, Publication 4012. The Volunteer Resource Guide has a number of tools, like decision trees and interview tips, all of which will help you gather, clarify and verify taxpayer information. Your Volunteer Resource Guide contains three sections. Let’s see behind each of the major sections: x White tabs contain tax law in the form of decision trees, charts and interview tips x Yellow tabs contain step-by-step procedures for electronic return preparation using TaxWise x Blue tabs contain information specific to users of the web-based option for TaxWise (TWO) Are there any questions about what has been covered thus far? Ask the students to open their Volunteer Resource Guide and review the content behind each tab.

Discuss the information in “How to “Use the Guide” and “Are You Ready to Get Started.”

Note: You may elaborate on whether or not the yellow and/or blue TaxWise tabs will be used during training and why.

Respond to inquiries and remind students that they must take and use the Volunteer Resource Guide at their VITA/TCE site.

How do I use the quality review sheet?
Realizing that preparing accurate returns is the goal we all want to reach, there is another step in the process to assist you in reaching that goal.

Page 2-2
Discuss the instructions for completing the form on page 2-3.

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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 by your Site’s quality reviewer to confirm the accuracy of the return before the taxpayer signs it and leaves the site. Advise the students that a quality review must be conducted of each return they prepare and that the information on Form 13614 will be the basis of the quality review. Direct the students to page 2-3 or provide an illustration of the TaxWise hint and/or display as a visual aid.

I would like to briefing discuss the intake and interview process using TaxWise.

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

How do I welcome and screen taxpayer?
Let’s greet and screen your first taxpayer. So, how do you get the screening process started? Here are some suggestions: x Greet the taxpayer and introduce yourself

Page 2- 3

Note: Publication 4475, Interview Techniques is an excellent demonstration of the entire intake and interview
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x x x

x

Take a few moments for small talk Explain the screening, tax preparation and quality review process 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 Ask if the taxpayer has any questions

process. It is available in DVD or VHS from your local IRS SPEC contact.

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 eligibility?
The taxpayer completes page 1 of Form 13614. You will interview the taxpayer to complete page 2 of the form and/or screen 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 assistance but does not have all the necessary documentation, provide guidance necessary for them to acquire the document. If their tax situation (including income) is beyond the scope of your training or the VITA/TCE program you have the following options: x Seek assistance from your Site Coordinator (if applicable). x Courteously explain why they do not

Page 2-4
Ask the students to locate Form 13614 in the Volunteer Resource Guide

Advise students that in future lessons, you will share the information that they need to provide guidance to the taxpayer about missing SSNs, W-2, 1099s, etc. Advise the students of the complexity of the returns they will prepare at their VITA/TCE site.

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x

qualify for assistance. 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 concerns about what we have covered up to now? Make sure all the students have a partner and have them do the 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 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 look at the Decision Tree and Interview Tips located behind Tab B.

Page 2-5

Conduct a thorough review of the chart in the Volunteer 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

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when conducting an interview. Will each of you complete the exercise on page 2-7? Discuss their answers. 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 techniques?
What are interview techniques and why do you need them? 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 of comfort with each other, you will need to ask open ended questions, and use active listening to avoid and overcome any communications barriers.

Page 2-8
Respond to any raised hands or student statements.

Refer the students to the Volunteer Resource Guide. In addition to the chart, discuss the standards of conduct with 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 challenge. You may feel that you are prying. You are not. You’re eliciting the 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 Have the student do the sample interview at the top of page 2-9 and share your observations.

Point out the TIP on page 2-8

Lesson 2 - Page 7 of 9

a lot of questions. Start the interview with open ended questions because these require more than a simple yes or no answer. Avoid asking leading questions. They can make the taxpayer feel that you have a specific answer in mind. Don’t make assumptions; let the taxpayer speak for 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.

and ask for a volunteer to read it and discuss it if desired.

Ask for two volunteers to do the sample interview at the bottom of page 2-9 and share your observations.

How to overcome communication 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 barriers to communications in your text on page 2-10.

Page 2-10

Pair up the class and have them conduct the sample interview at 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.

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What happens next?
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.

Page 2-11
.

Summary
To be a successful volunteer, you will need: x x The ability to communicate with all types of people. To know where and how to get the information you need and document your findings. To understand how to apply the information you obtain verbally and in writing from the taxpayer to their tax return.

Page 2-11

Point out the tools available to the students to ensure the accuracy of the return they prepare (page 2-11 of their text). Also tell them to take their Volunteer Resource Guide to the VITA/TCE Site with them and follow the interview process on page 4 of that book.

x

Remember, a tax return is accurate when the tax law is applied correctly and the return’s based on information acquired during this process

Close by connecting the volunteer agreement in the Volunteer Resource Guide to this process.

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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 x x x Verify a taxpayer’s identity Select the appropriate tax return form File the return Identify how long a taxpayer should keep certain records and documents.

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

Who must file?
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

Page 3-1

Lesson 3 - Page 1 of 20

Resource Guide. Look at the taxpayer’s date of birth. Confirm this date during the interview. 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 reported in box 1 of the taxpayer’s Form(s) W-2. x Take a look at Parts IV through VIII on Page 2 of the sample Intake and Interview Sheet at the beginning of your Volunteer Resource Guide. 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 sources of income that should be included and excluded in determining a person’s gross income. You can also refer to the Income lesson.

Direct the students to the appropriate line on the Intake sheet.

Remind the students to assemble all of the income reporting documents. Stress the importance of using the intake sheet as the beginning to a process.

Remind the students that the Volunteer Resource Guide has a helpful Income table under Tab D. You can also alert the 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 Married Filing Jointly filing status. Use the Volunteer Resource Guide’s Determination of Filing Status decision tree and the Interview Tips, under Tab B for helpful probing questions.

Refer the students to the graphic on page 3-2 and to the Volunteer Resource Guide’s Determination of Filing Status decision tree and interview tips. Note – many military couples who are separated by the service assume they must file separately. The decision tree can help correct this misconception. Tell the students that these amounts change each year.

Who is legally required to file a federal 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 $20,000. She must file a tax return. Example page 3-3: Henrietta and Javier are married and plan to file a joint return. Henrietta is 67 and had a gross income of $11,000 for the tax year. 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.

Use Lucy as an illustration of the use of the Volunteer Resource Guide.

Again, guide the students to use the Volunteer Resource Guide.

For Special Situations: If the Who Must File charts show that an individual is not required to file a return, then continue to the Who Must File–Other Situations When You Must File in the Volunteer Resource Guide to see if any of the following special conditions require the 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 $8,800 during the tax year. Based only on this information, is he required to file a tax return? Answer 1: Yes, Bob is required to file a return because his gross income was over $8,750.

You could demonstrate the lines for these special situations on a paper Form 1040. This would illustrate these amounts as additional taxes.

Lesson 3 - Page 4 of 20

Question 2: Janet and Harry are married and usually file jointly. During the tax year, she turned 66 and he turned 64. Their gross income was $16,200. Based only on this information, are they required to file a tax return?

Answer 2: No, Janet and Harry are not required to file because their combined gross income was less than $18,550.

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

Answer 3: Yes, Juanita must file because her gross income was over $14,100.

Taxpayer Scenario
Taxpayer Vanessa Franklin comes to your site and requests assistance with her return. She is married, but lives apart from her 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 and brought her valid taxpayer identification documents. You start the process by using the intake sheet to obtain her date of birth and marital status. The Taxpayer Information section indicates she is 36 and legally married. Next, you review the Family and Dependent Information section of the intake sheet.

Page 3-4
Use the graphic of Part 1 of the Intake sheet to guide the students.

Tell students that the requirements for valid taxpayer identification documents will be discussed later in this lesson.

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

Lesson 3 - Page 5 of 20

Vanessa has indicated three potential dependents. You decide to ask some questions to confirm and clarify her information.

Refer students to the sample interview on page 3-5. Remind them that the intake sheet responses are the start of a conversation to ensure an accurate tax return. Stress to the students that Vanessa does NOT want to file jointly with her spouse.

Vanessa may be filing as Married Filing Separately, Head of Household, or Married Filing Jointly. The next step is to make sure 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 selfemployment income and “yes” to having received unemployment compensation. You decide to ask questions about these two additional sources of income, as shown in the sample interview below.

Guide students through the sample interview questions on page 3-6. You determine Vanessa made about $2400 selling cosmetics in 2007. 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?
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 required to file, they should file a return if they are eligible to claim: x A refund of withheld taxes x The Earned Income Credit (EIC)

Page 3-6

Note: Stress to students that taxpayers who should file include: x Those entitled to a tax

Lesson 3 - Page 6 of 20

x x

The Additional Child Tax Credit The Health Coverage Tax Credit

x

credit – filing a return is the only way to get it. Those who receive Advanced Earned Income Credit – to “account for” the credit received.

These items are listed in your Volunteer Resource Guide, in the Tab A, Who Must 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, Earned Income Tax Credit, and/or Additional Child Tax Credit if: x Federal or state income tax was withheld on any income form, and/or x The taxpayer had earned income, and/or x The taxpayer has a qualifying child 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 professional tax preparer.

Illustrate these items by also referring the class to a 1040.

TIP page 3-7: Tell the students that the Earned Income Tax Credit may apply with or without a child. See the Earned Income Credit and Child Tax Credit lessons for details on determining eligibility for these tax credits.

Note: 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?
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 employment in the United States must have a social security number (SSN).

Page 3-7

TIP page 3-7: Tell the students that some 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 returns do not have social security numbers. The IRS issues an ITIN to nonresidents and others living in the U.S. who are required to have a U.S. TIN but who are not eligible to obtain SSNs. The ITIN contains nine digits and is formatted like an SSN (XXX-XX-XXXX), but begins with the number 9. You should enter TIP page 3-7 Tell the students that Taxpayers who cannot obtain an SSN must apply for an ITIN if they file a U.S. tax return or are listed on a tax return as a spouse or dependent. These taxpayers must file Form W-7, Application for Individual Taxpayer Identification Number and supply documentation that will

Lesson 3 - Page 8 of 20

the ITIN on the return wherever the social security number is requested.

establish foreign status and true 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 spelling of names entered on the taxpayer’s intake sheet. x Ask to see a social security card, an ITIN letter, or other legal document for each individual who will be listed on the return x Ask to see a proof of identity for the taxpayer (and the spouse if filing a joint return) x Verify that the SSN (or ITIN) and proof of identity are for the same person

TIP page 3-8: Tell students that taxpayer, spouse, and dependent name and social security number mismatch is rated as one of the top 5 errors in processing a tax return. Note: Tell students that time spent verifying these issues can save time for the site coordinator and the taxpayer.

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x

x

x

Verify that the SSN (or ITIN) and the spelling of each individual’s name on the social security card or other acceptable documents match the information you enter on the tax return Verify that the address and birth date on the Intake and Interview Sheet matches the information on their identification and discuss any discrepancies with the taxpayers Make sure the taxpayer understands how critical it is to have the correct information in order to receive any age-related tax benefits.

TIP page 3-8: Tell students that driver’s licenses and passports are not acceptable substitutes for social security or TIN cards. Direct students to the graphics of the social security card and the resident alien card on page 3-8.

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. For a taxpayer who cannot obtain an SSN and has not yet applied for an ITIN, you can

Note: Share the process for using the temporary ID number with the class. Demonstrate on TaxWise.

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use a temporary identification number to prepare the return in TaxWise. See “Apply for an ITIN”, under Tab 1 in your Volunteer Resource Guide.

TIP: page 3-9 Tell students that, if preparing the return on paper, leave the 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 1-800-8293676 (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.

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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. Taxpayers with a valid ITIN: Taxpayers who file tax returns under their ITINs (and other taxpayers without valid SSNs), often attach Forms W-2 showing erroneous SSNs. If such an ITIN/SSN 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: Question 4: True or False? It is your responsibility as a volunteer tax preparer to check the accuracy of every social security number provided to you by taxpayers. Tell students that the TIN on the electronic return is the ITIN for this Taxpayer. The ITIN taxpayer is NOT eligible for EIC (Earned Income Tax Credit)

Tell students that these returns can now be electronically filed.

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

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How do I enter the identification data? Turn to the Main Information Screen section in your Volunteer Resource Guide under Tab 1. Be sure to read all the details and helpful hints for entering the taxpayer’s identification information.

Demonstrate the way TaxWise applies the Social Security number issuing rules in the diagnostics, if TaxWise is available. While not actually a database of SSN it can give a 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
Look at the Intake and Interview Sheet for our taxpayer Vanessa Franklin. As you 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 Information Sheet or the Label section of Vanessa’s tax return, make sure you verify the identity information from her intake sheet.

Page 3-10
Refer students to the interview sheet on page 3-10

Guide students through a discussion of the sample interview on page 3-11

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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 tax return form?

Page 3-11
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 shows the filing status, exemptions, income, and adjusted gross income. Page 2 shows standard deduction, exemption amount,

TIP: page 3-12: For taxpayers who filed Form 1040EZ or Form 1040A the previous year, determine whether their situation has
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taxable income, tax, credits, payments, amount owed or refund, and signature. Form 1040A may be filed with certain schedules. Turn to the Which Form to File chart under Tab A of your Volunteer Resource Guide to see which types of schedules and forms can be filed with a Form 1040A.

changed. It may be to their advantage to file Form 1040 if additional adjustments or deductions will result in a lower tax!

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: Question 5: Lenny and Lisa are filing a joint return and 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 Answer 5: Lenny and Lisa can use Form 1040EZ to file their tax return.

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simplest form that Lenny and Lisa can use for their tax return? Question 6: Ray is married, but he and his wife Stella are filing separate returns. Their combined income was $105,000, but Ray’s income was $64,000, half of which 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? Answer 6: Ray will need to file Form 1040 both for two reasons: because he had selfemployment income and because he is itemizing deductions.

How do I file a return?
What is electronic filing? IRS e-file is a quick and easy alternative to traditional paper returns. Most VITA/ TCE volunteer sites are now set up for filing 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 compare?

Page 3-13
TIP page 3-13: Detailed instructions for completing and filing the return are covered in the Concluding the Interview lesson.

Direct students to the chart on 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 record keeping?
Taxpayers should keep a copy of the tax return, worksheets used, and records of all

Page 3-13
Tip page 3-14: For additional record keeping
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items appearing on it (such as 1099 forms) until the statute of limitations runs out for that return. Usually, this is the later of: 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

information, see Publication 552, Recordkeeping for Individuals.

How do I answer taxpayers’ administrative questions?
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

Page 3-14

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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 Presidential Election Campaign Fund is. Where can you find that information? Additional information on a variety of topics can be obtained by contacting the IRS at 1-800-829-1040, accessing their web site at www.irs.gov, or by visiting an IRS Tax Assistance Center in your area.

Answer 7: The index in Publication 17 directs us to a paragraph in the chapter on Filing Information. Demonstrate the search feature of the IRS website, if available.

What potential pitfalls should I 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, SelfEmployment Tax. If the income is

Page 3-14

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x

reported incorrectly, the IRS may later issue a notice of proposed tax increase for the self-employment income and tax. 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 to be filed?
Turn to the chart under Tab 2 TaxWise in the Volunteer Resource Guide that lists the forms, types of income, and the line item entries for both Form 1040 and TaxWise.

Page 3-15
TaxWise Hint page 3-15: Once the main information and income statements are entered, 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

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credits, and retirement savings contribution credit if there is only a Roth IRA contribution).

Summary
Let’s review some of the critical points in this lesson.

Page 3-15
Provide a thorough review of each of the topics in the summary, using examples from class and your experiences.

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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 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. Filing status is handled differently on different tax forms: x Form 1040 or Form 1040A: check the box for taxpayer’s filing status in the “Filing Status” section. x Form 1040EZ: does not require an 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 interview techniques and tools discussed in the Interview lesson. See the Volunteer Resource Guide, Tab B, for the Determination of Filing Status decision tree and for helpful probing questions. Explain the filing status can impact the amount of tax owed and, consequently, the refund. Display or refer students to the Intake and Interview Sheet.

Demonstrate different filing statuses on TaxWise Main Information Screen, if TaxWise is available or refer students to TaxWise tabs in the Volunteer Resource Guide.

The resources in Tab B of the Volunteer Resource Guide will be referred to many times throughout the lesson. Students may want to keep their guides open to these pages.

What are the five filing statuses?
Taxpayers must file using one of five filing statuses. Filing status impacts the

Page 4-1
Tip page 4-1: Taxpayers may qualify for more

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calculation of income tax and the allowance or limitation of certain credits and deductions.

than one filing status. Choose the filing status that results in the lowest tax (most beneficial) for the taxpayer. TaxWise Hint page 4-1: Filing status is selected on the Main Information Sheet in TaxWise. Refer students to the Main Information screen in the Volunteer Resource Guide, Tab 1.

The following list puts them in order from the most beneficial to the least beneficial to the taxpayer. x Married Filing Jointly x Qualifying Widow(er) with Dependent Child x Head of Household 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 on the last day of the tax year. Avoid using the information from the prior year as it may have changed. Generally, taxpayers are considered to be unmarried for the entire year if on the last day of the tax year: x They were unmarried or, x They were legally separated, under a separate maintenance decree, or x They were divorced under a final decree on or before December 31 of the tax year Note that the “marital status on the last day of the year” does not apply to surviving spouses as long as they did not remarry. Do not assume a taxpayer should file as Single. Ask the appropriate questions to find out if the taxpayer qualifies for a different status which may result in a lower tax.

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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 each filing status?

Page 4-2
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? Single taxpayers may qualify for Head of Household or for Qualifying Widow(er) with Dependent Child status, which can mean a lower tax. Taxpayers who are divorced can file as Single if they have not remarried on, or 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? Married taxpayers who choose to file a joint return will use one return to report their combined income and to deduct combined allowable expenses. Married taxpayers can Remind students for Married Filing Jointly, one Form 1040/1040A/1040EZ is filed, which covers both spouses. This is different than Married Filing Caution page 4-2: Avoid selecting a filing status that results in a higher tax for the taxpayer. For example, Single filers with dependents may qualify for Head of Household, which often results in a lower tax.

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select this status even if one of the spouses did not have any income or any deductions. The Married Filing Jointly status can be 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 x Lived together in a common law marriage that is recognized in the state where they currently live or the state where the common law marriage began, or x Did not remarry and their spouse died during the year

Separately, where each spouse must generally file his/her own Form 1040/1040A/1040EZ.

Note: The rules about common law marriages are very complex and differ from state to state. As a volunteer, it is not your responsibility to determine whether a couple is involved in a “common law marriage.” If a 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? Both taxpayers must include all world-wide income on their joint return. They each may be held responsible for all the tax, and any interest or penalty, due, even if all the income was earned by only one spouse. A subsequent divorce does not relieve either spouse of the liability associated with the

Caution page 4-3: A citizen or resident alien married to a non resident alien may be able to file a joint return. More information can be found in the Military Filing Status section of this publication.

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joint return. In some cases, a spouse may be relieved of joint liability. This topic is beyond the scope of the VITA/TCE Program. The volunteer would need to refer the taxpayer to a professional tax preparer. For more information, see Publication 971, Innocent Spouse Relief.

Note about SCOPE of the VRPP program: Tell students that Publication 971 Innocent Spouse Relief is not covered in this course, but students and taxpayers may read it if they would like more information. Stress that even if the volunteer is familiar with the Publication 971, the taxpayer should still be referred to a professional tax preparer.

What is Married Filing Separately? The Married Filing Separately status is for taxpayers who qualify as “married” under the definition provided above, and either: x Choose to file separate returns, or x Cannot agree to file a joint return If an individual taxpayer will be filing as Married Filing Separately, remind him/her to inform his/her spouse that the spouse may need to file a 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? Qualified married taxpayers may qualify as “unmarried,” according to the IRS definition of “unmarried,” even if they are not divorced or legally separated. Such taxpayers may be able to use the Head of Household filing status. Filing as Head of Household may result in a lower tax than Married Filing Separately. Refer to the “What is Head of Household: Can married taxpayers ever file as Head of Household?” section of this Note: This has been called “considered unmarried”. Tell students that if the spouse is temporarily away, but is expected to return home, then the taxpayer will probably not be considered “unmarried.”

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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 on a joint return. 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 personal exemptions. x One spouse (using the Married Filing Separately status) cannot claim the standard deduction if the other spouse (also using the Married Filing Separately status) is itemizing deductions on their return. For the complete list of special rules see Publication 17: Filing Status: Married Filing Separately.

These credits are discussed in other lessons in this publication.

The taxpayer must find out from his/her spouse whether the spouse will be itemizing deductions or using the standard deduction.

Ask the students to locate this list in the Publication 17, and recommend that they note the page number.

Are there special rules for taxpayers who live in community property states? The income of taxpayers who lived in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin during the tax year and wish to file separate returns may be considered as separate income or community income for tax purposes. Each state has its own community property laws.

TaxWise Hint page 4-4: Go to the Volunteer Resource Guide under Tab 1, Starting TaxWise. Find the appropriate section of the Main Information Sheet that addresses filing status. Notice the questions asked of the taxpayer filing Married Filing Separately. If the taxpayer is in one of the

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See Publication 555, Community Property, for more information.

community property states 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 community property issues. If it does, discuss Publication 555 and the Allocation of Income for Community Property Income worksheet.

If your local tax assistance program views community property tax laws for Married Filing Separately filers as beyond the scope of the program, refer such taxpayers to a professional tax preparer.

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. Another common reason taxpayers may want to file as Married Filing Separately is to avoid an offset of their refund against the other spouse’s outstanding debt. This includes things such as past due child support, past due student loans, or a tax

Display Form 8379. Challenge the volunteers to use the index to locate this information in the Publication 17, and recommend that they note the page number.

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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. Be aware of community property law requirements; these laws may affect the amount of tax owed by taxpayers living in community property states.

See the list of community property states earlier in the lesson.

What if a spouse has died during the tax year? Remember, taxpayers whose spouses have died during the tax year are considered 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. 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.

Ask students to locate this information in the Publication 17, and recommend they note the page number.

See the definition of Qualifying Widow(er) below.

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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 year, and x Had a qualifying person living in their home for more than half the year (except for temporary absences such as school) x For a married taxpayer “considered unmarried,” the taxpayer must also have a child they claim as a dependent. (Exception: if the only reason the taxpayer is not claiming 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? Turn to the Volunteer Resource Guide under Tab B, Filing Status. Look at the decision tree on the page titled Determination of Filing Status. Ask students to use the Who Is a Qualifying Person Qualifying You To File as Head of Household? table in Publication 17 to answer this question:

Note: College students often qualify as living in the home even if they are attending school in another area. Stress that dependent parents are not required to live with the taxpayer. See the lesson on Dependency Exemptions in this Publication.

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A qualifying person is defined as: x A Qualifying Child x A married child you can claim as a dependent x A dependent parent x An “other relative” you can claim as a dependent. x And for a married taxpayer, the qualifying person for Head of Household must be their dependent child. (Exception: the non-custodial parent rule.)

Q: Alexandra’s younger brother, Sebastian, is seventeen years old. Sebastian lived with some friends from January-February of 2007. From March-July of 2007, he lived with Alexandra. August 1, Sebastian moved back in with his friends, with whom he stayed for the rest of the year. Since Sebastian did not have a job, Alexandra gave him money every month. Assuming Alexandra had no 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 may not qualify the taxpayer as Head of Household. Also, a taxpayer may not be claiming a child as a dependent but the child may still qualify the taxpayer for Head of Household

The footnote for an “other relative” clearly states what “other relatives” meet the criteria for Head of Household purposes. These relatives must be dependents of the taxpayer.

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. Example page 4-6: Since Joan’s husband died 5 years ago, she has lived with her friend, Mary Ann. Joan is a U.S. citizen, single, lived with Mary Ann all year, had no income and received all of her support from Mary Ann. Mary Ann is a widow also. No one can claim Mary Ann as a dependent on their return. Joan falls under the definition of a

TaxWise Hint page 4-6: When you get to Step 7 on the Interview Tips for Filing Status in the Volunteer Resource Guide, be sure to refer to the definitions of a qualifying person on the previous page if you have any questions.

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“qualifying relative” and Mary Ann can claim Joan as a dependent on her return. However, Joan would not qualify Mary Ann for Head of Household purposes, because she does not fall under the “other relative” definition stated in the Volunteer Resource guide under Tab B, Filing Status.

For Head of Household, a Qualifying Child does not have to be a dependent of the taxpayer. (Exception: a married taxpayer considered unmarried for Head of Household 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? 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

Discuss this “considered unmarried concept.

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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 Cost of Keeping Up a Home worksheet. x Have lived apart from their spouse during the entire last 6 months of the tax year. The spouse is considered to have lived in the home even if 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.

Note: The spouse is considered to have lived in the home even if temporarily absent due to special circumstances, such as military service or education. This is very important for military VITA classes.

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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 filing status. Example page 4-7: Laura, whose husband Jim died in September of the tax year, has not remarried, and provides all the support for

TaxWise Hint page 4-7: Turn to Tab 1, Starting TaxWise, and locate the Main Information Sheet that includes the filing status section. For Qualifying Widow(er) filing status, you must enter the deceased spouse’s

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her two dependent children, ages 7 and 9. Laura can file Married Filing Jointly, claiming an exemption for her deceased husband. The next two years she can use the Qualifying Widow(er) with Dependent Child status if she has not remarried.

year of death on the TaxWise Main Information Sheet. There is no place to enter the year of death on a paper return. Stress that Qualified Widow(er) 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?
To determine the best filing status, follow the interview tips in the Filing Status section of the Volunteer Resource Guide, Tab B. Then enter the filing status on the Interview and Intake Sheet. Use the Interview Tips under filing status in the Volunteer Resource Guide to complete these exercises. Exercises page 4-8:

Page 4-8
Ensure that participants use the resources in Tab B of their Volunteer Resource Guides to complete these exercises. It may help to use both pages of Tab B to determine filing status. This allows the volunteer to double-check the filing status.

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

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 married. What filing status(es) can he use? x Single x Married Filing Jointly x Married Filing Separately x Head of Household x Qualifying Widow(er) with Dependent Child Question 3: Tanya’s divorce became final in early September of the tax year. She has sole custody of her three children, who lived with her the entire year. The children are all under the age of 19. She provided more than half of the cost of keeping up the home. What filing status(es) can she use? x Single x Married Filing Jointly x Married Filing Separately x Head of Household x Qualifying Widow(er) with Dependent Child Answer 2: Because he is not married and has no dependents living in his household, Seth can only file as Single.

Answer 3: Because she is legally divorced, Tanya can file as Single. However because she has children, she may be able to file as Head of Household, which may result in a lower tax.

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

Taxpayer Scenario
Look at the Intake and Interview Sheet for our taxpayer Vanessa Franklin.

Page 4-9
Direct students to graphic on 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 Vanessa does not want to use the Married Filing Jointly status, but if she chooses to file Married Filing Separately, it may result in a higher tax. You decide to proceed with the Interview Tips to see if Vanessa qualifies for Head of Household, which may Go through the Sample Interview page 4-10 with students. You could team up students or ask two volunteers to role-play this interview.

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result in a lower tax than Married Filing Separately. SAMPLE INTERVIEW (Continued) page 4-10 Because Vanessa will file as Head of Household, check the box for Head of Household status on the Main Information Sheet in TaxWise or on her Form 1040. Do not enter the names of Vanessa’s children in the filing status section. Enter the children’s names in the dependents section of the tax return. Remember, because she is married but “considered unmarried for Head of Household” purposes, at least one of her children must be her dependent to use this filing status. Exercises: Question 5: An earlier question referred to Sydney, whose wife died in January 2005. He filed a joint return for that year as the surviving spouse. In 2007, Sydney, who did not remarry, maintained a home for his young children, and he provided their sole support. We determined that he could file as Single or Head of Household. Go back to 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

Continue through the sample interview with students. Demonstrate with TaxWise (if available). Note: TaxWise Hint (this is not in the book) For Head of Household: if the child is not the taxpayer’s dependent then enter the qualifying child’s name and social security number in the Filing Status section. Demonstrate with TaxWise if available.

Answer 5: This answer takes the students through the steps of the interview. The Interview Tips say that he should use the Qualifying Widow(er) with Dependent Child status. The interview steps are: • Step 1: No • Step 5: Yes • Step 6: Yes

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Summary
Let’s review some of the critical points covered in this lesson.

Page 4-11
Provide a thorough review of 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.

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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?
An exemption is a dollar amount that can be deducted from an individual’s total income, thereby reducing the taxable income. Taxpayers may be able to claim two kinds of exemptions: x Personal exemptions allow taxpayers to claim themselves (and their spouse, on a joint return) x Dependent exemptions allow taxpayers to claim qualifying dependents

Page 5-1
Dependent exemptions are discussed in Lesson 6. TIP: The exemption amounts are indexed for inflation and are generally updated every year.

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When can a taxpayer claim personal exemptions?
To claim a personal exemption, the taxpayer must have answered “no” to the critical data question, “Can you or your spouse be claimed as a dependent on the income tax return of any other person for 2007?” This applies even if the other person does not actually claim the taxpayer as a dependent. A taxpayer who could be claimed as a dependent must claim “0” exemptions. This means they won’t be able to subtract the exemption amount from their gross income, and they might have to use a smaller standard deduction (Lesson 9 – Standard Deduction and Tax Computation).

Page 5-1
TIP: Always use the Interview Tips decision tree in Publication 4012, Tab C to determine the number of exemptions each taxpayer can claim.

TIP: If someone else can claim the taxpayer as a dependent, they cannot claim a personal exemption, but they can file for a refund of any withholding. Page 5-3. 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 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.

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To claim a personal exemption for one’s spouse, the taxpayer must meet these conditions: x Married as of December 31 of the tax year x Spouse cannot be claimed as a dependent on another person’s tax return x Files a joint return, or files a separate return and the spouse had no income and is not filing a return What about a deceased spouse? A taxpayer whose spouse died during the tax year can generally claim the personal exemption for the deceased spouse if the taxpayer meets all of these conditions: x Did not remarry by December 31 of the tax year x Was not divorced or legally separated from their spouse on the date of death x Would have been able to claim the exemption under regular circumstances.

TaxWise Hint: If the taxpayer is married filing a separate return, and is able to claim their spouse’s exemption, fill in the spouse’s name, SSN, and other information in the TaxWise Main Information sheet, Dependents/Non-Dependents section, showing the relationship as “other” and the Code as “3.”

Remind the students: We discussed deceased spouses in lesson 4 on filing status. TIP: Taxpayers who are divorced or legally separated at the end of the tax year cannot claim their (former) spouse as 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 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

Page 5-2

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need from the taxpayer.

How do I enter the personal exemptions?
On line 6a of the tax return, check the box next to “Yourself” if the taxpayer meets the requirements for claiming themselves as an exemption. On line 6b, check the box next to “Spouse” if the taxpayer meets the requirements for claiming their spouse as an exemption. If the taxpayer is filing as Head of Household and claiming an exemption for a nonresident alien spouse, check the box on line 6c in TaxWise and enter the spouse’s first name, last name, and SSN or ITIN.

Page 5-2
TaxWise Hint: TaxWise will auto-fill the entries for lines 6a and 6b as well as for “Number of boxes checked on 6a and 6b.” TaxWise automatically checks the exemptions box for the taxpayer (and for their spouse if Married Filing Jointly status is selected). If someone else is entitled to claim the taxpayer (or spouse), check the appropriate box on line 6 of the Main Information Sheet.

Taxpayer Scenario
Look at the intake sheet for our taxpayer Vanessa Franklin. As you recall, she is married, but lives apart from her husband, 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 Tips for Personal Exemptions under Tab C of the Publication 4012.

Page 5-3
Refer students to the scenario on page 5-3 and the sample interview on page 5-4.

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

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Because Vanessa cannot claim her husband as an exemption, you will leave him off the return, leaving the box on line 6b unchecked. TaxWise automatically enters “1” for “Number of boxes checked on 6a and 6b.”

Reminder: Vanessa: x Was still married on December 31, 2007 x Did not live with her husband. x Is not filing jointly with him x Her husband had his own income.

Taxpayer Example
Ray Jackson is a widower whose wife died during the 2007 tax year. Ray’s intake sheet shows the following responses. Which personal exemptions can Ray claim? Use the Interview Tips for Personal Exemptions within Tab C in Publication 4012 to help you complete lines 6a and 6b on his tax return. Here’s how the conversation might sound:

Page 5-4
Ask for volunteers from the students to role play the example page 5-4.

Reminder: x Ray’s Spouse died in February, 2007 x He did not remarry x He will file this final joint tax return x Ray is no one’s dependent TaxWise Hint: You must also go to Name Line 2 in the U.S. address area at the top of the Main Information screen and enter the name of the person filing the return for the deceased person. 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. When you print the return, TaxWise prints the date of death and DECD next to the deceased person’s name in the address
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Because Ray can claim himself and his late wife as exemptions, you will enter both their names and SSNs in the Main Information screen in TaxWise. TaxWise automatically checks the boxes on lines 6a and 6b and enters “2” for “Number of boxes checked on 6a and 6b.” You will also enter the Date of Death under the spouse in the Taxpayer Information area of the Main Information screen in TaxWise. If you are preparing a paper return, write “Deceased” along with the deceased spouse’s name and Date of Death across the top of the return. Once you complete the Date of Death in TaxWise, the program will automatically print that notation.

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
Can anyone name the two types of exemptions and give a brief definition of each? Can anyone tell me where the exemptions are claimed on the tax return?

Page 5-5
Review each of the bulleted items and discuss as necessary.

Remind students that we will discuss dependents in Lesson 6.

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Lesson 6: Dependency Exemptions

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

Introduction
This lesson will help you determine how many exemptions a taxpayer can claim for dependents. Claiming the maximum number of allowable exemptions will result in the lowest tax for the taxpayer. 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 lesson as well as the decision trees in Publication 4012. They contain helpful probing questions. The results of your interview are documented on Page 2, Part III, of the Intake and Interview Sheet. This information will be the basis of your entries in TaxWise. Who are dependents? Will someone read the information on page 6-1? A taxpayer can claim one exemption for each qualified dependent, thereby reducing the taxable income. Have someone else read the Tip page 6-1: Reiterate a dependent is neither the taxpayer nor taxpayer’s spouse, even if he/she has no income or does not provide any support.
Lesson 6 - Page 1 of 18

Refer students to Form 13614 Part II Family and Dependent Information. Stress importance of verbally reviewing all the information in Part II with the taxpayers.

Refer to Publication 4012, Tab C.

Refer to Form 13614 page 2 Part III once dependents are determined. Advise participants to ask taxpayer all questions.

Who may be claimed as a dependent?
A dependent may be either a “Qualifying Child” or a “Qualifying Relative.” The requirements for both have much in common, but there are some tests that are 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 section.

Page 6-1
Advise students two methods for determining if dependent is qualifying child or qualifying relative will be covered in detail.

Remind the students situations change and prior year information can be out of date

How do I apply the dependency tests?
The Intake and Interview Sheet addresses the issues concerning dependency, but you will still need to use your interview skills to clarify whether the individuals listed are eligible to be claimed as dependents.

Page 6-2
Advise students Form13614 Part II is completed by the taxpayer but the Dependency test must be applied to each dependent. Select a student to read the Tip on page 6-2.

Tab C of Publication 4012 will help with probing questions to verify information on the Intake and Interview Sheet. The two alternate methods for applying the 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

Note: Always refer to interview tips or decision tree when determining if person can be claimed as a dependent.

Refer to Publication 4012 tab C

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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: A child with divorced or separated parents, or 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 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 Child. If these tests are not met, then you 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 in Publication 4012, Tab C.

Page 6-2

Refer to Publication 17 for more detail.

Direct the students attention to Tab C Interview Tips in Publication 4012. Have someone read “Relationships at bottom of page 6-2. Discuss relationships – child, niece/nephew, adopted.

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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 residence as the taxpayer for more than half the year. The child can be out of the home for temporarily absents due to special circumstances such as education, illness, vacation, business, or military service. Special Exceptions for the Residence Test Example page 6-3: Hugh’s daughter died on January 15 of the tax year. If she met all the dependency tests up until her death, Hugh can claim an exemption for her on his return. A taxpayer may not claim dependency exemptions for a housekeeper, other household employee, or for a stillborn child. Refer to the Personal Exemptions and Dependents chapter of Publication 17 for Discuss death and kidnapping as it relates to the residence test. Stress qualifying child must live with taxpayer for more than ½ of the year. 183 days for 2007 Discuss temporary absents. Give examples i.e. school, illness, military service.

Ask if there are questions relative to these exceptions. Advise students that child cannot be stillborn.

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detailed information regarding the residency test. Special rules that apply to custodial and non-custodial parents will be discussed later in this lesson.

Review this example if time allows. This is a special exception to the Residency Requirement 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 being a member of the household. To pass the residency test, the dependent must be either a U.S. citizen or resident of the U.S., Canada or Mexico. If a U.S. taxpayer legally adopts a child who is not a U.S. citizen or resident, this test is met as long as the child lives with the taxpayer as a member of the household all year. Foreign exchange students generally are not U.S. residents and do not meet the 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 Tips of Publication 4012. To pass the joint return test, the dependent must not file a joint return for the year, unless: Page 6-4 Clarify the difference between US Citizen and Resident. Volunteer should ask: “Who is child living with?” and “Is child a US Citizen?” Note: Children are usually citizens or residents of the country in which their parents are citizens. So, if either parent is a U.S. citizen, a child born in a foreign country can be recognized as a U.S. citizen for tax purposes.

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The joint return is filed only to claim a refund of taxes withheld, and 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. Page 6-5 Note: Taxpayers are allowed to choose who can claim the exemption, but this choice may affect who can receive other tax benefits that require a Qualifying 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 Ellsworth) in Pub. 678-W. Refer the students to Exercise 7 Jessica Ellsworth in Publication 678W. If time permits, go through this exercise with the participants. Discuss the idea of these tiebreaker rules. If taxpayers cannot decide who will claim the qualifying child, IRS will decide. 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

Qualifying Child of More Than One Person Review step 8 and the associated footnotes in Publication 4012. It is possible for a child to meet the Qualifying Child tests for more than one taxpayer, but the dependency exemption can only be claimed on one tax return.

If the Qualifying Child is actually claimed on more than one tax return in a given year, the IRS will apply the “tie-breaker rules” listed within Tab C in Publication 4012. Dependent Taxpayer

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 Relatives? Dependents who do not meet the first few tests for Qualifying Child could meet slightly different tests and be a Qualifying Relative. Let’s turn to Table 2: Dependency Exemption for Qualifying Relative of the Interview Tips in Publication 4012, Tab C. Relationship or Member of Household: The dependent must be related to the taxpayer (or spouse on a joint return) in one of the ways listed in step 1. Would someone read Example page 6-5? An unrelated person can also meet this test by being in the household all year regardless of relationship. If the relationship violates local laws, this test is not met. For example, if the taxpayer’s state prohibits cohabitation, then that person cannot be claimed, even if all other criteria are met. Would some read the notes that apply to unrelated persons on page 6-6 and let’s discuss each as we read? Page 6-5 Discuss Qualifying Relative rules. Relationship, Residency, Gross Income, Support, and Joint Return. Refer to Publication 4012, Interview Tips, Step 1. Note: Dependent can meet relationship test and not live in taxpayer household. Note: A close relative may not have to live in the same house to meet the test. An Unrelated person must live in household for entire year. Interview techniques are needed here.

Note: Relationship by marriage does not end in divorce or death. Point out differences between qualifying child and qualifying relative: QC – No income test QR – No age test

The Interview Tips, steps 1 and 2, for Dependency Exemptions can help you determine if a person passes the Qualifying Relative Member of Household or Relationship test.

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Qualifying Child of Another Taxpayer Step 3 of the Interview Tips states that an individual cannot be claimed as a dependent as a Qualifying Relative if they meet the tests to be another taxpayer’s 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: Would some read the example regarding 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 Step 5 of the Interview Tips addresses the gross income test. The dependent’s gross income for the tax year must be less than the personal exemption amount ($3,400 for 2007). Gross income is defined in Publication 17, Personal Exemptions and Dependents. Will someone read the first example page 6-7? Support Step 6 addresses support. The taxpayer must have provided more than 50% of the dependent’s total support for the tax year. When calculating the amount of total support, taxpayers should compare their contributions with the entire amount of support their dependent received from all sources (such as taxable income, taxexempt income, and loans). Review valid support expenses listed in Publication 17.

Page 6-6 Advise the students that a person cannot be a qualifying relative if already a qualifying child of another taxpayer.

Discuss this example with students.

Page 6-7 Note: This rule only applies to qualifying relative. Refer to Publication 17.

Review first example on 6-7.

Note: This is another difference between qualifying child and qualifying relative. Tip page 6-7: Publication 17 contains a worksheet for determining support. Have the students find the list.

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Let’s look at the second example on page 6-7. Example three on page 6-7: Steve provided $4,000 toward his mother’s support during the year. His mother had earned income of $600, nontaxable social security benefit payments of $4,800, and 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 and used towards support are considered provided by the child. Multiple Support Agreements Multiple support means that two or more people together, who could claim the person as a dependent except for the support test, provide more than half the dependent’s support. However, only one taxpayer can claim the exemption for a dependent with Multiple Support. Individuals who provide more than 10% of the person’s total support can agree that one of them can take the person’s exemption. Step 10 will guide you in asking if the taxpayer has the appropriate documentation. The Form 2120 or similar statement must be attached to the return. The other supporting taxpayers must sign this written statement agreeing not to claim the exemption for that year

Review this example with students as time permits. Review this example with students. Have students refer back to the worksheet in Publication l7.

Read the second Tip on page 6-7.

Page 6-8 Note: Only one person can provide more than half, but see the exception to the rule here. Tip page 6-8: The taxpayers who provide Multiple Support for a dependent decide among themselves who will take the exemption for the year. Volunteer tax preparers do not decide. Hand out Form 2120, Multiple Support Declaration. Note: Multiple Support Agreements apply only to a Qualifying Relative. Stress this applies to qualified relative only.

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Let’s read the examples on page 6-8.

Ask students if anyone has any question regarding either example. This general rule applies to both qualifying children and relatives and was previously discussed.

Joint Return To pass the joint return test, the dependent must not file a joint return for the year, unless: The joint return is filed only to claim a refund, and 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 As a volunteer you will always ask “Can your parents or someone else claim you or your spouse as a dependent on their tax return?” If a taxpayer can be claimed as a dependent by another person, the taxpayer may not claim anyone else as a dependent, even if the taxpayer has a Qualifying Child or Qualifying Relative. Special Rule for Children of Divorced or Separated Parents Let’s find Table 3 in our Publication 4012 behind Tab C. These rules also apply to 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 dependent of the custodial parent, if they meet all the rules for a Qualifying Child. The custodial parent can agree to allow the non-custodial parent to treat the child as a Qualifying Child for two benefits only.

Page 6-9 Refer students to Tab C in the Volunteer Resource Guide

Restate this. If you are a dependent you cannot claim a dependent.

Distribute Form 8332. Assign someone to read the Caution on page 6-9.

Remind students that the Support Test for Children of Divorced or Separated Parents is described in detail in Publication 17.

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Method 2: How do I use the decision tree?
A quicker way for more experienced volunteers to apply the dependency tests is to refer to the Can You Claim an Exemption for a Dependent decision tree within Tab C in Publication 4012.

Page 6-9
Tip: Note that the general rules that apply to both Qualifying Child and Qualifying Relative are listed at the top of the 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 incorporate the exceptions allowed for the Support Test. For those exceptions you may also need Table 3 of Publication 4012. Note: The exceptions are in the last block of the decision tree and refer you back to Table 3 on the previous page.

How do I enter the exemptions?
What goes in the TaxWise Dependents/Non-dependents section? TaxWise determines the taxpayer’s dependency exemptions based on the information entered on the TaxWise Main Information screen. Verify all the family and dependent information before entering the following data into the Dependents/Non-dependents section of TaxWise. Let’s review the required fields within Tab 1 in 4012: Individuals’ first and last names Individuals’ birth dates (MM/DD/YYYY) Individuals’ social security numbers (SSNs or ITINs) – be sure to physically verify with the actual documentation, such as a social security card Relationship to the taxpayer 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 Codes for dependents and nondependents – select the correct

Page 6-10
Display TaxWise (if available), otherwise use the images in Publication 4012, Tab 1.

Remind the students to verify and update the Intake sheet for the quality review process. Use the last name on the Social Security Card. Note: Most errors on paper and e-filed return relate to mismatched names and SSN’s.

Refer to the tip on page 6-10 and have someone read.

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dependent code from the drop-down list. List non-dependents only if they are Qualifying Children for the Earned Income Credit or Dependent Care Credit.

Note: The dependent codes correspond to the applicable boxes on Form 1040 and 1040A.; box 6c1 - children who 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 box(s) if the Dependent Care Credit and/or Earned Income 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)

TaxWise Hints page 6-11: TaxWise offers context-sensitive help for the current field.

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
Elaine Smith has one Form W-2 from her clerk job of 36 years. She has been divorced from her husband for over 20 years. She is the main provider for her two grandchildren and two of her grown sons, who live with her. Her sons worked odd jobs and earned about $4,000 each. They are 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. How do I apply the dependency tests to Elaine’s sons? Let’s using the decision tree to apply the test to each of Elaine’s sons and grandchildren.

Page 6-11
Review this example with students. Note: See the Student Guide starting on page 6-11 for the examples of the Forms and Decision Trees.

Go through the steps with the class to determine the dependent status of each of the persons. Demonstrate with TaxWise if available.
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Taxpayer Scenario
Let’s take a look at the intake sheet for our taxpayer Vanessa Franklin. As you recall, Vanessa is married, but lives apart from her husband, and has two children. Her mother 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 Vanessa’s children? The special rules of divorced or separated parents do not apply in this situation since 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, 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 Support test?

Page 6-13
Refer students to Vanessa’s intake sheet Family and Dependent Information is shown on the top of page 6-14.

Have the students work independently and compare results when finished. Discuss the SAMPLE INTERVIEW page 6-15:

Page 6-15

A. Not necessarily. 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.

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As you gain comfort with using the process you may find the Interview Tips work better at times. It is probably easier to show the taxpayer how you reached your decision using the Decision Tree. Since Vanessa cannot claim dependency exemption for her mother, notation should be made to the Intake and Interview Sheet for the Qualify Reviewer that will follow your determinations. TaxWise will use this information to calculate Vanessa’s exemption deduction.

Remind the students about the importance of updating the intake sheet as part of the quality review process. Note: The volunteer should also complete Part III of the Intake and Interview Sheet, noting that Vanessa did not provide more than 50% of her mother’s support, and only two dependents could be claimed.

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

Page 6-17
Ask the class if they can now define “qualifying child” and “qualifying relative.” Ask if they can identify differences between qualifying child and qualifying relative.

Filing Status and Exemptions Practice:
This section gives you practice applying what you have learned so far. You will review the taxpayer’s Intake and Interview Sheet, as well as the interview between the taxpayer and a volunteer. You will complete the Exemptions section of Form 1040 and check your work. You will also find

Page 6-17
If time permits have students work independently, in pairs, or as part of a larger group to complete this practice exercise. Review the graphic of Janet’s Form 13614 on page 6-17 with taxpayer.

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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 Intake and Interview Sheet?
Q1: page 6-18: Is the information complete?

Page 6-18
A1: No, the taxpayer left blank a question about living with her husband during the last six months.

Is the filing status information complete?
The volunteer notices that Janet did not provide complete information about her 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:

Page 6-19
Read the Sample Interview on page 6-19.

Is the personal exemption information complete?
Q2 page 6-19: Based on the Interview Tips and on the information the taxpayer provided, do you have enough information to decide if she can claim a personal exemption for herself and for her husband? □ Yes □ No

Page 6-19
A2: No, the volunteer doesn’t have enough information to discover if Janet can claim a personal exemption for her husband. Although the volunteer covered some of the questions presented in the Interview Tips, the volunteer needs to ask the rest of the questions.

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Q3: If you answered “no,” what additional information would you need?

A3: The volunteer needs to determine if the spouse had any income, or if anyone else can claim the spouse as a dependent. See the Sample Interview that starts on page 6-20. This interview concerns Loretta.

Let’s continue with the sample interview.

Is the dependency exemption 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 claim an exemption for her daughter? □ Yes □ No Q5: If your answer is “no,” what additional information would you need?

Page 6-20

A4: No, the interview was incomplete. A5: The volunteer needs to 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 Worksheet for Determining Support from Publication 17. Together they determine that the daughter provided more than 50% Refer to class to the worksheet in Publication 17.

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of her own support for 2007. Q6: Can Janet claim a dependency exemption for her daughter? □ Yes □ No The volunteer can now complete Part III of the Intake and Interview sheet. The 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. A6: No, Janet’s daughter provided more than 50% of her own support. Stress updating the intake sheet for the quality review process.

How do I complete the exemptions 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 Main Information screen, Exemptions section, complete lines 6a through 6c of the Exemptions section and the Dependents/Non-dependents section. The “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.

Page 6-21

Demonstrate with TaxWise if available otherwise refer to Publication 4012 Tab 1 “TaxWise Main Information Screen.”

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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 your Form 1040 should look like the graphic on page 6-21. See the graphic at the bottom of page 6-21.

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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 were married. It does not matter if one spouse is living in another country. The person who is the resident alien/citizen still 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 Remind the students that we covered filing status in Lesson 4 and exemptions in Lessons 5 & 6.

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Tax situations involving nonresident aliens can be complex. If the taxpayer has a J, Q, 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 or if you are faced with a situation not covered in this lesson, refer the taxpayer to a professional tax preparer.

Refer to the Intake and Interview sheet.

Remind the students that some taxpayers need professional tax help.

Citizen, resident alien, or nonresident alien?
Let’s begin by looking at the Intake and Interview Sheet. Locate the part of the form where taxpayers and/or their spouses 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

Page 7-1

Refer to the Form 13614 in the Volunteer Resources Guide

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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 or Resident Alien? from Publication 519, U.S. Tax Guide for Aliens. This decision tree is used to determine if an alien is a resident alien or nonresident alien for tax purposes. 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 not have a green card or a visa. Dante does not have a tax home in another country. He was physically present in the U.S. for 150 days in each of the years 2005, 2006, and 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 considered a resident alien for tax purposes.

Direct students’ attention to the appropriate page in the Volunteer Resource Guide Use the “decision tree” of the Volunteer Resource Guide

Show how days are calculated; 2007: 150 days. 2006 1/3 of 150 = 50 days 2005 1/6 of 150 days= 25 days. Total days= 225 days.

Refer to first TIP on page 7-2: If a person’s visa has expired or the person is not complying with the requirements of the visa, then that person is not an

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2007: 150 days. 2006: 1/3 of 150=50 days 2005: 1/6 of 150 days=25 days. Total days=225 days. Who is exempt from the Substantial Presence test? Remember, we are looking at the Substantial Presence test to tax people as resident aliens. People who are in the U.S. on valid F, J, M or Q Visas, for example, are 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 Substantial Presence test are treated as resident aliens for tax purposes. No paperwork or documentation is needed to indicate that a person is a nonresident 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.

exempt individual and cannot exclude those days they are physically present in the U.S.

Refer to TIP 2 and explain most VITA sites do not prepare returns for individuals with F, J, M or Q valid visas.

Explain the Caution on page 73. An individual with an ITIN is not entitled to the Earned Income Credit. This will be covered in the Earned Income Credit lesson.

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If the taxpayer will be applying for an ITIN, you may prepare the return. Follow the instructions in the Volunteer Resource 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. IRS Taxpayer Assistance Centers or acceptance agents can help the taxpayer 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.

Refer to TIP on page 7-3. A return with an ITIN can be efiled. A return missing an ITIN cannot be e-filed.

Local Taxpayer Assistance Centers can be found by using http://www.irs.gov/localcontacts/

Example page 7-3 Sgt. Paul Kingman and his wife, Gabriella, were married at the end of 2007. Gabriella does not have a green card or a valid visa. They have no children and are not supporting anyone else.

Use the “decision tree” of the Volunteer Resource Guide. Gabriella’s Calculation: 2007: 120 days 2006: 1/3 of 120 days= 40 days 2005 :1/6 of 120 days= 20 days 180 days Ask does Gabriella meet the Substantial Presence test? The answer is NO. Address the answer after following the decision tree.

Gabriela lived in the U.S. for 120 days in 2007 (from September to December) as a nonresident alien. She was also in the U.S. for 120 days in each of the years 2005 and 2006. Gabriella does not have a tax home in another country. Does Gabriella meet the Substantial Presence test?

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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 certified volunteer or professional tax preparer to file Form 1040NR or Form 1040 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.

Remind students of the concept and importance of staying within scope

Can we assist a married couple 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.

Page 7-4

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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. Using Sgt. Kingman’s situation: Step 1 - he answers “yes” Step 2 - he could answer “no” if he does not 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? Even though Gabriella does not pass the Green Card test or the Substantial Presence test, it is possible for this married couple to file a joint return. The couple can 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: Explain taxpayers can choose to treat the nonresident alien spouse as a resident for tax purposes. Remind students about worldwide income. Discuss Sgt Kingman’s situation using the Volunteer Resource Guide, under Tab B, follow the filing status Interview Tips.

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x x

Both people qualify to make the choice to be treated as U.S. residents for the entire year 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? Either spouse may revoke their U.S resident 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. Let’s go back to the filing status Interview Tips with Sgt. Kingman and his wife. Step 1 - he answers “yes” Step 2 - after you explain the choice 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 This section covers reversing the choice.

Refer to the TIP on page 7-5. Make a note by step 2 that, if a spouse is a nonresident alien, the taxpayer can still make the choice declaration.

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their joint return. Paul and Gabriella must report their worldwide income for the year and for all 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 Question 1: Turn to Military Exercise 15 (Carpenter) in Publication 678-W. Presume the Carpenters moved to the U.S. in October, 2007. Does Maria pass the Substantial Presence test? Can the Carpenters elect to file a joint return? If yes, how do they make this choice? However, as a married couple with one spouse who is a U.S. 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 See the note about future separate returns

Have your students go through this exercise. Answer 1: Presuming that Maria arrived in the U.S. in October, she does not meet the Substantial Presence test.

Filing as Head of Household
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

Page 7-5

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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? 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 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 Married Filing Separately. Since Dante meets the Substantial Presence test, he is a U.S. resident alien for tax purposes. He and Gloria can file as Married Filing Jointly, or they can both file as Married Filing Separately. Dante must follow the U.S. tax laws since he is considered a resident alien.

Explain the exception to the rules for Head of Household.

EXERCISES (continued) page 7-6

Question 2: Gloria’s husband, Dante, meets the Substantial Presence test. Gloria is a U.S. citizen. They do not have any children and do not support anyone else. Dante is applying for an ITIN. Gloria has an SSN. They live together. Dante meets the Substantial Presence test and is treated as a resident alien for tax purposes. Refer to Tab B, filing status, in the Volunteer Resource Guide. What filing status options does Gloria have for 2007?

Answer 3: Yes.

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Question 3 page 7-6: Raul is a U.S. citizen and serving in the U.S. Army in Japan. His wife and his children live with him and he is able to claim the children as dependents. Raul’s wife, a citizen of Japan, chooses not to be treated as a resident alien for tax purposes. She does not want to file a joint return with him. Raul meets all of the other qualifications for Head of Household. Even though he is married and living with his spouse, can he claim Head of Household status? Yes No 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 does not meet the Substantial Presence test. If she does not wish to file jointly with her husband, could he file as Head of Household, presuming he meets the considered unmarried rules and can claim his child as a dependent?

Raul can claim Head of Household status since his spouse is a nonresident alien, she does not choose to file a joint return with him, and Raul meets the other qualifications for Head of Household. If Raul had not met the other qualifications for Head of Household, he would have to file as Married Filing Separately.

Answer 4: Yes.

TIP page 7-6: In the Volunteer Resource Guide, turn to tab B, Filing Status. Notate the fact that, if a spouse is a nonresident alien, the living apart rule does not 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

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they file a joint return and meet the EIC qualifications.

Page 7-6 Personal Exemptions
Can the citizen/resident alien spouse claim the personal exemption of the nonresident alien spouse when the nonresident alien spouse does not meet the Substantial Presence test and does not choose to file a joint return? Turn to the personal exemptions decision tree in the Volunteer Resource Guide under tab C. Use the Interview Tips to see if the citizen spouse can claim the personal exemption of the nonresident alien spouse. It does not matter if the citizen spouse is filing as Married Filing Separately or as Head of Household. Make a note on step 6 that, for a nonresident alien spouse, income is defined as U.S. - sourced income only. All the other rules apply as stated. To clarify 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 serving in the U.S. Army in Japan? His wife 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 Direct students to the personal exemptions decision tree in the Volunteer Resource Guide, under tab C.

TIP page 7-6: In this situation, the 2007 1040 Instructions say to enter “NRA” on line 4 (Head of Household status) of Form 1040. When preparing a paper return for such a nonresident alien taxpayer, also write “no” on the dotted line next to line 66a (Earned Income Credit) of Form 1040.

Note: Raul’s wife chooses not to file a joint return.

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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 Volunteer Resource Guide. Find the Main Information Screen screen shots. Notate on the appropriate pages how to claim the 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 Separately, go to the line that says Married Filing Separately and fill in the spouse’s name and SSN or ITIN. Now find the Main Information Sheet screen shot that shows the dependents/nondependent section. List the spouse’s name, date of birth and SSN or ITIN and write “other” in the relationship column. Enter the number of months, if any, the spouse lived in the home. Enter “3” in the code column. A “3” means all other dependents. Display TaxWise (if available) or refer students to Volunteer Resource Guide Main Information Screen screen shot.

Refer to TIP on page 7-7. When preparing a paper return for a taxpayer who is filing as Married Filing Separately, claim the exemption by checking box 6b (spouse’s exemption) of Form 1040. Enter the name of the spouse in the space to the right of the box. Enter the ITIN or SSN of the spouse in the space provided at the top of Form 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.

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Dependency Exemptions
Can a taxpayer claim a dependency exemption for a child born overseas, a foreign-born stepchild, and/or an adopted foreign-born child? 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. The birth of a child abroad should be reported as soon as possible for the purpose of establishing an official record of the child’s claim to U.S. citizenship at birth. Form FS-240, Consular Report of Birth, establishes official evidence that the child is a U.S. citizen.

Page 7-7

Refer students to TIP at top of page 7-8. While applying for the Consular Report of Birth, parents should also apply for a social security number and passport for their child. Without a social security number, the parents will not be able to claim 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?

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If a child is a nonresident alien, before addressing the dependency exemption question, it is necessary to confirm the child’s U.S. residency status for tax purposes. Turn to the Nonresident Alien or Resident Alien decision tree in the Volunteer Resource Guide.

Have students use the decision tree in the Volunteer Resource Guide under Dependency Exemption for Qualifying Child.

Example page 7-8: Sgt. Summers, a US citizen, is married to a German citizen whose 3 children are also German citizens. The children do not have green cards Sgt. Summers has not adopted the children. They all live in Germany. 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 citizenship test. If all the other rules were met for a qualifying child or qualifying relative, he could claim the adopted nonresident alien children as dependents on his tax return. Of course, the children would have to obtain SSNs, ITINs, or ATINs to be claimed on his tax return.

Read the example. Use the decision tree to show why Sgt. Summers cannot claim the children.

Refer to TIP at bottom of page 7-8. An adopted nonresident alien child must live with the taxpayer all year to pass the citizen or resident alien test.

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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 the case of a foreign adoption when the 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: Sgt. Summers moves his family to the U.S. in January. The stepchildren are still not U.S. citizens and they do not have green cards. Can he claim the stepchildren as dependents on his tax return? Since they are nonresident aliens, you must first determine their residency status. Do the children meet the Substantial Presence test? If they do, how would Sgt. Summers answer step 5 of the Dependency Exemption for Qualifying Child Interview Tips? Question 6 page 7-9: Sgt. John Ramsey, a U.S. citizen who has been in the U.S. Army for 13 years, is stationed in Germany. His wife is a German citizen who has never lived in the U.S. Their two-year-old son was born in Germany. Sgt. Ramsey’s stepdaughter, a German citizen whom Sgt. Ramsey has not adopted, also lives with them. The Ramseys provide total support for the two children. How many dependency exemptions can Sgt. Ramsey claim on a joint return?

Guide students to the section in Publication 17.

Discuss the answers to questions 5 & 6. Answer 5: Sgt. Summers’ stepchildren are considered resident aliens for tax purposes. He would answer “yes” to step 5, the citizen/resident test. As long as the other requirements for qualifying child or qualifying relative are met, Sgt. Summers can claim the stepchildren as dependents on his tax return. They have to obtain SSNs or ITINs. Answer 6: A. Sgt. Ramsey can claim one dependency exemption for his son on his joint return. The son qualifies as a U.S. citizen because his father is a U.S. citizen. The stepdaughter does not meet the U.S. citizen or resident test. A spouse is never considered a dependent, although Sgt.

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Ramsey may be able to take her personal exemption.

Summary
Before filing a tax return, U.S. citizens married to non-citizens must determine what filing status options are available and whether the non-citizen spouse will be treated as a resident alien for tax purposes or as a nonresident alien? To determine the residency status of a noncitizen, use the Nonresident Alien or Resident Alien decision tree in the Volunteer Resource Guide. Resident aliens follow the same tax laws as U.S. citizens. Nonresident aliens follow another set of tax laws, most of which are outside the scope of the VITA/TCE program. A married couple, where a citizen or resident alien is married to a person who does not meet the Green Card or Substantial Presence test, still has the option of making the choice to treat the nonresident spouse as a resident alien and file as Married Filing Jointly. 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

Page 7-9
Re-enforce what filing status options are available for U.S. citizens married to non-citizens. Remind students to use the decision tree to determine residency status of a noncitizen. Remind students of the green card or substantial presence test. Remind students when a U.S. citizen or resident alien may claim the non-resident alien spouse’s income. Remind students that a child born to a U.S. citizen is usually a U.S. citizen even if born in another country. Re-iterate the rules regarding non-resident alien stepchildren.

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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.

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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 covering lines 7 through 11 in this lesson. The chart on Pg. 8-1 shows what line you use to report each type of income on Form 1040. It also shows which income topics will be covered at each certification level. Note that some types of income are not included in this training at any certification level. As you can see, Income is a very big topic. You will want to have all tools and reference materials at hand as you work through each tax return.

Refer to the chart shown on page 8-1. Briefly go over what sections will be covered in the course you are instructing. Stress the importance of volunteers preparing only returns within the scope of their certification. Have students get out the Intake and Interview Sheet and the Volunteer Resource Guide

Income Overview
Before we get started working with reporting income on a return, let’s define some terms. Q: What is income?

Page 8-2

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. A: Gifts, inheritances, TANF, workers comp, etc.

Q: Can anyone think of an example of excluded income, i.e. income that you do not need to report on your tax return? What are types of excluded or exempted income? Exempted income is like excluded income, in that you don’t have to pay tax on it, but you may have to report it on your return, e.g. tax-exempt interest. What are types of reportable income? Earned income – any income accumulated by personal effort, such as wages or business income reported on Schedule C/C-EZ or Schedule F Unearned income – any income produced by investments, such as interest on savings, dividends on stocks, rental income, or most pension income. How is taxable income calculated on a tax return? There are several more income terms used on Form 1040: “total income”, “adjusted gross income (AGI)”, and “taxable income”.

Refer to income chart in the Volunteer Resource Guide (Income Tab D) for examples of excludible and reportable income.

Discuss/question to confirm students understand the concept of earned/unearned income Note that the earned/unearned income concept will be important later in the training, especially when learning about EITC.

Point out terms on F1040 (TaxWise or paper). Briefly go 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?
The first step to determining a taxpayer’s income is to discuss and review the Income,

Page 8-3
Form 13614, Part IV

Lesson 8 - Page 2 of 14

section of the Intake and Interview Sheet with the taxpayer.

Have students take out the 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 interview question you might pose to the taxpayer to complete/review the income section?

A: Look for examples of probes that address specific types of income and/or income that is not 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 variety of information forms and documents depending on the source. In addition to completing Part IV of Form 13614, you will need to ask the taxpayer to show you all Form(s) W-2, Form(s) 1099, and others statements reporting income.

Note that not all income is reported on an information return. Stress that careful review and input of information returns/income documents will help prepare an accurate return.

Form 1040, line 7: Wages, Salaries, 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 Form W-2? Form W-2 is the document that employers

Page 8-3

A: Show of hands

Refer to Pub 678W, for

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must have available for their employees by January 31. Most employers use a standardized form.

examples of Form W-2 or to the Form W-2 for Vanessa Franklin found in the appendix.

Q: What are some of the things that are reported on the Forms W-2 examples you are looking at?

A: Wages, tips, compensation, FIT, Social Security tax, 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 available to help you enter income correctly on the tax return. This chart will help you identify what kind of income is reported on common information returns and how to report it. Look at the Volunteer Resource Guide, Tab 2, and find the page titled How/Where to Enter Income. Refer to the Volunteer Resource Guide, yellow TaxWise Income tab, income chart. Ask students to find FW-2.

Go over each line in student guide, Pg. 8-4, Entering Form(s) W-2 into TaxWise. (Paper sites should skip this activity.) Have students follow along in the Volunteer Resource Guide, TaxWise Income Tab 2. Demonstrate on TaxWise if available

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Q: How do you enter Form W-2 in TaxWise? Now study the page titled Form W-2 Instructions: Review the six boxes with statements on the top of the TaxWise Form W-2.

A: Link for Form W-2

Confirm students have located the six statements starting with “Check if this W-2 is handwritten…” A: Check the fifth box and enter data exactly as it appears on Form W-2. A: Check the third box and enter data exactly as it appears on Form W-2. A: Yes, IRS requires that information on electronically filed Form W-2 matches the printed Form W-2. Note that TaxWise also automatically carries necessary information for credits, deductions, withholding, etc. from Form(s) W-2 to other sections of the tax return.

Q: What do you do if boxes 3, 4, 5 and 6 on Form W-2 do not match box 1 of Form W2? Q: What if an address on Form W-2 is different than the taxpayer’s correct address? Q: Is it important to reproduce Form W-2 exactly as it appears?

Once you enter all Form(s) W-2 into TaxWise, the program automatically reports the total on line 7 of Form 1040.

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. Have the student read the Tip Income section and discuss. Refer to the Intake and Interview Sheet, Part IV

Tip Income

Q: If the taxpayer indicated that he/she received tip income (the Intake and Interview Sheet, Part IV, item 6) what

A: Did you report all your tips to your employer? Did you receive more than $20 a month? Do you

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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. A: Identify pages in current Pub 17 (Note that main topics are in bold with sub-topics listed below.)

Q: On what pages will you find information about tip income?

You’ve found the answer to the question: “All tips you receive are income and are subject to federal income tax.”

Have participants turn to the appropriate page and read the 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 you find specific information about allocated tips? A: Identify pages in current Pub 17

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Other W-2 Income The term, “household employee” refers to one who works in someone’s home performing household duties such as caring for children, cleaning, or cooking. Generally, if a taxpayer, working as a household employee, earned less than $1,500 a year while working in the employer’s home, the employer is not required to provide the taxpayer with Form W-2. The income, however, must be 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 is included in the total on line 7 of Form 1040. Educational institutions issue F1098-T to report scholarships, fellowships and qualified tuition expense. If, in your review of F1098-T, scholarships and grants (Box 5) exceeds qualified tuition and related expenses (Boxes 1 or 2), probe the taxpayer to determine if the excess was spent on non-qualifying expenses. Scholarships and grants spent for room and board or other personal living expenses are Stress that a return preparer will correctly determine this income only by interviewing the taxpayer and noting it on the Intake and Interview form... Refer to the Volunteer Resource Guide Tab 2, How/Where to Enter Income for a TaxWise screenshot of where to enter this income.

Refer to Appendix A, page 4 for a copy of Form 1098-T.

The main purpose of F1098-T is to report qualified expenses for education credits. Scholarships and grants exceeding qualified expenses is an indication of income, but do not prove it.

Refer to the Volunteer Resource Guide Tab 2, How/Where to Enter Income for a TaxWise

Lesson 8 - Page 7 of 14

taxable. Taxable scholarship or fellowship is reported on line 7 of F1040. If the taxpayer did not receive a W-2, write “SCH” on the dotted line next to line 7.

screenshot of where to enter this income. Note that TaxWise will automatically make the proper notation on the return if the income is entered in this field.

Are distributions from Educational Savings Accounts, such as Coverdell ESA and 529 plans taxable? Q: What question should you ask to determine if any amount shown on F1099-Q is taxable?

Have student read the section and discuss. A: Were all distributed funds used for qualified educational 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 1099MISC, 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
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

Page 8-8

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 Review example of Form 1099-INT in P678W. x Look in the index of P17 and find the page number for the for the Interest Income section. (A: Page in current Pub 17) x Find the place on the Intake and Interview Sheet where you would note that a taxpayer had interest income. (A: Part IV, item 3)

x Form(s) 1099-INT from institutions that pay interest on bank accounts. x If the taxpayer cashed in Series EE or Series I bonds, they should have a form 1099-INT from the bank. Most taxpayers don’t report savings …see Publication 17 under Interest Income. x If the taxpayer has Series HH bonds, they receive interest twice a year. Ask the taxpayer for the bank statements reporting the interest received. x Ask if the taxpayer holds any loans or seller-financed mortgages.

What interest income is tax-exempt? Certain types of interest are exempt from federal income tax. Allow time for students to read this section. Note that careful review of 1099INT 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 taxable. Interest on a traditional IRA is tax deferred. Do not include that interest until the taxpayer makes withdrawals from the Have students read the section and then discuss the example on page 8-9 (Mike).

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IRA. The taxpayer will be issued a Form 1099-R to report a distribution. . Q: If a taxpayer had a statement that showed interest on their traditional IRA and you were unsure how it should be reported, where in Publication 17 would you find the information? How do I report the interest income? Let’s take a look at some screen shots of TaxWise where you will enter interest income.

Note that they will learn about Form 1099-R in a later lesson A: Look in index under Individual Retirement Arrangements, sub-topic – Interest on, treatment of for the appropriate page.

Review the Volunteer Resource Guide Tab 2 pages: How/Where to Enter Income-. Link from line 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
Now we are going to take a few minutes to practice gathering income information on the Intake and Interview Sheet. Remember our taxpayer, Vanessa Franklin?

Page 8-10
Select students to play the roles of taxpayer and tax return preparer for the taxpayer scenario in student guide, Pg. 810, 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
Now let’s see how our volunteer interviews Barbara Smith a US Postal Service employee.

Page 8-11
Select two students to role play the example. Have the rest of 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
How do I handle dividends? The corporate distributions that volunteer tax preparers may handle are: x Ordinary dividends x Qualified dividends and distributions x Capital gain distributions These are all found on Form 1099-DIV. Let’s take a few minutes to read about each kind of dividend income. Where do I get dividend information? This information is mostly for your awareness, since, if you enter dividend information correctly in TaxWise, it will compute the tax rate for you. Let’s first look at the 1099-DIV, where you will find the information. How do I report dividend information? Now let’s look at how you report dividends. Dividends are reported on Lines 9a and 9b of Form 1040. On TaxWise, however, you will never enter the amounts directly to those lines.

Page 8-12
Refer students to the caution on page 8-12 about dividends that are beyond the scope of the volunteer program. Allow time for students to read student guide, What are ordinary dividends?, What are qualified dividends?, and What are capital gain distributions?

Review examples of Form 1099DIV in P678W.Point out where ordinary (box 1a) qualified (box 1b) and capital gain distributions are found (box 2a).

Have students read the TaxWise Hint, student guide, Pg. 8-13. Review the Volunteer Resource Guide, TaxWise Tab 2 Income; How/Where to Enter Income; Schedule B, Ordinary Dividends; Dividend Statement for Schedule B, Line 5 Dividend Income pages.

Taxpayer Example
Now let’s quickly go over an example of a taxpayer interview about dividends.

Page 8-14
Designate two students to read the taxpayer example on page 8-14. A: The Intake and Interview Sheet, Part IV, Item 3

Q: Where would you record Leonard’s information about dividends?

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(comments in the margins).

Form 1040, Line 10: State and Local Refunds, Credits and Offsets
Okay, now we are going to go on to talk about how you handle taxable state and local refunds, credits, and offsets, which are reported on F1040, line 10.

Page 8-14
Note that only volunteers certifying at the intermediate level or above are required to 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 1099G 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 deducting their state or local income taxes have to include their state/local tax refunds in income. 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 refund is taxable. You must determine that through your interview with the taxpayer. Refer to Form 13614. Advise participants that they will learn about standard and itemized deductions in a later lesson.

Let’s practice. Q: Where on Form 13614 do you find a question about state tax refunds If the answer to this question is “yes”, you will need to ask more questions to A: Part IV, Item 4

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determine whether you will need to complete a state tax refund worksheet. x Did you receive a refund for part of your 2006 state and/or local income taxes in 2007? x If yes, did you itemize your deductions for tax year 2006? 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 complete a state tax refund worksheet, link to it on TaxWise and follow the instructions.

Discuss the four bullets at the bottom of page 8-14.

Suggest students jot these questions in their Volunteer Resource Guide under Tab 2 on the Income page for use at the site.

Refer to Publication 4012, TaxWise Tab 2, How/Where to Enter Income (Paper filers complete worksheet in the 1040 instructions.)

Form 1040, Line 11: Alimony
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 on behalf of the spouse or former spouse, such as medical bills, housing costs, and other expenses. It does not include child support or voluntary payments outside the instrument. The person receiving alimony must include it as income. (The person paying alimony can subtract it as an adjustment to income.)

Page 8-15

Stress that child support payments do not need to be included in income. If the taxpayer is unsure, ask if the payments will stop once the child is grown.

There is no TaxWise worksheet for Alimony. Payments are entered directly on line 11.

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

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. Let’s get started by taking a look at interview tools to help do this.

Have students take out the Intake and Interview Sheet and the Publication 4012.

Form 1040, Line 12: Business Income or Loss
Q: Where on the Intake and Interview Sheet is the probe for self-employment or business income?

Page 9-1
A: Part IV, Item 10, Self Employment Income - business, 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 questions you might ask? A: Did you have any income 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? Give examples of selfemployment income that may not be reported on a 1099MISC, e.g. painters, plumbers, and other service providers to personal residences, retail sellers.

Taxpayers may have Form(s) 1099-MISC showing some or all of their selfemployment income. Keep in mind that many payers of non-employee compensation are not required to file Form 1099-MISC. Whether or not the taxpayer has a 1099-MISC, you must probe for additional sources of self-employment income. Let’s take a look at an example of Form 1099-MISC.

Refer students to Publication 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 1099MISC in later lessons. Business income or loss, that is selfemployment 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 selfemployed taxpayers only if they qualify to report their business income on Schedule C-EZ.

Emphasize that taxpayers who must use Schedule C are to be referred to a professional tax preparer.

Taxpayers can use Schedule C-EZ only if they meet all the conditions shown in the flowchart in Part I, General Information on Schedule C-EZ.

Refer to the Publication 4012, TaxWise Income Tab 2, and Schedule C-EZ Business 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 The cash method of accounting reports all income when received and deducts all expenses when paid. x Inventory are items the taxpayer buys or makes for resale to others x Expenses were not greater than income—in other words, the business showed a profit or broke even x Has only one Schedule C-EZ 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

x Use the cash accounting method

x Did not have an inventory at any time during the year x Did not have a net loss from this business

x Had only one business as either a sole proprietor or statutory employee

Lesson 9 - Page 3 of 7

considered self-employment income for income tax purposes.) x Had no employees during the year x Are not required to file Form 4562, Depreciation and Amortization for this business. See Schedule C, line 13, instructions. x Was not required to issue any Forms W-2 x Was not required to compute depreciation on business assets. Note that taxpayers who claim actual vehicle expenses rather than standard mileage rate usually must compute depreciation. x Allocation of a portion of home expenses (rent, mortgage interest, utilities, etc.) for business use x This is very unlikely. It might occur only if at sometime in the past, the taxpayer had business losses and was not actively involved in making business decisions

x Do not deduct expenses for the business use of your home

x Do not have prior year unallowed passive activity losses from this business

In your probing interview, walk the taxpayer through these conditions, making notes on Intake and Interview Sheet.

Stress that the volunteer must determine that the business qualifies to be reported on Schedule C-EZ before starting to prepare the return. This will mean estimating business income and expenses.

Taxpayer Example
Let’s do a short exercise to practice.

Page 9-2
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 qualify to fill out a Schedule C-EZ?

A: Yes

Let’s go over some of the notations you made on Intake and Interview Sheet.

Solicit examples of notes and ask students to explain how the information helped them to 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 you go through the instructions in How do I complete Schedule C-EZ. 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.

Now we are going to look at how you complete Schedule C-EZ on TaxWise. Follow along on the Schedule C-EZ in your Volunteer Resource Guide as we go through the instructions step-by-step

What about self-employment tax?

Self-employed persons participate in Social Security and Medicare through payment of Self-Employment Tax (SE Tax). SE tax is similar to Social Security and Medicare Tax that employers withhold and pay for their employees. The SE Tax rate, paid on net earnings from self-employment, is equal to the combined employee and employer Social Security and Medicare Tax rates. Taxpayers are liable for SE Tax if they have

Show copy of Schedule SE if available. Note that TaxWise will automatically compute and carry the SE Tax and adjustment to the appropriate forms.

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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
Let’s read the taxpayer scenario in Student Guide, p. 9-5. Remember that Vanessa was afraid we might forget her cosmetics business?

Page 9-5
Designate two students to read the scenario aloud. Instruct the rest of the class to note why the volunteer asks each question and what in their resource materials they will use to conduct a “self-employment income” interview at the site. A: In Part I: General Information Schedule C-EZ. The Publication 4012 has a TaxWise screen shot of it in TaxWise Income Tab 2 section, Schedule C-EZ Business Income page. A: Yes, the nine points to qualify for Schedule C-EZ were addressed. The volunteer also asked about information documents.

Q: Where will you find the questions you must ask to determine if a taxpayer qualifies to report SE income on Schedule C-EZ?

Q: Did the volunteer cover all the questions about Vanessa’s business that needed to be asked prior starting return preparation?

Q: How would you document this interview on Intake and Interview Sheet?

A: Check “yes” on Item 10, Part 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
In this lesson, we discussed selfemployment or business income, which like

Page 9-7
Confirm students understand

Lesson 9 - Page 6 of 7

wages, salaries, and tips is earned income. We learned how to calculate net business income and where to report it on a tax return. We also learned how to determine which business tax issues are within the scope of VITA/TCE and when a taxpayer must be referred to a professional tax return preparer. Most importantly, we used tools and techniques to help to gather information about self-employment income needed to prepare an accurate tax return.

key concepts: self-employment income, earned income, net business income.

Confirm students can identify F4012, TaxWise Income Tab 2 pages, Intake and Interview Sheet, and Schedule C-EZ as resources. Optional: If you are doing an ongoing comprehensive problem from the 678-W enter the Schedule C-EZ information at this time.

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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 gains and/or losses on the sale of assets. In this lesson we will discuss the sale of stock and the sale of a personal residence. If the 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 shortterm and long-term capital gains or losses, the taxable gain or deductible loss, the tax liability, and the amount of any capital loss carryover. Instruct students to have Publications 4012, 678W, 17 and Form Schedule D and 1040 Instructions for referral.

What information must I have to report a capital gain or loss?
To report capital gain or loss on Form 1040, Schedule D, you will need to identify:

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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 estate) as gross or net proceeds. Refer students to P678W, 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 investment property or a home. A: Volunteers must probe the taxpayer for this type of income 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. 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? A: You would advise him/her to 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.

Exercises: Q: If Form 13614 does not have a specific item about income from the sale of investment property or a home, how will you know whether a taxpayer has any?

Q: What are some questions you might ask?

Q: What would you advise a taxpayer if he/she had sold house that he/she had rented out to tenants for the last 10 years?

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.

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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.102 aloud. (Confirm understanding after each section.) A: Pub. 17

Q: Since at the site, you won’t have your Student Guide, where would you look first if you had a question about basis? Q: Let’s practice. On what page of Pub 17 would you find information about adjusted basis?

A: Appropriate Page in current 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?
Schedule D classifies capital gains and losses as either long-term or short-term, depending on how long the taxpayer owned the stock. Taxpayers may designate specific shares they want sold. If they don’t do this, the broker will treat the shares sold as the earliest ones purchased. All of this information is mainly for your awareness. In order for you to prepare the return, the taxpayer must have the

Page 10-3
Read How do I determine holding period?, Long-Term or Short-Term, Student Guide. Stress that volunteers should refer taxpayers without this information to their stockbroker or financial planner. Allow time for students to read the two paragraphs. Reinforce that the taxpayer must have all

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purchase and sales dates and adjusted basis of the shares sold. Again, for your awareness, please read the Tax-Free Stock Dividends and Stock Splits and Taxable Dividends sections in your student guide.

information needed to determine basis and holding period.

Review the example on 10-4.

What information do I need from Form 1099-B?
Now we are going to go on to how you will enter the information about the stock sale on the tax return. First, let’s take a closer look at Form 1099-B.

Page 10-4
Have students open P678W, to the example of Form 1099-B, in the Advanced Comprehensive 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 prepared by the broker who handled the sale of stock. If there are entries in boxes 3, 9, 10, 11, or 12, refer the taxpayer to a paid tax preparer. x In box 1 on Form 1099-B, the stockbroker reports the date the stock was sold. Use this date, along with the day after the purchase date provided by the taxpayer, to determine the holding period. x In box 2 on Form 1099-B, the stockbroker reports the sales price of the stock, and checks a box to indicate if the amount in box 2 is gross proceeds or net proceeds: o If gross proceeds, add the sales commission to the taxpayer’s basis o If net proceeds (gross proceeds less commissions and option premiums), the broker already subtracted the

x Q. Are there any entries in boxes 3, 9, 10, 11, or 12? (A: no). Suggest students add a note in their Volunteer Resource Guide to remind them of this at the site. x Q. What is the sales date on the example in the 678W? (A: 3/10/2007)

x Q. What is the sales price on the example? (A: $8,859); Should you add the sales commission to Mr. Dalhart’s basis? (A: no, the net proceeds box is checked)

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commissions and fees.

Remember that Form 1099-B only gives information about the sale. The taxpayer must provide the purchase date and adjusted basis.

Optional: go over the example and exercise in Student Guide, Pg. 10-5. Note that many brokerage 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, Parts I and II?
Information from Form 1099-B is entered on Schedule D. Part I for short-term sales and Part II is for long-term sales. When preparing a return, determine the holding period for each block of stock sold. This will 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 through e, the gain or loss is calculated in column f. If you enter the information in TaxWise by linking to a Capital Gain or Loss Worksheet, TaxWise will automatically determine the holding period, compute gain or loss, and then carry the transaction to the correct part of Schedule D.

Page 10-5
Have students open their 4012, to TaxWise Tab 2, Schedule DCapital Gains and Losses page. Point out Schedule D, Parts I and II

Review Capital Gain and Loss Worksheet in Pub 4012, TaxWise Tab 2, Schedule DCapital Gains and Losses page. Note instructions for mutual funds entries with various purchase dates.

How do I report capital gain distributions?
Q: Who remembers what kind of income we talked about in an earlier lesson that

Page 10-6
A: dividends

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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. TaxWise will automatically carry capital gain distributions to all the correct lines of Form 1040 if they are properly entered using the Dividend Statement form. Note that a screen shot of this TaxWise form is in 4012, TaxWise Income Tab 2, Dividend Statement for Schedule B, Line 5 Dividend Income page.

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

Page 10-6
Have a student read How do I complete reporting of capital gain or loss? Emphasize that TaxWise will automatically do the calculation. Review each example on Page 10-7

How do I calculate and report a carryover of a capital loss?

Page 10-8
Designate students to read aloud, Student Guide, How do I calculate and report a carryover of a capital loss? Stress that taxpayers must have a copy of their 2006 Capital Loss Carryover worksheet to claim a prior year loss.

As you just read, the capital loss that a taxpayer can claim in is limited. The excess, however, can be carried over to later years. Let’s read about how to calculate and report the carryover.

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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
Let’s get a couple of you to act out a sample interview of the taxpayer whose 1099-B you looked at earlier in the lesson. 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 needed? Q: We all have different styles, of course. What different questions might you ask to obtain the necessary information?

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Designate two students to read the Sample Interview in Student Guide.

A: Yes.

Lead discussion on students’ ideas about effective interview 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.

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Who must file Schedule D for the 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.

Page 10-10

Who must report the sale of a 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. To determine if the taxpayer meets the criteria for reporting the sale of a home, use the interview techniques and tools discussed in the Screening and Interviewing lesson. 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 four options? You must report the sale of your main home when one of these things is true:

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Volunteers can refer to Pub. 17 for most information to help make the determination. In some cases, you may need to refer further to Publication 523, Selling Your Home.

Discuss each of the four points.

What is considered a “main” home?
Also, a gain from a sale of a home that is

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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. So the first step is to find out if the home meets the definition of a main home. The Student Guide has a definition, but since you won’t have it to refer to at your site, I am going to ask you to look it up in Pub 17, which you will have at your site.

Ask students to find and read the definition of main home in Pub. 17. (It is listed in the index under Home, definition of,): “Usually the home you live in most of the time is your main home, and it can be a House Houseboat Mobile home Cooperative apartment, or Condominium”

Q: What if the taxpayer owns more than one home?

A: The main home is ordinarily the one he/she lives in most of the time. (Pub 17). 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 tests?
Let’s go on to the ownership and use tests.

Page 10-11

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

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The point of this exercise was to demonstrate the importance of using your reference materials. Reliance on them, rather than memory, will help you to offer a high quality of service to your VITA customers. The ownership and use tests can be found in Publication 17. Publication 17 is a reference that will always be available at your site. Married Homeowners Five-year Test Period Suspension and Reduced Exclusion Let’s take a few moments to read about some special rules for married homeowners and for those that don’t fully meet the use and ownership tests. Remember that the reduced exclusion is out of scope but you can advise the taxpayer.

heart all the provisions of the ownership and use tests. (In the unlikely event you get a volunteer, let him/her try.) Ask participants to open their eyes and explain the point of the exercise. Reinforce that Student Guide should not be used as a reference at the site.

Page 10-11 Allow time to read Married Homeowners, Five-year Test Suspension and Reduced Exclusion, Student Guide. Go over the examples and have students complete the exercises using Pub 17, as a reference.

Five-year Test Period Suspension – Armed Forces Personnel
Let’s read the two paragraphs here and then we will discuss the example.

Page 10-12

How do I figure the gain (or loss) from the sale of a home?
Once you’ve determined that a taxpayer is eligible for the exclusion, you can figure the gain or loss on the sale. You will need to know the selling price, amount realized, basis, and adjusted basis.

Page 10-13
Designate students to read Student Guide sections: Selling Price, Amount Realized, Basis, and Adjusted Basis. Go over tips and exercises at the end of each section. A: No, there is no requirement to report the transaction.

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

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to calculate a gain or loss? Q: Where would you find information on what to include in adjusted basis? Q: How would you handle the sale of a home if the taxpayer had taken a deduction for the business use of home in 2005? A: Pub 17, under Sale of home, subtopic-adjusted basis. A: Refer to a professional tax preparer. (Calculating the part of 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 sale can a taxpayer exclude?
If all the requirements are met, an individual 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.

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Refer students to tips on 10-15

Where do I report any taxable gain from the sale of a home?
Gain on the sale of a home must be reported only if the gain is greater than the allowable exclusion. It is reported on Part II of Schedule D. A loss on the sale of a home is not deductible.

Page 10-15
Review the tip for this topic. If available, show copies of Schedule D and worksheets. Note that TaxWise users calculate the gain on Schedule D Worksheet 2. (Paper filers use worksheets in Pub. 523.)

Taxpayer Example
Let’s continue with our sample interview of the taxpayer.

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Designate students to read the sample interview aloud while the rest of the class makes notes on the Intake and Interview Sheet. Discuss the effectiveness of the interview.

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Suggest students add a probe to rule out previous business use of the home.

Summary
This lesson covered how to report the sale of stock and the taxable portion of a sale of a residence. Let’s take a few moments to review. We covered a lot of detailed information and practiced using Pub. 17 to find it again when preparing a return.

Page 10-16
Designate students to read Summary.

Stress the need to use reference materials to research tax law issues.

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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 adjust their withholding. 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. They will be discussed in Lesson 14 for entry on Form 1040, Line 20. Form 1099-R is the information return used by payers to report distributions from pensions, annuities, retirement, or profitsharing plans. You will learn how to use it, interview techniques and tools, and reference materials to calculate retirement income and accurately report it.

Refer to Volunteer Resource Guide, TaxWise Income Tab 2, How/Where to Enter Income

Examples of Forms 1099-R can be found in Publication 678W, Advanced Comprehensive Problem.

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First, let’s define some terms and discuss some general information about retirement distributions. Take a few moments to read What do I need to know about IRA and pension distributions? starting on page 11-1

General information about retirement distributions pages 11-1 to 11-4

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 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 before or after tax? Q: When you retire and get a distribution, will it be fully taxable, partially taxable, or non-taxable?

Allow time to read What do I need to know about IRA and pension distributions? pages 11-1 & 2. .

A: show of hands

A: before tax

A: fully taxable

Where can I get information about a taxpayer’s retirement income?
Form 13614, Intake and Interview Sheet includes questions about any retirement income the taxpayer may have received. In your interview with the taxpayer, be sure to probe for retirement income and record the information on page 2 of Form 13614.

Page 11-2
Have students look at The Intake and Interview Sheet. Point out Part IV, Item 7 – Pension and/or IRA distribution. Note that the taxpayer’s age (Part I, Item 13 – date of birth) is important information for handling retirement distributions.)

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Form 1099-R is used by payers to report distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, and insurance contracts. You will use information from boxes 1, 2a, 2b, 4, 5, 7, and 9b, as well as the checkbox (next to box 7) that indicates if this is an IRA/SEP/SIMPLE distribution.

Review examples of Form 1099R in Publication 678W, Advanced Comprehensive Problem. Briefly describe the information found in boxes 1, 2a, 2b, 4, 5, 7, and 9b and the IRA/SEP/SIMPLE checkbox. (Refer to Form 1099-R Instructions to Recipients or TaxWise Help for box 7 distribution codes.)

How do I find the taxable portion of retirement income?
As we’ve learned, retirement distributions may be fully or partially taxable. Let’s learn how you will determine the taxable portion. 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.

Page 11-3
Have students turn to Volunteer Resource Guide, TaxWise Income Tab 2, 1099-R Pension and Annuity Income page.

TaxWise will automatically enter the information on the correct lines of Form 1040 if you enter it on the TaxWise Form 1099-R.

Read the first TaxWise Hint, page 11-3 as participants review Volunteer Resource Guide, TaxWise Income Tab 2, How/Where to Enter Income and 1099-R Pension and Annuity 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 portion of pensions?
If the payer did not include an amount in box 2a of the Form 1099-R, you may need to interview the taxpayer further in order to compute the taxable portion of the distribution.

Page 11-3

Read the second TaxWise Hint, page 11-3 as participants review Volunteer Resource Guide, TaxWise Income Tab 2, 1099-R Pension and Annuity Income and 1099-R Exclusion pages.

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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 113 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 IRA income?
Q: What are the four kinds of IRAs?

Page 11-3
A: Traditional, SIMPLE, SEP, and Roth A: Roth IRA

Q: From which kind of IRA are the distributions tax-free if the taxpayer meets certain requirements? Q: How should you handle a return for a taxpayer that has Forms 8606 or other documents to prove that his/her IRA distribution is partially taxable?

A: Refer him/her to a professional tax preparer. VITA/TCE sites can only assist taxpayers with IRA distributions that are fully taxable or fully excludible.

Reporting IRA Distributions
For a normal distribution from a traditional, SIMPLE or SEP IRA, the distribution code in box 7 of Form 1099-R will be ‘7’ and the IRA/SEP/SIMPLE box will be checked. Ask the taxpayer: • Was this a distribution from a traditional IRA?

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Have students identify these entries on the Form 1099-R example in Publication 678-W, Advanced Comprehensive Problem.

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• Were the contributions deducted from

income in the year they were made?

If so, the entire distribution is taxable. Report it on Form 1040, lines 15a and 15b, or on Form 1040A, lines 11a and 11b.

Ask questions (e.g. Why ask that?) to confirm understanding of the purpose of the interview questions.(determine if the taxpayer has a basis in the IRA)

Distributions from a Roth IRA are not 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.

Note that if it is entered on TaxWise Form 1099-R, TaxWise will automatically carry it to the proper lines on Form 1040.

What other distribution issues must I deal with?
There are a few other issues related to reporting retirement income that you may encounter. Several types of distributions are subject to additional taxes which are computed on Form 5329, Additional Taxes on Qualified Plans and Other Favored Accounts. The completion of this form is not included in the VITA/TCE training. Refer taxpayers needing it to a professional tax preparer.

Page 11-6
Stress the importance of reviewing the distribution code in box 7 of Form 1099-R to determine the type of distribution. Advise that descriptions of distribution codes are available on the back of Form 1099-R and in TaxWise help. TaxWise help also notes which codes require the completion of Form 5329. Premature Distribution page 11-6 Designate students to read page 11-6 aloud. Comment at the end of each paragraph, as follows: The additional tax is often called an “early distribution penalty”.

A premature distribution is an early withdrawal from a pension fund, for purposes other than retirement, by a taxpayer who is under 59 1/2. Early distributions are subject to an additional 10% tax. The tax applies to the taxable portion of the distribution or payment.

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,

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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
Participants must start withdrawing funds from qualified pension plans at age 70 ½. Please take a few moments to read about minimum distribution rules.

Page 11-6
Allow time to read pages 11-6 & 7. For classes that will volunteer at TCE sites, you may want to discuss examples and review exercise 4 aloud.

Now, let’s take a few moments to read about how to handle a withdrawal of excess IRA contributions.

Withdrawal of Excess Contributions page 11-7

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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
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.

Page 11-8

Read or designate participants to read Rollovers section aloud. Note that rollover distributions are not taxable, if they are redeposited 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 the taxpayer when the funds were redeposited and if it was into an appropriate account. Note that in this case, the distribution code is often ‘1’ (premature distribution). Stress 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

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Volunteer Resource Guide, TaxWise Income Tab 2, 1099-R Exclusion Worksheet page.

We have covered a lot of detailed 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 Sheet, Part IV, Item 7) the taxpayer shows you a Form 1099-R. The IRA/SIMPLE/SEP box is checked and the distribution code is ‘7’ (normal distribution).

Interview Techniques Activity

Read the scenario to the left and ask questions; encourage discussion and a variety of examples of effective interview questions.

Q: What questions and would you ask and why?

A: Q1: Was this distribution from 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’ (premature distribution)?

A: Q1: Did you roll over this 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?

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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 in TaxWise Help.

Note that TaxWise will correctly report this distribution as nontaxable 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 encourage you to review it carefully and use it as an interview tool to gather additional necessary information from the taxpayer.

Make students aware of Volunteer Resource Guide, TaxWise Income Tab 2, 1099R entry variations page for examples of common 1099-R entries

How do I find the taxable portion of pensions and annuities?
Now we are going to move our focus to pension and annuity distributions.

Page 11-8
Note that Form 1099-R will not 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 cost of their pensions or annuities • Employers did not withhold part of the cost from the taxpayers’ pay while they worked

Allow time to read Partially Taxable Pensions and Annuities, Student Guide, page 11-9 Have students follow along in Volunteer Resource Guide, TaxWise Income Tab 2, 1099-R Exclusion Worksheet page as

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If the payer has not calculated the taxable amount of the distribution and reported it on Form 1099-R, box 2, you will need to complete a worksheet to calculate it.

you review the TaxWise Hint on page 11-9 (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.) Disability Pension Income page 11-10 Allow time to read Disability 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.

Report disability pension income on Form 1040 according to the information document, i.e. report as wages on line 7 if from Form W-2 and line 16 if from Form 1099-R.

What other retirement income issues must I deal with?

Page 11-11
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 pension plans are similar to those for IRAs. Q: What is the distribution code of Form 1099-R that signifies a premature distribution with no known exception?

Premature Distributions page 11-12

A: 1

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The minimum distribution rules discussed for traditional IRAs apply also to pension plans.

Minimum Distributions page 11-12 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
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 adjust their withholding.

Page 11-14

Remind students of the 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 rental income and expenses for U.S. citizens and resident aliens residing in U.S or abroad. To do this, you need to know how to allocate rental income and expenses when property is used for personal purposes. You must also be able to identify when the at-risk and passive activity rules are applicable and compute deductible depreciation expenses. Form 13614, Intake and Interview Sheet (Part IV, Income) does not list income from rent, but it is important to ensure that all income is accurately reported on the return. Ask taxpayers if they rented out their home or other property during the tax year. This lesson is only for Military and International VITA students. Note that this lesson does not apply to taxpayers who are in the business of renting properties. Have students take out Intake and Interview Sheet. Advise that volunteers should note rental income next to Part IV, Item 11. Have students take out the 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 be reported?
We will discuss what kinds of rental income must be reported.

Page 12-1
Designate students to read 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.122

We do not expect you to memorize all the 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 rental income in Pub 17?

Have students take out Pub 17.

A: Appropriate pages in current 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 taxpayer received rental income, what questions might you ask to get additional necessary information?

A: Possible responses: Q: Did your tenant pay any advanced rent or a security deposit? Did 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 expense?
Homeowners who reside in homes they

Page 12-2
Note that itemized deductions

Lesson 12 - Page 2 of 9

own generally report mortgage interest and property taxes as itemized deductions on Schedule A. However, when a taxpayer rents out a home, those become rental expenses along with the cost of repairs, maintenance, and certain other operating expenses. Deductible rental expenses are reported on Schedule E.

will be covered in a later lesson Briefly review TaxWise Hint, pg. 12-2. Instruct students to open the Volunteer Resource Guide, 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 Student Guide, 12-2

In general, taxpayers use Schedule A, 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 E, Supplemental Income and Loss. Mortgage interest is reported to the taxpayer on Form 1098. Let’s read more about rental expenses and how they are allocated if the home was rented for a partial year.

Note that Form 1098 is an information return that will be covered in more detail in the itemized deduction lesson. Allow time to read Partial Year Student Guide, pg.12-3. Stop at 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 handle a taxpayer’s rental expense, where would you find the information?

A: Pub 17, appropriate pages from Chapter on Rental Income and Expenses Instruct students to open Pub 17 to appropriate page.

Taxpayers often misunderstand when an expense qualifies as a repair or an improvement. Let’s look at the definitions of each in Publication 17.

Repair vs. Improvement Student Guide, pg.12-4 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 to determine whether an expenditure was for a repair or an improvement?

A: Possible responses: Did the work you had done add to the value of the property? Was this repair part of an extensive remodeling of the property? Allow time to read Advance Insurance Premiums Student Guide, pg.12-4. Complete exercise questions, Student Guide, pg.12-5 aloud with class.

Let’s continue reading.

How do I handle rental property that the taxpayer also uses?
Now we are going to go over rules for when a taxpayer uses a portion of rental property for personal use.

Page 12-5
Allow time to read Rental vs. Personal Use, Student Guide, 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) section of Pub 17. Point out information and Worksheet 9-1 Worksheet for Figuring the Limit on Rental Deductions for a Dwelling Unit Used as a Home. Instruct students to open the Volunteer Resource Guide to TaxWise Income Tab 2, 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 partyear 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.

As you can see, the rules for personal use of a home or dwelling unit are very detailed. Let’s see what tools you will have to help you at the site.

There is a similar worksheet in TaxWise

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 to determine if he/she met active participation requirements? A: Possible answers: Did you manage the property yourself or 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 rental property?
The cost of property with a useful life of one year or more, and used in a trade or business or held for the production of income (such as rent), is recovered by deducting an expense called depreciation.

Page 12-10
Allow time to read How do I handle depreciation of rental property? Student Guide, pg.1210 and complete exercises on pg. 12-11. Briefly review exercise answers. Basis and Adjusted Basis Student Guide, pg.12-11 to 1213

You learned about basis and adjusted basis in Lesson 10, Capital Gain or Loss. Q: Look in your Publication 17 index, On what page(s) in Publication 17 could you find information about basis and adjusted basis of rental property? Generally, the basis for depreciation is the A: Appropriate pages. (Main index topic: Basis; Sub-topics: Adjusted basis, Cost basis, Improvements to real estate, Real estate)

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 rental use, the basis is the lesser of the adjusted basis or fair market value (FMV) at the time of conversion

Review example on Student Guide, pg.12-11 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.1212

How do I figure a MACRS deduction?

Page 12-12
Allow time to read How do I figure a MACRS deduction? Student Guide, pg.12-12 to 1213 and complete exercise on pg.12-13. Review exercise.

Q: In what publication can you find MACRS depreciation tables?

A: Pub 925 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 all information needed to correctly calculate depreciation?

A: Possible responses: When did you first start trying to 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
Rental income and deductible rental expenses are recorded on Part I of Schedule E, Supplemental Income and 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, certain expenses must be divided between rental use and personal use

Page 12-14
Designate students to read Summary Student Guide, pg.1214, 15

Stress that because the rules for claiming rental income and expense are detailed and

Lesson 12 - Page 8 of 9

Limitations on the deductibility of a rental loss apply to taxpayers who use rental property for personal purposes Because rental activities are generally considered passive activities, rental losses are not fully deductible. However, taxpayers who actively participated in the renting of the property may deduct up to $25,000 of their rental losses.

sometimes complex, volunteers should refer to their research materials every time they prepare a tax return. Optional: Military Comprehensive Problem in the 678-W includes a rental which you may wish to practice on.

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: Unemployment Compensation
What is unemployment compensation? Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. In most cases, it is taxable. Where can I get unemployment compensation information? 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 from each government entity. In most states, a taxpayer can elect to have federal income taxes withheld from their unemployment compensation benefits. Be sure to review box 4 of Form 1099-G for any federal income tax withheld. How do I report unemployment compensation?

Page 13-1
Emphasize that unemployment compensation is generally received when a person is laidoff from work. Ask the students to determine if unemployment is “earned income”. Answer - It is not, see the chart in Pub 4012 under the Earned Income Credit Tab.

Note: If a person received unemployment compensation anytime during the tax year they should receive a Form 1099-G or a statement from the Unemployment Compensation Office. If they did not receive the form or statement the taxpayer can contact the Workforce Development Office for the State

Lesson 13 - Page 1 of 2

The total for all amounts in box 1 of Form(s) 1099-G should be entered on: Line 3 of Form 1040EZ Line 13 of Form 1040A Line 19 of Form 1040

in which they received unemployment compensation. TaxWise Hint page 13-1. From line 19, link to create each 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
This lesson explained: • What is unemployment compensation • How to report unemployment compensation

Page 13-2
Provide a thorough review of each of the bullets in the summary using examples from 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 Security and Railroad Retirement Benefits
Social security benefits are payments made under Title II of the Social Security Act. They include OASDI (old-age, survivors, disability insurance) benefits, and some workers’ compensation benefits. Generally, if social security benefits are the taxpayer's only source of income, then the benefits are not taxable and the taxpayer probably does not need to file a federal income tax return. If the taxpayer received social security benefits plus other income, some portion of the social security benefit may be taxable.

Page 14-1

Refer students to Form 13614, Intake and Interview Sheet, Income. Advise participants to ask taxpayer if receiving SSA benefits and/or RR benefits. Demonstrate TaxWise 1040 Worksheet 1 if available. Otherwise refer to the Volunteer Resource Guide. If the taxpayer’s only source of 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

Railroad Retirement Benefits (RRBs) are 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). How are these benefits reported to the 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 SSA1099, 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.

Again demonstrate with TaxWise or the Volunteer Resource Guide.

Two categories of RRB’s. Tier 1 and Tier 2. Details to follow.

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 RRB1099R (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 Benefits, for TaxWise entry.

Tier 2 Railroad Retirement Benefits 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 RRB1099R. 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? The taxable amount, if any, of a taxpayer's 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 to record the numbers. Discuss this example with the class.

Some of the benefits received are taxable if 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

If the taxpayer files a joint return, combine 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.

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 than 50%.

The process: Input both incomes if joint return. Example page 14-3: Wanda and Dan are both retired and will file a joint return. Wanda received Form SSA1099 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 Input all benefits if joint return.

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 RRB1099, 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-1099R. 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 14a. Report “0” on form 1040, line 20b or on Form 1040A, 14b. -Refer to the Volunteer Resource Guide.

Exercises page 14-4 Question 1: Hank comes to your site to get some help with his tax return. He is upset because his neighbor told him that he would 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 neighbor told him, with that much income, the entire $11,724 of his social security benefits would be taxable. What is the maximum taxable amount of Hank’s benefits?

A1: D. $9,965 or 85% of the net benefits is the maximum amount that could ever be taxable. Use the worksheet in the 1040 instructions or TaxWise to calculate this.

Lesson 14 - Page 6 of 8

Lump-Sum benefit Payments
Some taxpayers may have received a lumpsum 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 the entire lump-sum payment on line 1. The second option is to treat the payment as received in the earlier year or years. This 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 Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Page 14-4

Students should complete this exercise using the worksheet in the 1040 instructions OR (TaxWise if available)

As always complete Social Security Worksheet, or if 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 Form SSA-1099, which includes a lumpsum benefit payment for both 2006 and 2007. For which option would you refer her to a professional tax preparer?

A2: B. There are (ONLY) two options available for figuring the taxable portion of social security benefits paid as lump-sum benefit payments. The first option allows the taxpayer to report the whole payment in the year it was received. The other option is a special procedure that must be used to figure the taxable portion of the benefits assigned to the earlier years. Refer taxpayers who want to use this option to a professional tax preparer or to Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Summary
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.

Page 14-5

Lesson 14 - Page 8 of 8

Lesson 15: Income – Other Income Form 1040, Line 21

Objective
This lesson will help you determine: x x x Other forms of income and how to report other sources of income. How to properly report income earned from worldwide sources. 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 forms of income and how to report other sources of income. This lesson will also help you properly report income earned from worldwide sources. To do this, you need to be able to identify the type of income and, if reportable, convert it to the equivalent U.S. dollar value of the foreign currency. This requires using the contemporaneous exchange rate or, if not known, an average annual exchange rate. This lesson will help you determine who is eligible for the foreign earned income exclusion and how to calculate the excludible amount by using Form 2555, Foreign Earned Income, or Form 2555EZ, Foreign Earned Income Exclusion. Important Preliminary note: This lesson contains three components: 1. Regular “other” income 2. Worldwide Income 3. Military Foreign Earned Income Exclusion That is why there are three summaries. Chose the section(s) appropriate to the volunteers you are training. Remind the students that all income is taxable unless excluded. Refer the students to the Volunteer Resource Guide and IRS Pub 17

Lesson 15 - Page 1 of 18

Form 1040, Line 21: Other Income
How do I handle other income? “Other income” is anything that does not have its own line on Form 1040. Here are examples: x Prizes and awards x Gambling winnings, including lotteries and raffles x Jury duty fees x Alaska Permanent Fund dividends If you are unsure about sources of other income, consult the Volunteer Resource Guide and Publication 17, or discuss the 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.

Page 15-1
Refer the students to Form 1040 line 21. If TaxWise is available you could share it. Caution: Total gambling winnings must be reported on line 21 of Form 1040. If the taxpayer also had gambling losses, the losses can only be deducted on Schedule A (see the Itemized Deductions lesson for more information.)

How do I report other income? In most cases, if a taxpayer has "other income" they must file Form 1040 and report the income on line 21.

TaxWise Hint: 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
The volunteer continues working with our taxpayer, Vanessa Franklin. Recall that Vanessa is married but, lives apart from her husband. She qualifies to file as Head of Household. Her husband was employed as a cook for most of the tax

Page 15-2
Review the Scenario with the students Display the intake sheet.

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 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.

Sample Interview page 15-2

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?
Would someone read the two paragraphs at the bottom of the page? Example: In 2007, Alfredo Kendall earned $40,000 while working in Dallas, Texas, for Dade Corporation. In September 2007, he transferred to their office in Stuttgart, Germany. While in Germany, he earned $30,000 (U.S. dollars). All of Alfredo’s wages, including the income he earned in Germany, is included in his gross income; enter $70,000 on line 7 of his Form 1040. Income is treated the same on the return regardless of the country from which it is derived. Similar income earned inside or outside the U.S. is generally taxed in the

Page 15-2

This is a good illustration of the concept of “worldwide income. $40,000 in Texas $30,000 in Stuttgart $70,000 total We will discuss conversion issues shortly.

TIP page 15-3: Foreign income might be reported to the taxpayer on forms or in

Lesson 15 - Page 3 of 18

same way on the return. Likewise, income earned in the U.S. and not taxed will be treated in the same way if earned outside the U.S. The lines on which income is reported on Form 1040 are the same whether the U.S. citizen or U.S. resident alien is living within or outside U.S. boundaries.

ways that are not used in the United States. Question the taxpayer closely to ensure that the taxpayer is reporting all worldwide income. Review the income records to ensure that includable amounts are accurate and complete. Remind the students to notate the intake sheet for the Quality Review Process

EXERCISES Q1: Marta Bremer, a U.S. citizen, lives in Mussbach, Germany. Her 2007 income included $22,000 in wages earned in Germany. She earned $300 in interest from her U.S. bank and $2,000 unemployment compensation from the state of Iowa. What is Marta’s gross income? A. $2,300 B. $22,300 C. $24,000 D. $24,300 Q2: Mary Carleton, a U.S. citizen, lives in Belgium. Her 2007 income included $10,000 in wages from her Belgian employer, $200 in interest from her U.S. bank, $8,000 in alimony payments, and $8,000 in child support payments from her ex-spouse. What is Mary’s gross income? A. $8,000 B. $16,200 C. $18,200 D. $26,200

A1: D. Marta’s gross income includes her: $22,000 wages, $ 300 interest, and $2.000 unemployment, $24,300 - all of which should be reported on her tax return.

A2: C. Mary’s gross income includes her: $10,000 - wages, $200 - interest, and $8,000 - alimony, $18,200 All of which should be reported on her tax return. Her child support payments are her only nontaxable income.

How do I convert foreign income 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

Page 15-3

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 Q3: Caryn received 200 Euros on a day that the exchange rate was .75514 Euros to one U.S. dollar. In U.S. dollars, she would have ____. A. $264.85 B. $377.57 C. $115.03 D. $11.50

Page 15-4 A3: A. Dividing 200 Euros by the .75514 exchange rate comes to $264.85. 200 Euros .75514

= $264.85.

Lesson 15 - Page 5 of 18

Q4: Given an exchange rate of .7000, how much is 36,000 Euros worth in U.S. dollars? A. $252.00 B. $25,200.00 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 Lubbock Incorporated from January until September 2007. On September 29, he 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.

A4: C. Dividing 36,000 Euros by the .7000 exchange rate comes to $51,428.57. 36,000 Euros .7000 = $51,428.57

Note: he was only paid in pesos for three months. Before that his pay was in dollars.

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Where to Obtain Exchange Rates In mid-January, the IRS distributes exchange rates for various currencies to its worldwide offices, including the prior year’s average annual exchange rate information. 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.

Remind the students that the phone numbers are in Pub 54. You could also share the following US Treasury web site: http://fms.treas.gov/intn.html#rates (if available)

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Exercises (Continued) page 15-5: Q5: You can generally use the average annual exchange rates posted in the IRS worldwide offices for taxpayers who _____. A. Have blocked income in a foreign country B. Earned income in a country with 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 How/Where to Enter Income. 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 the money was earned. For Section e, TaxWise Help can be used to determine 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.

A5: C. The average annual exchange rate should be applied only when the taxpayer received foreign income evenly throughout the year and when the exchange rate remained relatively stable.

Display this in TaxWise (if available)

TaxWise help is the F1 key in the disk based version of the software.

Lesson 15 - Page 8 of 18

What is the foreign earned income exclusion?
Certain taxpayers can exclude income earned in foreign countries. For 2007, the maximum exclusion amount is $85,700. The foreign earned income exclusion does not apply to wages and salaries of military and civilian employees of the U.S. Government. For tax years beginning after 2005, nonexcluded 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 exclusion the taxpayer must: - Demonstrate that his or her tax home is in a foreign country (the tax home test) - Meet either the bona fide residence test or the physical presence test - Have income that qualifies as foreign earned income The requirements are applied separately to each individual. If a husband and wife are working overseas, each must meet all requirements to qualify for the exclusion. If they do qualify, each is entitled to an exclusion of up to $85,700 (on qualified income) for 2007. Exercises Q6: page 15-6: Miranda has lived in Puerto Rico since 1999. Is she eligible for the foreign earned income exclusion? A. Yes B. No

Page 15-6
Note: This lesson will help you determine who is eligible for the foreign earned income exclusion and how to calculate the excludible amount by using Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.

To determine eligibility and amount, use the interview techniques and tools discussed in Lesson 2, Screening and Interviewing. TIP: The terms “foreign,” “abroad,” and “overseas” do not include Puerto Rico, U.S. Virgin Islands, America Samoa, Guam, the Commonwealth of the Northern Marianas, Wake Island, the Midway Islands, and Johnston Island.

A6: B. Miranda is not eligible for the foreign earned income exclusion because Puerto Rico is not a foreign country.

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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 defined as the country in which the taxpayer is permanently or indefinitely engaged to work as an employee or a self-employed individual, regardless of 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 paid on this income to a foreign government may be eligible for the foreign tax credit. Once the taxpayer chooses to exclude foreign earned income that choice remains in effect for that year and all later years until revoked. Taxpayers may revoke the exclusion for any tax year by attaching a statement. When the exclusion is revoked, the taxpayer may not claim the exclusion again for the next five tax years without the approval of the IRS.

Very Important Note: Generally, most military personnel and their dependents will not qualify for the foreign earned income exclusion.

See the lesson Foreign Tax Credit for more information.

Reinforce the point that it is the taxpayer’s choice to exclude, then they must take action to revoke if they want to stop excluding, but then can’t exclude again for 5 years without approval.

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Exercises (continued) page 15 - 7 Q2: True or False? Alan has lived and worked in China since August 16, 2000. For 2007, China is his tax home. A. True B. False

A2: A. Generally, the tax home is the country in which taxpayers maintain their place of business. Because Alan works in China, it is considered to be his tax home. For taxpayers who do not have a regular place of business because of the nature of the work, their tax home is the place where they regularly live.

How do I determine the tax home?
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. Can someone read question 1? Question 2? Question 3? If the answer to two of the questions is

Page 15-7

Ask if there are concerns about either of the questions.

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“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 country and works a 28-day on/28-day off schedule. He returns to his family residence in the U.S. during his off periods. Does Stan’s employment satisfy the tax home test? A. Yes B. No

A8: B. Stan is considered to have an abode in the United States and does not satisfy the tax home test in the foreign country. He is not eligible for the foreign earned income exclusion.

What is the period of stay requirement?

Page 15-9

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The period of stay is the amount of time the taxpayer stays in the foreign country. To meet the period of stay requirement, the taxpayer must be either: ƒ A U.S. citizen or resident alien from a tax treaty country who is a bona fide resident of a foreign country (or countries) for an uninterrupted period 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, as long as the intention to return to the 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 for the last two years. Zach’s wife, who is also a U.S. citizen, lives with him in Spain. Zach visits the U.S. frequently and intends to eventually live there again. Does Zach 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

Bona fide means: 1. made in good faith without fraud or deceit 2. made with earnest intent : SINCERE 3. neither specious nor counterfeit : GENUINE

Ask students to read the example on 15-9 and discuss as needed.

A9: A. Since Zach went to Spain to work and has established a permanent residence there with his wife he meets the bona fide residence test.

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 employees do not qualify for the exclusion. This includes military pay and payment for such activities as post exchanges, commissaries, and officers clubs. ƒ Compare the list in the text to the list in the 4012. . What are sources of earned income? Services must be performed in a foreign

Refer the class to the 4012 for the Earned Income Table under the Earned Income Credit Tab; it has a list of earned and unearned income.

Have the students read the middle example on page 15-10 and ask for questions?

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 spent working in Florida. Exercises (continued) page 15-11 Q10: Juanita lives in Scotland. She is retired and her income consists of U.S. social security, a pension, and several stock dividends. Does she qualify for the foreign earned income exclusion? A. Yes B. No

Ask if there are questions on anything you have covered.

A10: B. Social security benefits, pension, and dividends do not qualify as earned income, and therefore, Juanita does not qualify for the foreign earned income exclusion.

When do I complete and file Form 2555 and Form 2555-EZ?
To be able to use Form 2555-EZ, the taxpayer must: - Be a U.S. citizen or resident alien who has wages and salaries, but not selfemployment income - Have total foreign earned income of $85,700 or less - Have no business or moving expense deductions Taxpayers who do not meet these restrictions should file Form 2555 to claim the exclusion.

Page 15-11
If available you should display the TaxWise Form 2555 EZ. The volunteers will be using that to prepare returns. It shows the requirements at the top of the form. It would answer the example just below.

Lesson 15 - Page 15 of 18

Example 15-11 Could someone read the example on page 15-11? Exercises (continued) page 15-11 Q11: Mallory is a U.S. citizen who has $34,000 of foreign earned income. She has no other income. Which form should she file? A. Form 2555 B. Form 2555-EZ

Discuss this example.

A11: B. Since Mallory’s earned income is less than $85,700, she can file 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 of its possessions during the tax year. How do I complete Form 2555? Use the following guidelines when 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

Note: Unlike many other topics this is not well covered by the 4012. This is a topic that may also be out of scope for many volunteers.

Lesson 15 - Page 16 of 18

exclusion are: •Self-employment tax •Itemized deductions •Moving expenses After adjusting the exclusion for any deductions allocable to excluded income, enter the amount of the foreign earned income exclusion in parenthesis on Form 1040 line 21. Subtract the amount from the income to arrive at total income on line 22.

Note: This section says, “Selfemployment tax (self-employment income may be exempt from income tax but not selfemployment tax”. This is an advanced tax topic.

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) Taxpayers are sometimes alarmed at how high their total income is. If this happens, reassure the taxpayer that the return is TaxWise Hint: TaxWise automatically totals all the income amounts you enter and displays the result on line 22

Lesson 15 - Page 17 of 18

not finished yet! It is very likely that adjustments, deductions, and credits will considerably reduce the total tax owed.

of Form 1040

Summary Page 15-14
Can someone read each of the points in the summary on page 15-14? Are there any questions or concerns? This is the end of the income section of the course this summary is meant to 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. Note: To ensure a more accurate return, correctly identify income from all sources, and know the difference between taxable and non-taxable 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 reportable on the return and the status of any medical separation pay or pay related 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. Note: Members of the Armed Forces access their W-2’s on the military “My Pay” web site.

What are the types of income?
Service members receive many different types of pay and allowances. Some are includible in gross income while others are 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.

Page 16-1
Refer your students to Table 1 in Publication 3 the Armed Forces Tax Guide

Lesson 16 - Page 1 of 9

What is includible income? Includible items are subject to tax and must be reported on the taxpayer’s tax return. The items listed in Table 1 of Publication 3 are included in gross income, unless the pay is for service in a combat zone or in a qualified hazardous duty area declared by statute. All includible military income will generally be shown in box 1 of Form W-2 and reported on line 7 of Form 1040. What is excludible income? Excludible income does not have to be reported as income on Form 1040, Form 1040A, or Form 1040EZ. The exclusion applies whether or not the item is furnished in kind or is a reimbursement or allowance. For example, the personal use of a vehicle cannot be excluded from gross income as a qualified military benefit. Excludible income will not be included in the amount in box 1 on Form W-2. EXERCISES – page 16-2 Q1: You need to account for enlistment and reenlistment bonuses separately when preparing a service member’s tax return because the tax withholding information is not shown on Form W-2. Refer to Publication 3. A. True B. False Q2: Which of the following items is excludible from service members’ income? A. Student loan repayments B. Basic Allowance for Housing (BAH) or Subsistence (BAS) income C. Basic pay D. Hardship duty pay

Caution: If the amount shown in box 1 of Form W-2 differs from the last Leave and Earnings Statement for 2006, advise the taxpayer to contact the local accounting and finance or payroll office for an explanation.

TIP: If service members were provided a commuter highway vehicle (such as a van) by their employer, refer them to Publication 525, Taxable and Nontaxable Income, and to a professional tax preparer.

A1: B. The payments and withholdings for the enlistment and reenlistment bonuses are reflected on the service member’s Form W-2.

A2: B. The basic allowance for housing (BAH) and basic allowance for subsistence (BAS) are both nontaxable income. Note: Nontaxable here means the same as excludible.

Lesson 16 - Page 2 of 9

What is military separation with 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 service after years of service or medical reasons are given severance pay, which is generally taxable as wages. If the member receives disability severance pay and is later awarded Veteran’s Affairs (VA) disability benefits, up to 100% of the disability severance benefit may be excluded from income. The VA makes the determination that the member is entitled to medical disability benefits, and the determination process can take several 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 terminated through separation or discharge under honorable conditions. Disability 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

Page 16-2

Note: This is a strange topic because the taxability of the pay can change. They receive the money before the VA decides how much will be untaxed. If the determination is late the service member may have already filed their tax return and paid tax. If this happens, once the determination is made the taxpayer can amend the return.

Note: The benefits are not subject to federal or state income tax.

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 the VA to the discharged service member _____. A. Are taxable B. Appear on the taxpayer’s Form W-2 or 1099-R C. Are not included on the taxpayer’s 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? A3: C. Once the VA sends the letter of determination, all pension payments are offset by the disability percentage paid directly from the VA, which are not taxable and not included in any Form W-2.

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?
The President of the United States designates these areas by Executive Order The U.S. Armed Forces are engaging or have engaged in combat. An area becomes a combat zone and ceases to be a combat 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

Page 16-3
Refer your students to the IRS Web site (www.irs.gov) or to the DFAS (Defense Finance and Accounting Service) for a complete list.

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 the combat zone. They do not have to receive the pay while in a combat zone, in a hospital, or in the same year they served in a combat zone.

See IRS Publication 3, Armed Forces’ Tax Guide for the complete list of military pay that can be excluded from service 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: x Presence in a combat zone while on leave from a duty station located outside the combat zone x Passage over or through a combat zone during a trip between two points that are outside a combat zone, and x Presence in a combat zone solely for a member’s personal convenience Exercises (continued) page 16-5 Q4: Which of the following may qualify as service in a combat zone? A. Temporary duty in a combat zone B. Traveling through a combat zone between two points outside of the combat zone C. Presence in a combat zone while on leave from a duty station located outside 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, or commissioned warrant officers who serve in a combat zone during any part of a month (even if it’s only one day) can exclude all of that month’s military pay, including awards and re-enlistment bonuses Reminder: If the service member finds an error on the W-2 the correction must be made by DFAS.

TIP page 16-4: Service personnel are considered to be serving in a combat zone if they are either assigned on official temporary duty to a combat zone or they qualify for hostile fire/imminent danger pay while in a combat zone.

A4: A. Military members are considered to be serving in a combat zone if they are either assigned on official duty to a combat zone or they qualify for hostile fire/imminent danger pay while serving in direct support of a combat zone.

Lesson 16 - Page 6 of 9

x

for which the member becomes eligible while in the combat zone. Military pay earned while hospitalized due to wounds, disease, or injury incurred in the combat zone can also be excluded. 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.

Note: As a volunteer, you need to be exact in entering the W-2 into TaxWise as it appears.

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
The Military Comprehensive Problem in the Publication 678-W has an example of Form W-2 with combat pay excluded. Here’s how a volunteer might help a taxpayer that has combat pay:

Page 16-6
Guide the class through this sample interview. If it is available you should demonstrate entering a W-2 with combat zone pay using the TaxWise software.

What are the laws regarding 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:

Page 16-6

Lesson 16 - Page 8 of 9

Will someone read the first bullet on page 16-6?

Discuss each response.

Summary
What income and expenses received or incurred by members of the Armed Forces are includible/ excludible from taxable income?

Page 16-7
x x x Medical separation pay Combat zone exclusion Community property laws

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 any, adjustments to income a taxpayer is eligible to claim on their return. Adjustments to income are amounts that a taxpayer can 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 these adjustments:
• • • • • • • •

Adjustments are considered Intermediate. However, Basic courses should cover Tuition & Fees Deduction.

Educator’s expense Half of self-employment tax Penalty on early withdrawal of savings Alimony paid IRA deduction Student loan interest deduction Jury duty pay Tuition and fees

Refer to the Volunteer Resource Guide, TaxWise Adjustments to Income Tab 3 for a screen shot of the Adjustments to Income section of Form 1040.

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

Q: What are some of the questions you might ask? 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?

Suggest students customize their Volunteer Resource Guide throughout this lesson, adding notes to remind them about additional information they will need to gather.

How do I handle educator 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 neither can deduct more than their first $250 of qualified expenses.

Page 17-2

Who is eligible Designate students to read How 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, and services), and other materials used in the classroom.

Advise to use Publication 17 or Form 1040 instructions to research specific requirements. What expenses qualify?

Expenses that do not qualify are home schooling or non-athletic supplies for physical education or health courses.

Advise to use Publication 17 or Form 1040 instructions to research specific expenses that qualify.

Lesson 17 - Page 3 of 15

Taxpayer Example
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? • Did you redeem tax-free interest on U.S. Series EE and I Savings Bonds? • Did you receive non-taxable earnings from a Qualified Tuition Program (QTP) or Coverdell Education Savings Account (ESA)? Educator expenses are entered on line 23 of Form 1040.

Page 17-3

Review TaxWise Hint on page 17-3. Advise students to input total qualified expenses and TaxWise will automatically impose the $250 limitation. Note that excess educator expenses may be deductible as employee business expenses (subject to the 2% of AGI limitation) on Schedule A.

At this time we will have a chance to practice interviewing taxpayers that are teachers.

Designate students to read the sample interview on page 17-4 while the rest of the class follows along making notes on Form 13614. Discuss students’ notes.

How do I handle self-employment tax?
Self-employed taxpayers can subtract half of their self-employment tax from their income.

Page 17-4

Note that TaxWise automatically calculates SE tax and SE tax

Lesson 17 - Page 4 of 15

If you establish that the taxpayer or spouse has self-employment income, you will calculate the self-employment tax using Schedule SE. This topic was covered in the lesson on business income.

deduction (Form 1040, line 27) from the information entered on Schedule C-EZ. See Appendix A for Vanessa’s completed Form C-EZ and Form SE

How do I handle penalties for early 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 early withdrawal penalty, it will be reported in box 2 of Form 1099-INT. It may also be reported on Form 1099-OID. Early withdrawal penalty is reported on line 30. In TaxWise, it must be entered on the Interest Statement-Schedule B, early penalty column when you enter Form 1099INT.

Page 17-5

Refer to Publication 678W, page 83 for an example of Form 1099-INT with an early withdrawal penalty.

Review the TaxWise hint, page 17-5 while students review Volunteer Resource Guide, 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?
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.

Page 17-5

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 what tools you will have. Q: Where on Form 13614 is the item about alimony paid? A: Part V, Adjustments Q: Will this item on Form 13614 help you to determine whether the payments made were qualifying alimony payments? A: No, it does not provide any qualification rules. Q: What additional questions might you ask? A: Possible responses: Did your divorce decree require you to make the payments? Were you also required to make child support payments? Q: If you were unsure about whether the 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.

Have students refer to an Intake and Interview Sheet.

Note: Volunteer Resource Guide does not have a tool to help determine the deductibility of Alimony payments. Advise participants that they may want to customize their Volunteer Resource Guide with some notes and references. Caution that alimony payment deductions are matched with alimony income reported by the recipient. A missing or incorrect SSN will result in disallowance of the deduction and/or an audit. Do exercise on page 17-6 as a group aloud.

How do I handle IRA contributions?
An IRA, or Individual Retirement Arrangement, is a personal savings plan that offers tax advantages to set aside money for retirement. Generally, amounts in an IRA, including interest and gains, are not taxed until distributed.

Page 17-6

Note that IRA contributions will also be discussed in a later lesson about the Retirement 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 requirements in order to make IRA contribution and deduct it. Let’s look at some of them?
• Types of IRAs the taxpayer(s)

Eligibility requirements to contribute, page 17-7 Designate students to read each of the four bullets under What are the eligibility requirements for an IRA contribution?, page 17-7 After each bullet is read, ask for examples of questions or other sources of information the volunteer might use to gather the necessary information Possible sources of information:
• Taxpayer interview: Q: Was

contributed to. Only contributions to traditional IRAs are deductible.
• Age limit: Taxpayers can contribute to a

traditional IRA only if they are less than 70-1/2 years of age at the end of the tax year.
• Compensation: Individuals must have

taxable compensation (wages, selfemployment income, commissions, taxable alimony, taxable scholarships or fellowships).
• Time limits: Taxpayer(s) must make that

your contribution to a traditional, Roth, SEP or SIMPLE IRA?
• The taxpayer’s puts his/her

they make IRA contribution(s) for TY 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.

TaxWise will automatically screen taxpayers for these eligibility requirements provided that the information you gather is entered correctly. 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

Note that taxpayers can deduct a contribution they are planning to make before April 15, 2008. If they fail to make it, however, they will have to file an amended return.

Let’s take a look at Form 13614.

Have students review a Form 13614. Suggest that participants customize their Volunteer Resource Guide with notes to prompt them to ask.

Q: What item addresses IRA contribution deduction? A: Part V, Adjustments, Item 1 (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 Let’s read about contributions.

Allow time to read How much can a taxpayer contribute to an IRA and What is the compensation requirement? Including examples and exercises, pages 17-7 & 8. Have students use the index of Publication 17 to find the answer.

This information is mainly for your awareness, since TaxWise automatically applies the limitations.

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 taxpayer may be able to deduct their full contribution. The deduction is phased out at certain income levels. Let’s take a look at the Volunteer Resource Guide, Tab E. Adjustments.

Briefly review the Volunteer Resource Guide, Adjustments Tab E, IRA Deduction Phaseout Charts pages. Note that all the income levels (with the exception of MFS) are above 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 Deductible and Nondeductible Worksheet. (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 Nondeductible Worksheet.

If part of the contribution is not deductible, you must complete Form 8606 for the taxpayer’s record. TaxWise will do this automatically.

The IRA deduction is entered on line 32 of Form 1040.

Although there is not a taxpayer scenario regarding Vanessa contributing to an IRA, her sample return in Appendix A shows that she has $600 IRA Deduction

Demonstrate how her $600 contribution to a traditional IRA 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 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 ask you to obtain the information from the source that you will have at your site.

Page 17-10

Have participants open Publication 17 to Chapter 19, 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 consult the text that follows this table. 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 that this would not be a common deduction for TCE customers.

As Table 19-1 indicates, the amount of the student loan interest deduction is phased out at certain income levels.

Now we are going to discuss how to go about gathering the information to determine if a taxpayer qualifies for the student loan interest deduction. Q: Where on Form 13614 is this deduction addressed?

Have students review the Intake 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 used only for qualified educational expenses? Lenders are required to issue Form 1098-E to persons who paid more than $600 in student loan interest.

If available, have students look at a copy of Form 1098-E. Remind participants that payments of less than $600 will not be reported on Form 1098E, but may still be deductible. It 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
Use the Student Loan Interest Deduction Worksheet for F1040 to figure the deduction and report it on line 33. If using TaxWise, link from line 33 to 1040-WKT2. Let’s practice interviewing a taxpayer about their student loan interest.

Page 17-13

Designate participants to read the roles of Brenda and the volunteer. Instruct the rest of the class to take notes on Form 13614. Discuss notes taken and why.

Is pay for jury duty an adjustment to income?
As you learned earlier, jury duty pay is included in other income reported on Form 1040, line 21. If an employee receives regular wages during jury duty, often they must turn their jury pay over to the employer. In this case, they must include

Page 17-14
Note that jury pay can only be deducted if it is included in income on line 21. Note that TaxWise has a special entry line for jury pay under “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?
Taxpayers can deduct up to $4,000 in qualified tuition and related expenses paid during the tax year. The amount of the deduction is determined by the taxpayer’s filing status, MAGI, and other factors. This deduction is phased out at certain income levels.

Page 17-14
Refer to Volunteer Resource Guide Adjustments Tab 3 or Publication 17 for phase-out chart. Note that as with IRA contributions and student loan deduction, phase-out limitations are above general VITA limitations. Review Vanessa’s Form 8917 located in Appendix A.

Form 8917, Tuition and Fee Deduction, will help you compute the taxpayer’s Modified 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 expense.

Allow time to read What are 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 eligible educational institution will receive Form 1098-T. This information return shows qualified expenses paid and grants 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 only one benefit for the same expense, you must help them choose whether it would be 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.

Form 1098-T, page 17-16 Take a look at Vanessa’s Form 1098-T located in Appendix A.

Review How do I use TaxWise to compare education benefits? Page 17-16.

Taxpayer Scenario
Let’s proceed with interviewing our taxpayer, Vanessa Franklin.

Page 17-17
Designate students to read the 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
The other adjustments on Form 1040 are beyond the scope of the VITA/TCE program and will not be covered in this lesson

Page 17-18

Total Adjusted Gross Income
Adjusted Gross Income (AGI) is the amount of income that the taxpayer will carry forward after all adjustments have been subtracted from the total income.

Page 17-18
Vanessa’s completed Form 1040, page one is in Appendix A.

Taxpayer Example (Enter in TaxWise)

Page 17-18
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
Quality review is a vital component of the tax preparation process. It must be performed on every return we prepare. Let’s look at how we would look at this part of the return.

Page 17-19
Quality Review pages 17-18 &19. Designate participants to read each bullet point in the Quality Review, pages 17-19 & 20 as the class reviews Form 8158 and determines which items would be covered.

Lesson 17 - Page 14 of 15

Summary
In this lesson, you learned how to identify and work with these adjustments to income: • 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.

Page 17-20
Solicit questions and comments.

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 who move for PCS.

To deduct moving expenses as an 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 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.

Page 18-1

What does a permanent change of station include for spouses and dependents? If the Armed Forces move service members and their spouses or dependents to or from 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?

Note: The service member and his family may be in different locations.

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 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:

Page 18-2

Lesson 18 - Page 2 of 7

• •

Moving household goods and personal effects Reasonable travel and lodging expenses

To qualify as “reasonable,” the route taken must be the shortest, most direct route 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.

TIP page 18-2: Publication 521, Moving Expenses, has detailed information on deductible and nondeductible moving expenses. This publication also contains a special section on Members of the Armed Forces.

How do I handle military 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 (DITY) move; the most common form of military move. The military provides an incentive payment equal to 95% of the estimated cost to the government for DITY moves. When the move is completed, the service member provides receipts and paperwork to substantiate authorized expenses. The net financial profit is taxable, and is reported on a separate Form W-2.

Page 18-2

Note: If TaxWise is available you can show this. It goes in as wages on line 7. The calculation looks like this: Gov’t est Actual expenses (95%) of Gov’t Est Actual expenses Income to Jones $2500 $1750 $2375 $1750 $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 government’s estimate) but Box 1 on Form W-2 will show only $625 ($2,375 minus $1750) for the DITY move. Captain Jones 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?

.

Note: moving expenses are an adjustment to income on the front of the 1040. The taxpayer does not need to itemize.

Lesson 18 - Page 4 of 7

How do I calculate the adjustment? Deductions can only be claimed for the 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. • All reimbursements and allowances are included on line 4. • If the expenses are greater than reimbursements, the difference will be carried to line 26 of Form 1040, and reduce the taxpayer’s Adjusted Gross Income. • If all reimbursements were nontaxable allowances, then no amount is included in line 7 wages, even if the reimbursements were greater than the allowable expenses. When this occurs, Form 3903 is not needed.

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, even if they exceed allowable expenses.

TaxWise Hint page 18-4: Link from line 26 of Form 1040 to access Form 3903, Moving Expenses. Check the box near the top of the form to indicate an Armed Forces PCS move. Line 2 is broken into two separate entries: one allows you to enter the miles traveled and compute the standard mileage amount; there is a separate line for “other travel costs.” If you need to add together expenses or reimbursements, link from lines 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
Service members can deduct allowable moving expenses either in the year in which they were incurred or the year in which they were paid, whether or not there was reimbursement by the government. 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?

Page 18-4
Go through this Sample Interview with the class to determine if the Sierras had any deductible moving expenses. Note this is the Sierra tax return that is referred to on page 18-5

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
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.

Page 18-6

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 taxpayers understand how their tax is computed and reported.

Instruct students to find standard deduction amounts in Publications 4012 or 17.

Q: Using your Publication 4012, under which tab can you find the standard deduction for most people? What is a deduction? A deduction reduces the amount of the taxpayer’s adjusted gross income. 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? A standard deduction is a benefit that eliminates the need for many taxpayers to itemize actual deductions, such as medical expenses, charitable contributions, and

A: Volunteer Resource Guide, Deductions, Tab F.

Page 19-1 Let’s take a closer look at standard deductions.

Page 19-1

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 taxpayer with a filing status of head of household? Who cannot take the standard deduction? x x Married filing separate Nonresident or dual status alien Review the situations when a taxpayer may not be allowed to take the standard deduction on page 19-1. A: Publication 4012, Deductions, Tab F, $7,850.

Taxpayers benefit from the standard deduction if the amount is more than their total allowable itemized deductions. What is an itemized deduction? Itemized deductions are deductions for certain expenses that are listed on Schedule A (Form1040). Page 19-2 Itemized deductions are covered in detail in the next lesson.

How does age or blindness affect 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 older at the end of the year. A taxpayer is considered 65 on the day before their 65th birthday. Therefore, a taxpayer can take a higher standard deduction for 2007, if they

Page 19-2

Review the TaxWise Hint on page 19-2.

Lesson 19 - Page 2 of 5

were born before January 2, 1943. If a taxpayer is blind on the last day of the year and the taxpayer did not itemize deductions, then they are entitled to a higher standard deduction. Refer to the footnote on the table in Publication 4012, Tab F. 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 Student Guide. Have a student read aloud and check your answers at the end of the lesson.

How do I determine which deduction to use?
If not required to itemize taxpayers should estimate their deductions allowable for itemizing and take the larger of the two options. Examples:

Page 19-3
See list of things to include on page 19-3.

Review all examples on page 19-4. A: If they file jointly and take the standard deduction, it will equal $10,700. If they file separately, they can each take a standard deduction of $5,350. A: His standard deduction is $6,650. Have someone read the third example and discuss. Page 19-5

Q: Loretta and Chauncey are married. They are under 65 and neither is blind. Neither can be claimed as a dependent on someone else’s tax return. What would their standard deductions be? Q: Rupert is 78. He lost his wife 10 years ago, so he is filing as Single. He is not blind and he cannot be claimed as a dependent on someone else’s return.

What about individuals who can be 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 than the regular standard deduction amount for the filing status used. If the dependent taxpayer is 65 or older and/or blind, this calculated standard deduction will be increased by $1,300 ($1,050 if married or 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. Show students where to check the box for a dependent being claimed by another taxpayer on the Main Info Sheet, TaxWise section in Publication 4012, Tab 1 and/or on TaxWise.

Taxable Income and Tax
Taxable Income (TI) is the result of reducing AGI by the standard deduction or the total itemized deductions, and the exemption 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

Page 19-5
Refer to lines of Form 1040, on blow up, TaxWise, and/or in Publication 4012, Tab 4.

Lesson 19 - Page 4 of 5

Example: Mr. and Mrs. Brown are filing a joint return. Their taxable income is $25,300. First find the range that includes their income: $25,300-$25,350. Then read across to the column that applies to their filing status: MFJ/Tax $3,016. Discuss example on page 19-6 and have students look up tax in table of Publications 678-W, 17 and/or Form 1040 Instructions.

Taxpayer Scenario
Let’s take a minute to practice asking interview questions

Page 19-6
Have two volunteers role play 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
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. All of this will make it easier for you to help taxpayers understand how their deduction is computed and the impact on their tax. You should also understand that the tax computation is based on taxable income. The tax may be further reduced by tax credits to be covered in an upcoming lesson. You are now ready to work with taxpayers’ personal deductions to get the lowest possible tax.

Page 19-8

Point out that itemized deductions are in the next lesson but that they are an intermediate/advanced topic and that if students do not certify at that level they are not allowed to do returns for taxpayers that itemize and must refer them to a volunteer that is certified in that area or refer them to a professional tax preparer.

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 that is taxed. Most taxpayers have a choice of taking a standard deduction or itemizing deductions. Taxpayers should use the type of deduction that results in the lowest tax.

Review the difference in Itemized and Standard Deductions taught in the previous lesson.

You have a choice unless using MFS status. See TIP in student text page 20-1. Itemized deductions include amounts paid for qualified: • Medical and dental expenses • Certain taxes you paid • Mortgage interest • Gifts to charity • Certain miscellaneous deductions

Explain Schedule A is used to calculate itemized deductions. Review some items on Schedule A. Display on TaxWise if available or refer to Volunteer Resource Guide, TaxWise section, Tab 4.

Medical and Dental Expenses
Q: Are all medical and dental expenses deductible? A: Unreimbursed medical and dental expenses totaling more than 7.5% of the AGI are deductible.

Page 20-2
Note: Itemized deductions reduce the amount of income taxed. Use standard or itemized deductions, whichever results in the lowest tax. 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. Now let’s review the types of medical and dental expenses covered.

particular expense is deductible, then politely refer the taxpayer to a professional tax preparer. The taxpayer may be correct, but you should not deduct an expense unless you are sure it is deductible. Page 20-2

Example 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 20-3.

Review answer when complete. A1: The total of qualified medical and dental expenses is $3250.

Taxpayer Scenario
Remember in the previous lesson that Vanessa indicated that she had expenses that indicated that she may be able to itemize rather than take the standard deduction. As we go through this lesson we will gather Vanessa’s expenses and enter them on the Schedule A. Are there any questions about Medical and Dental expenses before we move on to the next portion of the Schedule A?

Page 20-3
Ask two students to read the Sample Interview. Refer to the appropriate screen shots under Tab 4 of Publication 4012 and/or demonstrate entering Vanessa’s medical expenses in TaxWise.

Taxes
This topic helps you calculate and accurately report deductible taxes on Schedule A. What taxes are deductible? Deductible taxes are reported on lines 5 through 9 of Schedule A. See Tab F in your Publication 4012.

Page 20-4

Page 20-4

Lesson 20 - Page 2 of 10

Review state and local income taxes or general sales tax. Review real estate taxes. Review personal property taxes. Review other taxes. Example Suppose Wayne pays his mother’s property taxes. He cannot deduct the tax payments because he was not liable, and his mother cannot deduct them because 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? Explain the general sales tax option.

Line 5, Schedule A.

Line 6, Schedule A. Line 7, Schedule A. Line 8, Schedule A. Page 20-5 Review the example. Explain there must be a legal liability and payment must be made by the taxpayer.

Page 20-5 Compare state and local income taxes withheld to the general sales tax option to determine the best tax advantage. Refer to Pub. 17 chapter on Taxes for expenses that are not deductible.

Foreign income taxes paid may be claimed on line 8. If customer has paid foreign 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
Now let’s get back to our taxpayer Vanessa Franklin in the Taxpayer Scenario in the student text (page 20-6). You will find a copy of Vanessa’s Form 1098 that lists her real estate taxes, in the appendix at the back of your student guide.

Page 20-6
Ask two students to role play the Vanessa scenario regarding Vanessa’s tax deductions. Refer to the appropriate screen shots under Tab 4 of 4012 and/or demonstrate entering Vanessa’s deductible taxes in TaxWise.

Interest
What type of interest is deductible? Home Mortgage Interest, Points (paid as a form of interest), Qualified Mortgage Insurance Premiums, and Investment Interest.

Page 20-7

Review Form 1098 – Mortgage Interest Statement: . Amount of Interest paid . 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 From 1991 through 1998, Alfredo and Cindy 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

Page 20-8 Review & discuss the example.

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 Points are the charges paid by a borrower and/or seller to a lender to secure a loan. They are also called: ƒ Loan origination fees (including VA and 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 the use of money) can be deducted on Schedule A. Qualified Mortgage Insurance Premium 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 ƒ AGI between $100,000 and $109,000 eligible for reduced deduction Could someone read exercise 4 on page 20-9 regarding interest? Page 20-8 Refer students to Publication 17 the Interest Expense chapter to help determine if points are fully deductible.

Advise students to see Publication 17, “Items You Cannot Deduct”. Review the items with class. Page 20-9

Ask participants if there are any questions on Qualified Mortgage Insurance Premiums. Discuss the potential answers. A4: $2180.

Taxpayer Scenario
Now let’s get back to our taxpayer Vanessa Franklin.

Page 20-9
Ask for two volunteers to read the 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
Next we will discuss gifts to charity or charitable donations. Can anyone name a charitable organization? This topic helps you identify and report a taxpayer’s deductible gifts to charity, and explain to taxpayers how they need to 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 deductible? Example Susan ran a 10K organized by the Chamber of Commerce to benefit a qualified 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

Page 20-10

Refer the students to the Contributions chapter in Publication 17 and review the first column in Table 24-1.

Page 20-11

Review the example use student participation.

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 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. Explain the records a taxpayer should keep for charitable contributions. Let’s work Exercise (Q5) on page 20-13. Review student text pages 20-12 thru 20-13 on what records to keep for charitable contributions. Review answers. Answer 5: $632. Page 20-12

Taxpayer Scenario
Let’s review Taxpayer Scenario in student text on page 20-13. This is an overview of Vanessa’s scenario with her charitable donations.

Page 20-13
Refer to the appropriate screen shots under Tab 4 of 4012 and/or demonstrate entering Vanessa’s charitable contributions in TaxWise.

What are casualty and theft losses?
Refer taxpayers to professional tax preparer.

Page 20-13
Explain Casualty & Theft Losses are outside the scope of volunteer services.

Miscellaneous Deductions
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

Page 20-14

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taxpayer’s AGI can be deducted. Other miscellaneous deductions are deductible regardless of AGI. Which deductions are subject to the 2% limit and which deductions are exempt from the 2% limit? Review student text on page 20-14 listing deductions subject to 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
Now let’s review the miscellaneous expenses that Vanessa incurred.

Page 20-15
Refer to the appropriate screen shots under Tab 4 of the Volunteer Resource Guide and/or demonstrate entering Vanessa’s miscellaneous expenses in TaxWise.

Completing Form 1040, Lines 40 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.

Page 20-16

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
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.

Page 20-16

Summary
Medical and Dental Expenses Qualified medical and dental expenses are 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.

Page 20-17
Discuss each topic briefly and ask the students if they have questions.

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. 2. Subtracts line 40 from line 38 (AGI) and displays the result on line 41. 3. Calculates the exemption deduction on line 42.

Optional: Demonstrate on a comprehensive lesson from 678-W how to enter itemized deductions on TaxWise.

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 them on a tax return. You will learn the deductible and nondeductible expenses for the Armed Forces, such as uniforms, education and travel that are related to working as a member of the Armed Forces. These expenses may be reported on Form 2106 with one exception. Reservists deduct them on Schedule A as a Miscellaneous Itemized Deduction subject to the 2% limit. To determine itemized deductions of special interest, use the interview techniques and tools discussed in the Screening and Interviewing lesson. Ask taxpayers if they had any work-related expenses, and whether they received any reimbursements. Caution: As you go through this lesson remind the students that Congress is allowing taxpayers to deduct the costs they incur in generating taxable income. In general, if the costs are not connected to generating taxable income there is no deduction. Remind the students that we are talking about unreimbursed expenses, or expenses that exceed the reimbursement they receive. Stress the 2% “limit”, or 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?
Military personnel can deduct the cost of buying and maintaining uniforms if the uniforms are: specifically required as a condition of employment, and not adaptable to general use as regular clothing.

Page 21-1
Discuss these two basic rules for uniforms.

Deductible vs. non deductible uniform expenses? 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 when off duty. Military regulations prohibit off-duty wear of certain uniform; service members can deduct the cost and upkeep of those uniforms. In addition, service members can deduct the cost of required items that do not replace regular clothing. The same rules apply for active duty personnel and reservists.

Discuss required use vs. allowed use and how it differs from a civilian.

Remind students that service members must reduce the deductible expenses by any nontaxable uniform allowance or reimbursement they receive

Discuss uniform cost vs. normal upkeep. See example on 21-1. Read and discuss each of the 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 page 21-2?

Discuss the answer.

Lesson 21 - Page 2 of 14

What are work-related educational expenses?
Will someone read the introductory paragraph?

Page 21-3
So, what are deductible 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 education? Taxpayers cannot claim an employee business expense for education that is: ƒ Needed to meet the minimum educational requirements for their trade or business, or ƒ Part of a program of study that will qualify them for a new trade or business. Example Sgt. Vance Ventura, an Army pilot, incurred educational expenses to obtain an accounting degree. He cannot deduct his accounting degree expenses on Schedule A because the degree qualified him for a new trade or business. Exercises Question 4: For educational expenses to be claimed as an employee business expense deduction, the education must help the taxpayer qualify for a degree. A. True B. False

Page 21-3

Caution: If your taxpayer is not itemizing, qualified education expenses should be claimed elsewhere as an adjustment or credit. See Lesson 24 – Education Credits.

Page 21-3 Consider a scenario that would make Sgt. Vance Ventura’s accounting degree deductible?

Page 21-3 Answer 4: B. The education does not have to lead to a degree as long as it helps maintain or improve skills or knowledge needed for the taxpayer’s current job.

Lesson 21 - Page 3 of 14

What are deductible and nondeductible 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 they are: ƒ Items of a personal nature, such as the cost of dinner on campus while the taxpayer attends evening classes ƒ Items of a capital nature, such as computers or desks

Page 21-3

Remind students that deductible educational expenses must be reduced by the amount of educational reimbursement or allowance received.

Exercises (continued) Question 5: Have someone read.

Page 21-4 Answer 5: B. Educational expenses may be claimed as miscellaneous deductions if the education improves the skills used in the taxpayer’s current job. Page 21-4

What about travel for education? 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): Question 6: Major Lindsey Manchester is stationed in Manila. On weekends, she drives to Taal to take lessons in traditional Philippine dance. Can Major Manchester deduct these travel expenses? A. Yes B. No

Page 21-4 Answer 6: B. Major Manchester cannot deduct the cost of traveling to Taal on weekends because the travel is not workrelated.

What are travel expenses?
Travel expenses must be ordinary and necessary expenses of temporarily traveling away from home for a person’s job and must be greater than the total of any advances, allowances, and reimbursements 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 Ordinary and necessary expenses include: ƒ Airfare ƒ Car rental ƒ Costs of operating and maintaining a vehicle ƒ Meals

Page 21-4

Give the students other examples of ordinary vs. necessary.

Page 21-5 Discuss these examples.

Lesson 21 - Page 5 of 14

ƒ ƒ ƒ ƒ

Lodging Taxi fare Laundry and/or dry cleaning Tips

What is meant by “away from home”? “Away from home” has a slightly different meaning for military than for nonmilitary taxpayers. For service members, “home” is the duty station to which they are permanently assigned (which can be a ship or a base). It includes the entire city or general area where the post of duty is located. Service personnel are considered to be away from home if they are away from their permanent duty stations for a period substantially longer than an ordinary day’s work. Service members may deduct business related travel expenses incurred while traveling away from home. Service members who are on permanent duty assignments overseas are not traveling away from home, and cannot deduct expenses for meals and lodging.

Page 21-5 TIP page 21-5: For Navy personnel assigned to permanent duty aboard a ship that has regular eating and living facilities, the ship is considered to be “home” for travel expense purposes. TIP page 21-5 If the Armed Forces member does not claim reimbursement for expenses that they are entitled to, no deduction for those expenses may be claimed.

Refer to Publication 3, Armed Forces’ Guide, for a complete list of “away from home” expenses.

When are travel expenses deductible? For travel expenses to be deductible: ƒ ƒ ƒ There must be a work-related purpose for the travel They must be deemed as the “ordinary and necessary” costs of traveling away from home The expenses must be greater than the total of any advances, allowances, and/or reimbursements service members received

Page 21-5

Lesson 21 - Page 6 of 14

What are work-related travel expenses? Examples of work-related travel expenses for members of the Armed Forces include: ƒ ƒ ƒ ƒ ƒ Expenses incurred while on TDY or TAD if away from home (ship, base, or station) Expenses of a reservist away from home overnight to attend drills Meals and lodging of a reservist temporarily called to active duty Travel expenses, including meals and lodging, incurred in connection with deductible educational activities Travel expenses incurred when carrying on official business while on “no cost” (to the government) orders

TIP page 21-5: TDY stands for temporary duty and TAD stands for temporary additional duty.

EXERCISES (continued): Question 7: Which of the following individuals is entitled to deduct travel expenses? A. Sgt. Bullock, who commutes from his 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 reservists’ expenses? Military reservists temporarily called to active duty who must remain away from home to perform their duties may claim unreimbursed travel expenses such as meals and lodging. This applies: ƒ As long as the duty occurred under

Page 21-6 Answer 7: C. Only Major Forrest can deduct the costs of traveling overnight to attend a reservists’ meeting.

Page 21-6

Lesson 21 - Page 7 of 14

ƒ

competent orders, and 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? Military reservists who must travel more than 100 miles away from home and stay overnight to attend a drill or reserve meeting may be able to deduct their travel expenses as an adjustment to income rather than as a miscellaneous itemized deduction. The amount of expenses that can be deducted is limited to the: ƒ Federal rate for per diem (for lodging, meals, and incidental expenses) ƒ Standard mileage rate of 48.5 cents per mile (for car expenses) plus any parking fees, ferry fees, and/or tolls Any expense in excess of these rates and expenses that do not qualify for the adjustment to gross income deduction can be claimed only as a miscellaneous itemized deduction subject to the 2% limit. See “local transportation” later in this lesson. Page 21-6

Note: The following discussion covers reservists whose expenses may not be subject to the 2% limit. TIP page 21-7: Military Reservists include members of the U.S. Armed Forces (Army, Navy, Marine Corps, Air Force, Coast Guard Reserve), the U.S. Army National Guard; the U.S. Air National Guard; or the Reserve Corps of the U.S. Public Health Service.

TaxWise Hint page 21-7: 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: Mary is an Army Reservist. She lives in a town that is 120 miles from Base A, where she normally reports for Reserve drills or meetings. During 2007, she also occasionally traveled to Base B, which was only 40 miles from her home. Mary may claim the travel expenses she incurred going to Base A as an adjustment to income. Mary’s remaining expenses for travel to Base B may qualify as an itemized deduction on line 20 of Schedule A (Form 1040). This deduction will be subject to the 2% AGI limitation. What is the deduction for meals? 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.

Page 21-7 Discuss this example to illustrate the reserve component vs. Schedule A employee business expenses. Note: Most military members are familiar with the per diem concept. Reminder: Commuting, the expenses of getting to and from your regular place of work are not deductible. Page 21-7

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 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? 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.

Page 21-7

Page 21-7

EXERCISES (continued) Question 8: Which of the following costs are considered

Page 21-8 Answer 8: C. Taxi fare to travel on work-related business while

Lesson 21 - Page 10 of 14

to be a local transportation expense? A. Daily meals taken during a week-long training session while on duty 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 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 Sgt. Manuel Vallejo attended a meeting of an Armed Forces reserve unit. The meeting is considered to be a second place of business because it is held on one of Sgt. Vallejo’s regular work days. He can deduct

not away from home is an allowable local transportation expense.

Page 21-8

Page 21-8 Discuss this example. It is meant to illustrate the difference between commuting to work and traveling to a different work 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 2106?
If the service member has job-related travel, meals or local transportation expenses, or other expenses which are greater than reimbursements, Form 2106 must be used to calculate the itemized deduction.

Page 21-9
TIP page 21-9: The shorter Form 2106- EZ can only be used by employees who received no reimbursement from their employer, and who use the standard mileage rate. In most cases, military members with work-related travel expenses will have received reimbursement, and will need to use the more complete Form 2016.

Form 2106 is not required if the taxpayer is claiming only job-related expenses for uniforms, professional dues or education, and no reimbursement was received. To determine whether service members need to complete Form 2106, consider the following factors: ƒ Did the service member have workrelated travel, meals or local transportation expenses? ƒ Did the service member receive an allowance or reimbursement from the military? ƒ Did the amount of travel expenses exceed the amount of the reimbursement or allowance? 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 Capt. Glendale traveled from his duty 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.

Reminder: Taxpayers can only claim unreimbursed expenses. Refer the class to the appropriate page in the Volunteer Resource Guide or display the TaxWise process if available.

Page 21-9 Discuss with the students.

Lesson 21 - Page 12 of 14

How do I complete Form 2106?
Use Form 2106, Employee Business Expense, to calculate business and jobrelated 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 “placed in service” date is the date the taxpayer began using the vehicle for business. ƒ Section B (line 22) is for taxpayers who choose to use the standard mileage rate for the vehicle. ƒ 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 to a paid preparer. Part I, on the first page of Form 2106, is divided into 3 steps: 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.

Page 21-9

TaxWise Hint page 21-9: Once you enter the total mileage on line 22 of Form 2106, TaxWise will apply the standard mileage rate and carry the amount to line 1 of the form. You can link to a scratch pad from line 22 if you need to add up mileage amounts. Remind students of the scope of the VITA program.

Demonstrate the process in TaxWise if available.

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
This lesson explained itemized deductions of special interest to the military and how to claim them. 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

Page 21-13
Provide a thorough review of each of the bullets in the summary using examples from class and your experiences.

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 expense?
Deductible travel expenses include “ordinary and necessary business expenses for your job,” such as transportation, meals, and lodging while conducting business.

Page 22-1

Note: Ordinary and necessary is 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 expenses related to travel Lodging and transportation connected with 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, a taxpayer cannot deduct expenses for a family member who goes along on travel for pleasure.

Note: Commuting between home and work is NOT a business expense. Give examples.

TIP page 22-2: United States Foreign Service employees who are on 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. Page 22-2

Tax Home 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.

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One cannot deduct expenses for travel away from one’s tax home for any period of temporary employment of more than 1 year. Example 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 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 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. Page 22-2 Page 22-2 Page 22-2

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What records must the taxpayer 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.

Page 22-3

Are there alternative methods for figuring some expenses?
Vehicle Expenses If a taxpayer has qualified vehicle expenses, you figure those in Part II of Form 2106. There are two methods: the actual expense method and the standard mileage rate. The actual expense method figures the deduction based on a variety of factors, including gasoline, oil, repairs, insurance, rentals, and may even involve depreciation or the value of a vehicle provided by the taxpayer’s employer. 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

Page 22-3

TIP page 22-3 See the instructions for Form 2106 to determine if a taxpayer is subject to DOT hours of service. TIP page 22-3 See Publication 463 for details on how to figure deductions using the standard meal allowance, including special rules for partial days or travel and for transportation workers.

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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 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 Question 1: Which of the following is true for meals and Page 22-4 Answer 1: C. Taxpayers may report the actual amounts for Page 22-3

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entertainment expenses? A. Taxpayers may deduct meal expenses for family members if the travel can be proven to be primarily business related. B. Taxpayers can deduct 100% of meal and entertainment expenses that are not subject to DOT hours of service. C. Taxpayers may report the actual amounts for meals/entertainment and for incidental expenses or use the standard method for one or the other. D. All of the above.

meals/entertainment and for incidental expenses or use the standard method for one or the other. Show the students the information behind the TaxWise Deductions tab in the Volunteer Resource Guide. Demonstrate this with the TaxWise software (if available). Note: Determine if a Form 2106 is needed, then determine if the Form 2106-EZ is appropriate. Answer 2: False. All business expenses must be supported by records.

Question 2: True or False: Taxpayers who can use the standard method for calculating business mileage need not produce records proving prove the time, place, and business purpose of the travel.

How do I report business expenses?
Business expenses are reported on Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses. The result from Form 2106 or 2106-EZ is reported as a miscellaneous itemized deduction on Schedule A of Form 1040. To determine if a taxpayer must file Form 2106, ask the taxpayer the questions shown 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

Page 22-4
TaxWise Hint page 22-4: Once you enter the total mileage on Line 22 of Form 2106, TaxWise will apply the standard mileage rate and carry the amount to Line 1 of the form. Hint: You can link to a scratch pad from Line 22 if you need to add up mileage amounts.

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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 business travel expenses except meals/entertainment, and Column B lists only meals and entertainment. x Step 1: Complete for all taxpayers who must use Form 2106 x Step 2: Complete only if the employer reimbursed the taxpayer and the reimbursement is not included as income on Form W-2, Box 1 x Step 3: Figure expenses to deduct on Schedule A: - Subtract the amount of reimbursement from the expenses - Calculate meal expenses in Column B - Determine the total deduction to be entered on Schedule A

TIP: page 22-5 The final deduction amount on Form 2106 may be reduced when you apply the 2% AGI limit on Schedule A. TIP: page 22-5 Special rules apply to figuring the final amount for business travel expense deductions for ministers, armed forces reservists, certain state and local officials, qualified performing artists, and disabled employees. See Form 2106 Instructions to determine if a taxpayer will qualify under any of these categories.

Lesson 22 - Page 7 of 8

EXERCISES Question 3: You should complete Step 2 of Form 2106 when the taxpayer receives ___. A. All reimbursements for expenses from the employer 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

Page 22- 5 Answer 3: B. Step 2 is used only if the employer reimbursed the taxpayer and the reimbursement is not included as income on the taxpayer’s tax return.

Summary
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.

Page 22-5

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 credit. Your time and effort may result in a lower tax for the taxpayer. 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. Stress to the students their knowledge will help educate the taxpayer and may reduce their tax.

Caution to students: Don’t confuse this credit with the child tax credit! Allow the students to look at 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.

Notice that the child and dependent care credit expense is addressed.

Lesson 23 - Page 1 of 12

What is the child and dependent care 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 maximum of 35% of the taxpayer’s qualified expenses. 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” 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 provided dependent care benefits appear in 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.

Page 23-1

Let students know that expenses will be addressed in detail later during the lesson.

Emphasize this is a key point about this credit.

Refer students to look at Form W-2 and locate box 10.

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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) ƒ Form 2441 and instructions. ƒ Publication 17

Have students locate each product.

How do I determine if a taxpayer is 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 taxpayer must satisfy all five to qualify for the credit.

Page 23-2

Stress this is an important point.

Lesson 23 - Page 3 of 12

What is the qualifying person test?
A qualifying person can be any of the following: ƒ A qualifying child who is the taxpayer’s dependent and under age 13 when the care was provided. ƒ Dependents who were physically or mentally unable to care for themselves and for whom the taxpayer can claim a dependency exemption. This person must have lived with the taxpayer for more than half the year. No age limit applies if the qualifying child dependent is permanently and totally disabled. ƒ A spouse who is physically or mentally unable to care for themselves.

Page 23-2
Point out that only the custodial parent can take this credit. If the child is not being claimed as a dependent by the taxpayer because the non-custodial parent is taking the exemption under the special rules for children of divorced and separated parents, only the custodial parent may treat the child as a qualifying person for this credit. For more, see 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 income or filed a joint return. Refer to this example in the lesson on page 23-2

Here is an example: Jim paid someone to care for his wife, Janet. Janet is physically unable to care for herself. 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. Let’s take a minute to practice asking interview questions.

Team up the students or get two volunteers to role play the scene in the lesson, page 23-3. Ask for a volunteer to answer. A: Even though she is over age 13, she meets the test because she is unable to care for herself.

Q: Why is Dorothy’s daughter a qualifying person?

Once you’ve determined if the taxpayer had eligible expenses for the credit, check the appropriate box on the Intake and Interview Sheet.

What is the earned income test?
The taxpayer (and spouse, if married) must

Page 23-3

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 to care for themselves? The rules governing the credit treat such a spouse as having earned income for any month they are a full time student or are physically or mentally unable to care for themselves. Page 23-3

The income is considered to be $250 for each 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 interview questions.

State that a full time student is defined as enrolled and attending a school for the number of hours or classes the school defines as full time. The spouse must be a full time student for some part of five calendar months during the year.

Follow the same guidelines 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 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.

Page 23-4

What are examples of work related expenses? Some examples of work related expenses include: ƒ The cost of care outside the home for 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 workrelated? Expenses that do not qualify include amounts paid for food, clothing, education or entertainment.

Page 23-4 Ask for a volunteer to read the Krista example on page 23-5.

Page 23-5

Point out that small amounts of these expenses can be 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

ƒ ƒ

or a higher grade. The cost of overnight camp. 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 employees? Before moving on to the next test, we will spend a few minutes addressing what happens when taxpayers pay someone to provide care services in their home. When this happens, the taxpayer may be required to pay household employment taxes and they may be considered a work related expense. If the employee earned less than $1,500 for the year and the taxpayer did not withhold income tax, employment taxes are not required to be paid and no W-2 needs to be provided. What if the taxpayer makes payments to a relative? These payments may qualify as work related expenses if the taxpayer does not claim the relative as a dependent. Page 23-5

Refer to Employment Taxes for Household Employers in Publication 17 for more information.

Refer taxpayers who did not pay employment taxes or who are unsure about these requirements to Publication 926, Household Employer’s Tax Guide or to a professional tax preparer.

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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?
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 months of the year and paid more than half the cost of providing a home that was the main home of the qualifying person for more than half the year.

Page 23-6

Point out that for a taxpayer whose spouse died during the year and has not re-married a joint return must usually be 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 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.

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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 provider or who have incorrect information may still be able to take the credit if they can show they use due diligence in trying to obtain the 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 learned. Have the students do the practice exercise on page 23-7 of the lesson. Review answers when done. Refer to sections Due Diligence and Provider Refusal of Publication 17 for more information.

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 for Zoe on the Tax Wise main information sheet. The credit is entered in the Nonrefundable Credits section of Tax Wise. You can see this screen on Tab 5 in the Volunteer Resource Guide.

Show on TaxWise main information sheet if available.

Refer to Publication 4012.

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 credit?
TaxWise performs most of the credit computation for you. On page 2 of the TaxWise Form 1040, link from Line 47 to bring up Form 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. The form is divided into three parts: ƒ Part I is for general information about the care provider ƒ Part II is where the child and dependent care credit is calculated 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: 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 provided benefits. Taxpayers may be able to exclude these benefits from their income. They can be paid either directly to the care provider or to the taxpayer.

Page 23-10

Demonstrate this on TaxWise as you explain this point.

If instructing paper preparers refer to Form 2441 as you discuss each section. Also advise preparers that an Alternative Minimum Tax worksheet may be required to figure the credit.

Refer students to page 23-10 to see this example.

Remind the students these benefits will be in box 10, Form W-2.

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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 Form 2441 has space for two care providers. If 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? 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 children. She received $4,800 in dependent care benefits from her employer. Mary’s work related expenses will be limited to $1,200 ($6,000 - $4,800). Read the example on page 23 -10 of the lesson. Demonstrate this hint on TaxWise.

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Lesson 23 - Page 11 of 12

Taxpayer Scenario
It’s time to put it all together and complete Form 2441. Remember Vanessa and her daughter Zoe? Well, let’s do her 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.

Page 23-11
Use the Vanessa scenario that begins on page 23 -11 of the lesson to complete Form 2441 on TaxWise.

Summary
The Child and Dependent Care credit is a nonrefundable credit that allows taxpayers to reduce their tax liability by a portion of the expenses. 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.

Page 23-14

Have students read the summary paragraphs on page 23-14.

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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. You will want to be sure to check which, either the adjustment or credit, will result in the lowest amount of tax.

Note: Remind students that TaxWise will not run the calculations and automatically choose the best deal. You will 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 interview techniques and tools you learned in the Screening and Interviewing lesson. The decision tree in Publication 17 will help you with framing questions.

When available, give page reference for Publication 17. Remind students that the TaxWise screens referenced are found at Tab 5 in Publication 4012.

Lesson 24 - Page 1 of 11

What are Education Credits?
Education credits, like other tax credits, can help reduce the amount of tax due. In the case of these credits, the amount is based on the qualified education expenses 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.

Page 24-1
Stress to students that education credits are nonrefundable credits and can only help reduce tax to $0.

Who can take an education credit?
An education credit can be claimed by a taxpayer for themselves, spouse and/or dependents (claimed on the tax return) who were enrolled at or attended an eligible educational institution during the tax year.

Page 24-1

Let the students know that eligible educational institution will be defined later in the lesson.

What basic requirements must the taxpayer 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 elected to be treated as a resident alien x There must be a tax liability (not already offset by other credits) on the return

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Remind students again that all must be true.

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If any are not true, an education credit can’t be claimed.

Advise the student of other possible options such as the Tuition and Fees adjustment or deduction on Schedule A or C-EZ if the education is work related. Page 24-2

How do I handle dependents? 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?
You’ve heard the term eligible educational

Page 24-2

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institution during this lesson and it’s now time to define this term. An eligible institution is any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.

Remind the student the taxpayer will need to supply this information. The school should be able to tell the student if it is an eligible institution. If the taxpayer doesn’t know, neither do we.

What are qualifying expenses?
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 enrollment or attendance at an eligible 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 those that must be purchased from the school as a condition of enrollment.

Page 24-3

Stress the term required with the students.

Note: If books can be purchased at any bookstore, 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? 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 Page 24-3

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x

x

expenses 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 Any course of other education involving sports, games or hobbies, unless the course is part of the student’s degree program or (for the Lifetime Learning Credit) helps the student acquire or improve job skills

Have students read the three examples that begin at the bottom of page 24-3 and continue at the top of page 24-4 in the student course material. Ask if there are any questions on what they have read.

Are any amounts excluded from qualified 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 x Tax free portions of scholarships and fellowships x An other nontaxable payments receives as educational assistance x Refunds of any of the qualified expenses paid on behalf of a student 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 educational institution. You should review

Page 24-4

Note: This does not include gifts or inheritances. An example would be a tuition refund due to the student dropping a class.

Refer to example on page 24-4.

Remind the students to verify

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this form carefully, just as you would a W-2. The most frequently completed boxes will be: 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 half time x Box 9 showing if the student is a graduate student

with the taxpayer that the amount in box 1 or 2 is the amount actually paid during the year.

Read the example at top of page 24-5 in student guide. Point out this is an example of reducing expenses by nontaxable amounts received. Page 24-5

What about payments for the next academic year? A common cause of concern and confusion comes about because an academic year and a calendar year do not always match in terms of when payments are made. The next example clarifies this situation.

Have a student read the second example shown on page 24-5.

What rules apply to each credit?
It was mentioned at the beginning of this lesson that there were two education credits, Hope and Lifetime Learning. Turn to Publication 17, Chapter 35 to find the table comparing the two credits. Part of your role is to help taxpayers 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 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

Page 24-5

Give students 3-5 minutes to review the table. Ask them to note similarities and differences. Once time is up, ask some students to identify a similarity or a difference.

Demonstrate this on TaxWise.

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credits. Let’s look at the specifics on who can take the Hope Credit. Hope Credit Taxpayers can take the Hope Credit for a student if they can answer yes to these questions: x As of the beginning of the tax year, was 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 controlled substance? Page 24-5 There are five questions, the first three must all be yes and the last two must be no in order to claim this credit.

Point out that if all the Hope 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? The Hope Credit can be up to $1650 per eligible student. The credit is 100% of the first $1,100 and 50% of the second $1,100 up to the amount of tax.

Note: 1st 1,100(100%)= 1,100 2nd 1,100(50%)= 550 Total = 1,650 Remember, non-refundable credit can only bring the tax down to $0.

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Lifetime Learning Credit 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.

Page 24-6

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 eligible for the Hope Credit.

Have students do the exercises 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 credits?
x x x Do not figure the education credits based on expenses already taken on Schedule A or C-EZ Do not take both a Hope and a Lifetime Learning Credit for the same student in the same year Do not take the Hope Credit for the same student for more than two tax years.

Page 24-6

Read the example at the bottom of page 24-6.

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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. TaxWise will not catch other errors, such as taking more than one benefit for the same taxpayer. This is where your knowledge and skill becomes important.

How do I determine the amount of the credit?
The credit is figured on form 8863, Education Credits. There are separate sections on the form for the Hope Credit and the Lifetime Learning Credit and a line to total them. At this point you will have reviewed the 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 qualifying expenses. Do not enter expenses in excess of the limit for the credit. Q: What is the expense limit for the Lifetime Learning Credit? Q: How about the Hope Credit?

Page 24-7
Remind students that the total amount of the credit goes on form 1040, line 49.

Open TaxWise to the Form 8863 and go over the form as you talk about the steps.

Remind students that the amount entered should be qualified expenses reduced by any untaxed benefits.

A: $10,000.00

A: $2,200.00

Step 4 has you find the totals for each

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section, apply the limits, transfer the amounts to part III of the form, apply the income test and do the calculations. The good news is, TaxWise does this step for you. 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.

Advise paper preparers that an Alternative Minimum Tax worksheet may be required to figure the credit.

Taxpayer Example
Here’s a chance to practice.

Page 24-8
Get two students or pair up the class and have them do the sample interview.

Which education benefit is better for the taxpayer?
Taxpayers have several options when it comes to using education expenses to reduce taxes. They are: x Business expenses on Schedule C-EZ x Tuition and Fees Adjustment x Itemized deduction on Schedule A if employee related x Hope or Lifetime Learning Credit You will probably follow this sequence as you prepare the return.

Page 24-8

Remind students to use their knowledge to select the option that is best for the taxpayer and do not claim multiple deductions for the same expense.

Taxpayer Scenario
In an earlier lesson, on adjustments to income, we met Vanessa and determined that she was eligible for the Tuition and Fees adjustment. Now we need to consider the education credits.

Page 24-9
Ask for two volunteers to do the sample interview.

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Quality Review
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.

Page 24-9

Summary
Use the knowledge gained in this lesson to help taxpayers determine which education benefits are best for them. Remember, one of your roles as a volunteer is to help taxpayers maximize the benefits that they are entitled to under the tax law.

Page 24-10
Have students read the summary paragraphs on page 24-10.

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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?
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 nonrefundable credit that allows a taxpayer to claim a credit against their tax of up to $1000 per qualifying child.

Page 25-1

Point out that the non refundable portion can only reduce tax liability.

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The additional child tax credit affects taxpayers who are not able to claim the full amount of the child tax credit. If the taxpayer is able to take the additional child tax credit as well as the child tax credit, the result may be a refund even if the taxpayer owes no tax.

Note: Form 8812 must be completed to claim the additional child tax credit Remind the students not to confuse these credits with the child and dependent care credit.

Who can claim the child tax credit?
The taxpayer must have at least one qualifying child to claim the credit. To be a qualifying child for the purposes of this credit, the child must: x Be under 17 at the end of the year x Be a U.S. Citizen, U.S. National or resident of the United States x Not have provided over half of their own support for the tax year 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 - Eligible foster child (any child placed with the taxpayer by an authorized placement agency or by order of the court) 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 credit if their qualifying child is not their

Page 25-1

Note: If adopted child, see exception to citizen test in Publication 17 or Form 1040 Instructions. Refer students to page 25-1 of their student guide.

Ask a volunteer to read the example at top of page 25-2. Ask for show of hands, yes/no. Page 25-2

Point out to students that to

Lesson 25 - Page 2 of 10

dependent because of either of the following: x The taxpayer (and spouse if Married Filing Jointly) can be claimed as a dependent on someone else’s return or x The taxpayer’s qualifying child is married and files a joint return for the tax year ( other than a joint return filed as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns) Let’s take a look at how TaxWise handles this.

claim a nondependent child as a qualifying child for the purposes of the child tax credit only, Form 8901, Information on Qualifying Children Who Are Not Dependents.

Are there any questions or comments on this information?

Display TaxWise and select Form 8901 from the list of forms. Complete the information for the nondependent child. TaxWise will check the CTC block on Form 8901 if the child meets the 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 the main information screen. Respond as needed.

Are there special rules for children of divorced, separated, or never married parents? In most cases the custodial parent may claim the dependency exemption for the qualifying child. 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 signed written declaration to the non custodial parent that the custodial parent will not claim the child as a dependent or x If the divorce or separation agreement went into effect before 1985 and if the non custodial parent provides at least $600 for the support of the child.

Page 25-2

Custody for this purpose means the child lives in the parent’s main home.

This can be a divorce or separation agreement, Form 8332 or similar statement Note: A custodial parent’s release of the dependency exemption will also release the child tax credit and the additional child tax credit to the 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?
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 nonrefundable credits is less than the maximum child tax credit or x The modified adjusted gross income is above the amounts shown based 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

Page 25-3

Note: Modified AGI, generally, is the same as the AGI from line 37, Form 1040 or line 21, Form 1040A. See Publication 17 for more information.

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? Remember, is the taxpayer’s tax liability is zero, they can’t take the credit because 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 3 on page 25-4. A1: A, Paul and Marie are not 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. Page 25-4 This will be discussed later in the lesson.

How do I determine taxpayer 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 tools you learned in the Screening and Interviewing lesson get put to use. Begin by reviewing the Family and Dependent Information section of the Intake and Interview sheet.

Page 25-5

Show Part II of Form 13614 and point to sections as you go over the information.

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Using the sheet, verify that the child: x Is under 17 on or before December 31 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 resident of the United States.

Remember the special rules for divorced, separated or never married parents.

Point out that based on the 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 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? That was paper, now for TaxWise. TaxWise will automatically calculate the credit if you have: x Correctly completed the Dependents/Nondependents section of the main information sheet and x Correctly completed the tax return through line 51 (Form 1040) or line 31 (Form 1040A)

Page 25-5

Page 25-6 Note: If you have a question about the amount that shows on line 53, Form 1040 link to display a completed worksheet. This may help understand the results of the calculation.

Taxpayer Scenario
We are going to go back and visit our taxpayer, Vanessa Franklin.

Page 25-6
Display or refer to the completed Part II, Form 13614 for Vanessa.

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Notice that the information indicates that both children are qualifying children for the credit. Vanessa’s tax liability on line 46 is $915. Remember that she took the child and 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 Vanessa. Let’s take a moment to review Vanessa’s Tax Credit Worksheet. It is very similar to the worksheet in TaxWise.

Ask for two volunteers to do the interview at top of page 25-7.

Display Form 1040 lines 46 –53 on TaxWise.

Have the same volunteers continue the interview at top of page 25-8. Display or refer to worksheet on page 25-8

What is the additional child tax 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

Page 25-9

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? 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 x Paid tax on tips not reported to their employer. Once eligibility has been established, complete Form 8812. If TaxWise is being used the system will verify eligibility and calculate the credit amount which will appear on line 68 of the payments section of Form 1040. Take a moment to read and complete Exercise 4 at the top of page 25-10. Page 25-9

Point out that the amount of EITC is a factor in this calculation on Form 8812. Form 8812, Additional Child Tax Credit Note: If you want to view the calculations, link to bring up the completed Form 8812. A: Yes, Jose and Yolanda are 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
It is time to go back and visit Vanessa Franklin.

Page 25-10
Show her return on TaxWise

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 credit as well as the earned income tax credit (EITC). Let’s take a look at Vanessa’s Form 8812. 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.

EITC is covered in a later lesson. Show on TaxWise or refer to page 25-11.

Quality Review
Once the CTC block had been checked on the Main Information Screen or Form 8901 has been completed, TaxWise will compute the credit. When doing a paper return be sure to use all appropriate worksheets. Be sure to note any unusual situations on the Intake and Interview Sheet to provide Quality Review with a clear path to an accurate return.

Page 25-11
Note any unusual situations on the intake and interview sheet. For example, if a person is listed in the family and dependent section but can’t be claimed as anyone’s dependent, make a note if the non dependent child is eligible for the child tax credit.

Lesson 25 - Page 9 of 10

Summary
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.

Page 25-12

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 following nonrefundable credits: x Foreign tax credit x Credit for the elderly or the disabled x Retirement savings contributions credit x Residential energy credit x Alternative motor vehicle credit x Mortgage interest credit Many of your taxpayers will not be aware of these credits and may be eligible for one or more of them. Use your interview techniques and tools you learned earlier to help you determine if any of these credits are applicable. What does the term nonrefundable credit mean? Note: This lesson contains basic and intermediate tax law topics. The basic course includes the Credit for the elderly or the disabled and the Retirement savings contribution credit. All the other miscellaneous credits covered in this lesson are part of the intermediate course.

Have the students open Publication 17 and find the chapter on Other Credits.

Have a student read from Publication 17, Nonrefundable credits. Respond to inquiries.

It is important to know that these credits are applied against tax in the order they are listed on lines 47 – 55 of Form 1040.

Refer students to that section of the form as a visual aid. 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 (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 scope of the volunteer program, but under certain conditions a taxpayer can 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 conditions, when met, did not require the completion of the Form 1116. Turn to your Volunteer Resource Guide and find the tab that says TaxWise Nonrefundable Credits. Find the page with Form 1116. This is the Form 1116 in TaxWise which looks different than the 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.

Page 26-1

Point out the exception to this out of scope rule: Certain International/Military sites.

Additional references: For more information you can refer to the Form 1116 Instructions and Form 1040 Instructions.

Compare the TaxWise version of Form 1116 and the paper Form 1116.

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.

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Here is what you would do in TaxWise: x Add up all the qualified foreign tax paid shown on Form(s) 1099 INT and DIV. TaxWise Schedule B statement does not have a place to enter foreign tax paid on interest or 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 TaxWise Form 1040, link to open TaxWise Form 1116. x In the Volunteer Resource Guide under the TaxWise tab “TaxWise Nonrefundable Credits”, look at TaxWise Form 1116 and note the 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 TaxWise can be displayed, demonstrate, otherwise have students follow along on page 26-2.

Caution: In the 4012 the TaxWise example is from tax year 2006 and foreign tax credit is shown on line 47. The line number for foreign tax credit for tax year 2007 may be different based on tax law changes.

If doing a paper return enter the amount directly on the line for foreign tax credit. Be sure to remember the $300/$600 limitations.

Remember, in TaxWise, from any Form 1040, use the help feature to bring up or display instructions for that line.

Lesson 26 - Page 3 of 12

Take a few minutes to check your understanding of what has been covered so far.

Assign exercise questions 1 – 3. Review answers with students when done. 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 Disabled
This credit is calculated on Schedule R. This credit can also be calculated on Schedule 3 of Form 1040A, but for TaxWise always use Form 1040.

Page 26-3
Refer to Form 1040 and identify the line for credit for the elderly or disabled. Caution: The line numbers on 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 limits. 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.

Have a student read “qualified individual”

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 Total Disability x Part III, Figure the Credit

This ensures that taxpayers under 65 have a completed Physician’s statement that proves their disability.

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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 disabled line on the TaxWise form 1040, link to open part III of Schedule R x On line 13a, TaxWise automatically 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: x Completes the rest of the form x Transfers the amount of the credit to the proper line of the Form 1040 x Attaches the entire Schedule R to the return

As long as you entered these items in the income section of Form 1040 line 20a and linked to the social security and RR tier one benefits worksheet.

Have a student read the TaxWise hint at bottom of page 26-4

It’s time for another knowledge check.

Assign exercise question 4 and review with class when done. 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
Take a few minutes to read the Taxpayer Scenario about Albert on page 26-5 and continuing at the top of page 26-6.

Page 26-5
When the class is done ask if there are any questions or comments on this credit.

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Retirement Savings Contributions Credit
This credit is calculated on Form 8880 and 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. It the contribution is tax deferred, the taxpayer gets this benefit as well as a credit against tax. So, who can get this credit?

Page 26-6
Caution: Line numbers may change due to late legislation.

Point out that this is a very rare double benefit.

Have the students turn to the 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 and list. Ask a volunteer to read a few of the examples from the list.

The term qualified plan was mentioned a few minutes ago. A list of plans that qualify are listed in Publication 17 in the chapter 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.

Military personnel may have an amount in box 14 coded Q and/or E. If the amount qualifies, the box qualifies for Form 8880 will be checked.

Refer the class to the volunteer Resource Guide tab titled TaxWise Income. Have them look at the Form W-2. Point out that as long as the information was entered correctly, TaxWise will do the credit calculation.

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You may want to write these codes on a Form W-2 for future reference. Remember, you asked the taxpayer about 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 tax year and the due date of the return, including extensions. Ask a student to read the tip at the bottom of page 26-6.

Ask a student to read the TaxWise hint at the bottom of page 26-7.

Have the class read the first example on page 26-7 What about married filing jointly?

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Are there any questions on that example? The next example relates to reducing the eligible contribution.

Respond to inquiries. Ask for a volunteer to read the second example on page 26-7. Have the students read the TIP on page 26-7.

The credit is calculated using Form 8880.

Form 8880 will appear in the forms tree on the left with a red exclamation point and will have to be completed prior to return 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.

Ask a student to read the TaxWise hint at the bottom of page 26-7.

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
Take a few minutes and read the taxpayer scenario on page 26-8

Page 26-8
When students are finished, have them look at the entries on the Form 8880 on page 26-9 and discuss.

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OK, that’s three down and three to go.

Residential Energy Credits
A recent tax law change created nonrefundable credits to improve energy efficiency of taxpayer’s main homes. These purchases, made during 2007, will provide tax benefits on the 2007 tax return. These provisions will also apply for purchases made in 2008. 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.

Page 26-9
Point out that manufacturers of energy efficient items like insulation or storm windows commonly alert their customers about product eligibility for the credit.

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 this credit?

Respond as needed.

Alternative Motor Vehicle Credit
The next credit we will cover may be more familiar to you. It is the Alternative Motor Vehicle Credit.

Page 26-10

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Taxpayer’s may be able to claim this credit of a qualifying vehicle place in service for business or personal use after 2005. The vehicle must meet certain requirements and be a new: x Advanced lean burn technology vehicle x Qualified alternative fuel vehicle x Qualified fuel cell vehicle x Qualified hybrid vehicle Form 8910 is used to claim this credit.

Have the students read the last 3 paragraphs on page 26-10. When finished point out the manufacturer will provide certification that the vehicle is a qualifying vehicle and information about the phase-out percentage.

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
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 credit amount is claimed on line 54 of Form 1040. Remember, the certificate must be for the main home and the interest cannot have been paid to certain connected parties such as relatives.

Page 26-12

Have the class read the TIP on page 26-12

Have the students read the example on page 26-12.

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In order to calculate the credit must have the actual paper titled “Mortgage Credit Certificate”. The amount of the credit is on the certificate.

Have the students read from the TaxWise Hint to the end of page 26-12.

Let me ask you; is anyone who has purchased a home eligible for this credit? 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 preparer

If any hands are raised, ask one for the answer.

Remind the class that the total of all nonrefundable credits is reported on line 56 of Form 1040. Have students read the TaxWise Hint on page 26-12.

Summary
In this lesson we have covered: x Foreign Tax Credit x Credit for the Elderly or the Disabled 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.

Page 26-13
Have students read the summary paragraphs on pages 26-13 and 26-14.

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Lesson 27: Other Taxes

Objective
Determine the additional taxes that apply to each taxpayer’s situation.

Introduction
After you’ve subtracted your tax credits, determine whether there are any other 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 qualified retirement plans, ƒ Advanced Earned Income Credit payments, and ƒ Household employment taxes This is a critical step in completing an accurate tax return. Refer to other taxes section on the Form 1040. Review lines that will be discussed in this lesson. Note: Pay attention to the level at which each line is classified. You may need to skip to certain sections if you are teaching a basic class. Stress the fact that the students must be certified to prepare a return including additional taxes on IRAs and other qualified retirement plans, if not refer taxpayers with this issue to a 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
Self-employment tax (SE tax) is social security and Medicare tax collected from individuals who work for themselves.

Page 27-1
Note: Self-employment tax is tied into Business Income or Loss. If you are teaching a

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SE taxes must be paid when: The taxpayer has income as a church 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.

Basic class, skip this section and go to taxes on unreported tip income on Page 27-2.

What about taxes on unreported tip income?
Social security and Medicare taxes are due on tip income of more than $20 per month from any one job. An employer may “allocate” tips to an employee if the employee worked in a restaurant, cocktail lounge, or similar 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

Page 27-2
Note: This section applies to basic taxpayers since many “simple” returns belong to those in the service industry. If you are certified at the basic level and find you are uncomfortable with this topic, refer the taxpayer to a more experienced volunteer.

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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 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. Let’s look at the Form 4137, Social Security and Medicare Tax on Unreported Tip Income.

Review example on Page 27-3.

Note: Identify which tips go on each line and the steps to compute the tax due. Note: TaxWise will allow you to link to the Form 4137 and the context sensitive help will 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.

How do I enter unreported tips into TaxWise?

What about taxes on IRAs and other qualified retirement plans?
Traditional IRAs and other “qualified plans” allow individuals to defer paying taxes on money they contribute and on its earnings until the funds are distributed. • If a distribution is taken before the individual reaches the age of 59 ½ and is

Page 27-5

Note: If you are teaching a basic class, skip over this section and go to Advance Earned Income Credit Payments on Page 27-6.

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not rolled over into another qualified plan or IRA (and no other exception applies), or • If minimum distributions are not withdrawn when required, or • If excess contributions are not removed by the due date of the return (including extensions), • Then the taxpayer must pay income tax due and an additional tax of 10%. • Refer to the Intake and Interview Sheet, Part IV, question 7. If the answer is “Yes”, ask the taxpayer for any Form(s) 1099-R that reports these payments.

Note: IRA contributions or distributions, pensions, and annuities are covered in the Retirement Income – IRAs and Pensions lesson. Note: Remind students if they are not certified above the Basic Level, refer taxpayers with these issues to a more experienced volunteer or to a professional tax preparer.

Advance Earned Income (AEIC) 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. To receive advance EIC payments, the taxpayer must have, or expect to have, a Qualifying Child and submit a Form W-5, 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: Claire lives with her 2-year-old, and knows 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.

Page 27-6

Note: All students need to be aware of AEIC as it relates to the Earned Income Credit that many of our low income clients qualify for.

Have a student volunteer to read.

When the volunteer helped Claire prepare

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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. Let’s do the exercises on page 27-7. Check your answers on page 27-9.

Total Tax
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.

Page 27-7

Taxpayer Scenario
Let’s have two students role play the Taxpayer Scenario with our taxpayer Vanessa Franklin, on page 27-8 to see how the volunteer handled her “other taxes”.

Page 27-7
Assign students do the practice exercise questions in this lesson. Review answers when done.

Summary
After you’ve subtracted your tax credits, determine whether there are any other 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 qualified retirement plans, ƒ Advanced Earned Income Credit payments, and ƒ Household employment taxes

Page 27-9
Remind students TaxWise will fill in the entries automatically.

Optional: If demonstrating a comprehensive lesson from the Publication 678-W, show how the “other taxes” were calculated.

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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. Foreign tax paid or accrued and the Foreign Tax Credit are not specifically listed on the Intake and Interview Sheet so you will need to ask taxpayers if they paid any tax to a foreign country.

Remind the students to use the techniques and tools learned in the Screening and Interviewing lesson and part VII form 13614.

What is the Foreign Tax Credit?
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

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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 avoid this double taxation. This credit allows a dollar-for-dollar reduction in U.S. tax for the foreign tax paid. Remind students that this is a non-refundable credit.

There may be some cases where not all foreign taxes paid on foreign source income can be used to compute the Foreign Tax Credit. It is usually to the taxpayer’s advantage to claim the Foreign Tax Credit and in general, if the credit is chosen, you must include all qualified foreign taxes. Note: Non qualifying taxes may be deductible on Schedule A as other taxes paid. Refer taxpayer to a professional preparer.

What qualifies taxpayers for the credit?
We have taken a look at the why and the what of the credit. Our next step is to look at how the taxpayer qualifies for the credit. 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 Earned Income Exclusion on the same income 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 x Provide no economic benefit to the taxpayer paying the tax

Page 28-2

Show on screen or refer to page 28-2

Point out that if the income is excluded from U.S. tax the credit can’t be claimed because there would be no double taxation.

Note: Economic benefit is discussed further.

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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.

Are there any questions on either of these examples? EXERCISES: Question 1 and 2 on page 28-3

Read the example at the top of 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 there would be no double taxation.

Are there any questions about the exercise or what has been covered so far?

What is “economic benefit?”
A few minutes ago it was mentioned that the foreign tax paid cannot provide a

Page 28-3
Refer students to Publication

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specific economic benefit for the taxpayer and count toward the Foreign Tax Credit.

514 for detailed information on economic benefit.

Can anyone imagine what this might mean? 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

Call on 1or 2, if any hands go up.

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: x Cuba x Iran x Libya (Presidential waiver granted for 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 Form 1116 must be completed for foreign income from such a country.

Note: This list can change so be sure to check for updates. For example, Iraq was on the list, but was removed effective June 27, 2004.

Point out that this is beyond the scope of the volunteer program.

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Let’s do exercise questions 3 and 4 on page 28-5.

Assign exercise and review 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 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. Two of these fall within the scope of the volunteer program: x Passive category income x General category income Passive category income includes: x Dividends x Interest x Royalties

Page 28-5

Tip: A separate Form 1116 must be used for each type of income and each form can be used for income for up to three foreign countries.

Example: a taxpayer who lives in a foreign country and pays taxes on interest income could

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x x x

Rents Annuities Gain from the sale of property that produces income or non-income producing investment property

claim the credit and check box a, Passive category income on the 1116.

General category income consists of wages earned in a foreign country that an individual has not excluded or excludes only a part of under the Foreign earned Income Exclusion. It also includes foreign income that does not come under any other category on the Form 1116.

Note: Passive category income may qualify as general category income if the foreign government taxes it at a rate higher than the highest U.S. tax rate. 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. In 2007 the highest income tax rate is 35%. Have a student read the example at the bottom of page 28-6.

It’s time for more exercise questions.

Assign Questions 5 and 6 on 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
Now, let’s take a look at what you will need to consider when determining if a foreign

Page 28-7

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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 types of questions. Ask the students to pair up and have them do the sample interview on page 28-7.

Do I have to file Form 1116?
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. The total qualified foreign taxes must be: 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/1099DIV Here is a look at how you might handle this 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.

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Point out that all three of these must be met.

If TaxWise is available demonstrate the example.

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How do I complete Form 1116?
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 the situations are complex and outside the scope of the volunteer program. 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 Form 1116. For the top portion remember to use a separate 1116 for each type of income. 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.

Page 28-8

Point out that if the taxpayer has these types of deductions they should be referred to a professional preparer.

Demonstrate this using TaxWise. Note: Also, up to 3 countries per form.

Now, moving on to part II. Check the appropriate box to indicate

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 must be entered manually.

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whether the foreign tax was actually paid during 2007 (paid) of if the tax was billed in one year but paid in another (accrued).

Note: A taxpayer using the 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. Point out that the amount of tax withheld should be shown under the related type of income. 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.

Next comes Part II, lines j – s. Report taxes in both foreign currency and U.S. currency amounts unless taxes on passive income were reported in U.S. currency.

Finally comes part III and IV. The credit is figured in part III and part IV is only needed if the taxpayer had more than one 1116 because their income fell into more than one category. Note: If the taxpayer has a carryback or carryover, refer the taxpayer to a tax professional. Note: TaxWise performs the calculations for you in parts III and IV.

Summary
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

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x

income Foreign Tax Credit is reported on line 51, Form 1040 Remember, foreign tax paid on excluded income cannot be used to claim the credit.

The Foreign Tax Credit and The Foreign Earned Income Exclusion are different. Taxpayers can choose the approach which results in the lowest tax paid overall.

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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 the year and refundable credits for which the taxpayer may qualify. By the time you reach the payment section you should have the taxpayer’s income sources and tax withholding or payment information. This information taken from 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. Refer to payment section on the Form 1040. Review lines that will be discussed in this lesson. Refer to the Publication 4012, Tab 6, Other Tax Payments.

How do I report federal income tax withheld?
Who is familiar with form W-4, W-4P, and W-4V?

Page 29- 2
Provide an overview of the pay 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 withholding.

Note: You may refer students to 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 amounts applied from 2006?
Taxpayer that have income from selfemployment, 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)

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Let’s take a look at Gloria’s situation on page 29-3.

Gloria planned ahead, but some taxpayers do not. If the taxpayer should have paid estimated taxes but did not, explain the requirement so they can avoid penalties in the future.

Discuss the information on page 29-3 after discussing Gloria’s example.

Taxpayer Example
Ok, let’s check-out Ernie’s situation.

Page 29-4
Team up students to role play the interview on Page 29-4 of the lesson.

What about amounts paid with an 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. Let’s look at Bernice’s situation to get an understanding of why an extension may be required.

Page 29-4

Ask for a volunteer to read the example on Page 29-4. Provide examples based on your experience for taxpayers that file for extension.

Taxpayers may file the extension on paper or electronically. Let’s review how you can file an extension for a taxpayer using TaxWise.

Discuss TaxWise information on Page 29-5 in their student guide and also use the information in Publication 4012, Tab 6.

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Also be prepared to discuss completing Form 4868 using the paper form.

Total Payments
The entry required on Form 1040, Line 70 is not within the scope of the VITA/TCE Program. Examples of the forms and the types of payments to enter on Line 70 are shown on Page 29-5.

Page 29-5
Explain how to figure the total payments using the information on Page 29-6.

Taxpayer Scenario
Let’s see where we stand in the Payments area for our taxpayer Vanessa Franklin.

Page 29-6
Team up students to role plays the Taxpayer Scenario. Optional: Demonstrate the payment section for the comprehensive problem from Publication 678-W.

Summary
The proper completion of the payment section of the taxpayer’s return will determine if the taxpayer receives a refund, break even or owe additional federal taxes. Explain why the payment section is critical to the accuracy of the tax return.

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 decision trees to answer questions 1 and 2. Nationwide, there are a lot of errors made in determining EIC amounts. By using your tools including the 4012 common errors can be avoided. Read these questions to the class.

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 the EIC?
There are general sets of rules for claiming the Earned Income Credit:

Page 30-2

Lesson 30 - Page 1 of 8

x x x

General EIC requirements EIC without a Qualifying Child EIC with a Qualifying Child Point out that certain requirements apply to everyone who claims the EIC.

Let’s look at the general requirements first. Open your 4012 to Tab H and find the interview tips for EIC General Eligibility.

Take a look at the interview tips and the seven steps in 4012, Tab H.

Have a student read the caution then point out that it relates to step 1. Have the class read the first TIP on page 30-2. Call on one of the students to answer. Have the class read the second TIP on page 30-2.

Q: Which step does this tip relate to? A: This tip relates to step 2.

Q: Which step does this tip relate to? A: This tip relates to step 6. This credit is called the Earned Income Credit, so what is earned income?

What rules apply to everyone?
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 purposes? Several types of income need clarification. Disability Benefits: Benefits that the taxpayer receives under 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 code 3 (disability) in box 7. Once you

Page 30-2

Have the students find the Earned Income Table under the EIC tab in 4012 and review the examples for what is earned income for EIC purposes and what is not earned income.

Note: The major factor with 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? There is special treatment given to combat pay. Read “What about Combat Pay” and the TIP on page 30-3

Review the tips and cautions on page 30-3 as they relate to combat pay.

What about self employment income? Self employment tax is paid on the net of self employment income and the expenses incurred to earn that income. What about household employee income?

Remind students that they must be certified for certain levels of training to prepare Schedule CEZ. Also address the tip on that page regarding expenses. Have the students read the paragraph about household employees and discuss. Page 30-4

Earned income not qualifying for the EIC Congress has established special treatment for income received for work while an inmate in a penal institution. Such income is not considered earned income for the purpose of the EIC.

Point out that this includes work performed in a work release program or while in a halfway 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 child if the child meets all the tests we will look at next. Turn to Tab H in 4012, this time looking for Interview Tips – EIC with a qualifying child. Have the students review the interview tips in 4012 and compare them with the steps listed under “What are the rules for taxpayers with Qualifying 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 305. 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.

When using TaxWise, if there is the smallest chance the child will be a qualifying child for EIC, be sure and check the EIC box next to the child’s name on the Main Information Sheet. If they do not qualify, the software will not allow the EIC.

Review the example and then ask for a volunteer to read the TIP on page 30-5 Point out that TIP 1 relates to step 1, the second TIP relates to step 2 with a child and the third TIP relates to no children.

What are the rules for taxpayers without Qualifying Children?
Turn to Tab H in 4012 and find the Interview Tips – EIC without a Qualifying Child.

Page 30-5
Review the rules including the example and the last tip on 30-5.

Lesson 30 - Page 4 of 8

We have covered the issues relating to who qualifies for the EIC, so it’s time to check our understanding.

Assign exercise questions 3-9 and review as you go. Ask for volunteers to answer questions and ask them to state which interview tip was used. 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.

Would someone read question 3?

Point out the TIP at the bottom of page 30-6.

Let’s go back to part VIII of the Intake and Interview sheet. If the taxpayer answers yes, make sure their answer is not because their EIC was Have the students answer “Based on the interview, is the

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
Take a few minutes to read “Taxpayer Scenarios” on page 30-7 including a review of the Family and Dependent Information. Based on the facts gathered, the answer to question 2, part VIII of Vanessa’s intake and interview sheet is Yes. Are there any questions or comments over what has been covered so far?

Page 30-7
Pair students up and have them conduct the sample interview on page 30-8 using the facts on page 30-7 and the interview tips under Tab H of the volunteer resource guide.

Respond as needed.

How is the correct Earned Income Credit amount calculated?
Now that we have completed the qualification step, we are moving on to the calculation step. Take a few minutes and read “How is the correct EIC amount calculated down thru Combat Pay Election. Are there any questions on what you have just read? Next, please read “Where are the EIC tables and how do I use them”. Continue up to “Class Exercise A”. We are going to use the EIC tables in just a 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.

Page 30-9
Remind the students to look for any worksheets or tips mentioned in the reading in the resources they have available. Respond as needed.

This reading begins at the bottom of page 30-9.

Make sure every one has the correct tables open.

Lesson 30 - Page 6 of 8

Look at the end of the lesson for the blank forms to use for Exercise B.

Read the first sentence under “Class Exercise B” on page 3010 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) 3012, 13 and 14.

How do I compute the Earned Income Credit using TaxWise?
You have seen the process of calculating the EIC amount by hand, but most of you will be using TaxWise to prepare the returns. Take a look at how TaxWise computes the EIC.

Page 30-10
Have the students read “How do I compute the Earned Income Credit using TaxWise?” stopping at the bottom of page 30-10.

Note: If possible demonstrate this on TaxWise.

As was noted in the Caution, with any form, read and answer the questions carefully. Always double check that there are no red checkmarks by the Schedule EIC Worksheet on the forms tree. If there are, go back to the form and correct the situation. Let’s revisit combat pay for a moment. This is an area where accuracy is important. As long as you made all the W-2 entries correctly, including box 12 code Q and the taxpayer qualifies for EIC, TaxWise will determine if it is better to include the combat pay for EIC purposes or not.

Remind the class about the potential for EIC errors mentioned at the beginning of the lesson. Bottom of page 30-10

Have students read from “Advance EIC in box 9 of W-2” to “Do I need to attach Schedule EIC or Schedule EIC worksheets to the return?”

Lesson 30 - Page 7 of 8

Summary
The EIC is a refundable credit designed for low income working people. It has the potential to create large refunds for those who qualify.

Page 30-19

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. Refund and amount due are reported on lines 73 through 77 of Form 1040.

Refer students to either a copy of Form 1040 or show them the 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 Payments during explanation of calculations. Note: If the payments made exceed the amount of tax liability, TaxWise automatically shows the amount of the overpayment on line 73.

The taxpayer’s total tax appears on line 63 of Form 1040. The taxpayer’s total payments, (including refundable credits), appears on line 72. If payments (line 72) exceeds total tax (line 63), the overpayment is reported on line 73 (line 72 minus line 63)

Lesson 31 - Page 1 of 7

Taxpayers can choose to apply any portion of their overpayment to estimated tax payments for the following tax year. If a taxpayer opts to receive a refund of the full overpayment, carry the amount on line 73 to line 74a. If a taxpayer wants to apply a portion of the 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 73 minus line 75) and enter it on line 74a.

Note: See Calculating the refund page 31-1, 2 Tell students estimated tax payments will be discussed in a later lesson. TIP: TaxWise will do this automatically.

Note: TaxWise will automatically calculate the remaining amount to be refunded and show it on line 74a. Check or Direct Deposit Options Student Guide, page 31-2

Taxpayers may receive their refund as a check or direct deposit(s) to up the three bank accounts. Before we take a look at the 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 check mailed. Add mailing time, plus the time before the taxpayer deposits or cashes the check. You can see that the taxpayer will have their money a couple of weeks earlier with direct deposit. There are also more security issues with mailed checks, which can be stolen, lost, or destroyed.

Review Volunteer Resource Guide, References Tab, IRS e-file Refund Cycle Chart page. Advise using the chart to let taxpayers know when to expect their refunds. Encourage students to promote direct deposit at their sites.

First let’s look at what information you will need to request a direct deposit.

Refer to F1040 Instructions, page 5, or TaxWise F1040, page 2 screen. A: routing number, account number, and whether the account is checking or savings

Q: Look at line 74. What three pieces of account information does it ask for direct deposit?

Lesson 31 - Page 2 of 7

Now let’s take a look at the tools you will have at the site for identifying this information.

Designate students to read in Publication 4012, Finishing the 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. You should always see a voided check as proof of account, enter the numbers and then double and triple check the numbers. Stress that incorrect account information could result in a delayed refund check mailed to the taxpayer or, even worse, the refund deposited to the wrong account. Direct depositing the refund to more than one account Student Guide, page31-2. 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 error, the additional amount will be deposited into the last account listed on Form 8888. If the refund is decreased, the deposit will be reduced first to the account shown on line 3 of Form 8888, next to the account shown on line 2, and finally to the account shown on line 1. Remind students no bank account information should be entered on the TaxWise Main Information Sheet if Form 8888 is used. Stress that because IRA contributions are limited and may be deducted on the return, generally an IRA account should not be listed last.

Taxpayers can choose to divide their direct deposited refund among up to three accounts. Use Form 8888, Direct Deposit of Refund, to list the RTN and account number for each deposit.

Complete Exercises on 31-3.

Discuss answers.

Lesson 31 - Page 3 of 7

Taxpayer Scenario
Now let’s take a look at how our taxpayer Vanessa Franklin would like to have her refund distributed.

Page 31-3
Designate students to read the Sample Interview on Student Guide, page 31-4. Note that Vanessa’s account information is included in the appendix in the Student Guide. A: Ideally prior to arriving at the site to ensure he/she has necessary information in hand.

Q: When would the best time to advise the taxpayer of what information he/she will need to have his/her refund directly deposited? The needed information is listed at the top of Form 13614. If a taxpayer has the account information to do a direct deposit or split direct deposit, you may want to note it in this section when you start your interview.

Have students find the banking Information bullet above F13614, Part I.

Amount Owed
If the payment total is less than the amount of tax, calculate and report the balance due on line 76 (line 63 minus line 72) of Form 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.

Page 31-5 to 31-7
Refer to F1040 Instructions, page 5, or TaxWise F1040, page 2 screen.

There are three payment options: x Check or money order x Direct debit from the taxpayer’s bank account x Credit card Let’s read about them.

Designate student to read in 4012, Finishing the Return Tab, Balance Due Returns page aloud.

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 wanted to hold off on filing the return until he/she could pay?

A: If the tax return is not filed by April 15, 2008, you will be 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. A. C – use of credit card.

Complete Exercise 3 page 31-6.

Taxpayer Example

Page 31-6
Designate students to read the Sample Interview.

Estimated Tax Penalty
Remember to stress the need to pay by the due date to avoid late payment penalty and interest.

Page 31-7
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 or more and more than 10% of the total tax 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 owe an estimated tax penalty. If this occurs, enter $1 on the Form 2210 line that asks for “2006 tax”. This will cause TaxWise to calculate a $0 penalty. IRS will still calculate the penalty, if owed, and send a notice to the taxpayer.

Refer to Pub. 17 for further information.

Review the TaxWise Hint in Student Guide, page 31-7 Show TaxWise Form 2210 screen, if available.

Third Party Designee
For taxpayers who want to allow a friend, family member, or any other person to discuss their 2007 tax return with the IRS, the “Yes” box of the Third Party Designee area of the return can be checked. You will also need to enter the name, phone number and any five numbers the designee chooses as their personal identification number (PIN).

Page 31-8
Emphasize that VITA/TCE volunteers may not be designated as a “Third Party Designee.” Refer to F1040 Instructions, page 5. or TaxWise Main Information Sheet.

Lesson 31 - Page 6 of 7

Quality Review
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.

Page 31-8

Summary
In this lesson, we have discussed refunds and amounts owed and shown you some tools to use to handle them.

Page 31-9
Designate students to read the summary aloud.

Q: Where will you find instructions for requesting a direct deposit of a refund?

A: Volunteer Resource Guide, Finishing the Return Tab, Pointers for Direct Deposit of Refunds page. A: Every time a taxpayer requests a direct deposit.

Q: When should you refer to this page

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 the quality review process for federal tax returns. Review the What do I need box on page 32-1 with the class. Make sure students have the forms and publications listed.

How do I conduct a quality review 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.

Page 32-1

Lesson 32 - Page 1 of 10

There are three generally accepted methods of quality review: • Designated quality reviewer – an experienced designated reviewer • Peer review – preparers review each other’s work • Self-review – volunteers review their own work The Quality Review Sheet is a list of items that must be verified when reviewing tax returns. Reviewing these items prevents common errors from occurring such as overlooking income or credits.

Point out that using a designated reviewer is the preferred method.

Have the students take out the Form 8158 and review the items listed. Stress that it is important to check returns for accuracy; 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 taxpayer right after completing the return and before it is signed. 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. Remind the class to always include the taxpayer in the quality review process.

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
Through out this course we have been preparing a tax return for Vanessa Franklin. Her return has been completed and now it 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

Page 32-2
Have the students find Vanessa Franklin’s source documents in the appendix.

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 section of a paper Form 1040?
When a paper return is filed, the taxpayer(s) must sign and date the return in the Sign Here section of the Form 1040. A return is not considered to be valid and refunds are not issued unless the return is signed. Your Volunteer Resource Guide has instructions on signature procedures.

Page 32-3

Remind students both spouses must sign and date a Married Filing Joint Return.

Have students find the Finishing 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?
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 the SIDN has been entered in the box “Preparer’s SSN or PTIN.”

Page 32-3

Stress that this is the only information entered in the Paid Preparer’s Use Only section.

The SIDN will be provided to you. Sites using paper forms will have forms with the SIDN pre-printed or you may be given a 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.

Have students look at the Paid Preparer’s section on page 32-3 to see the location of the SIDN.

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 check. Please do Exercise Questions 1 and 2 at the top of page 32-4. Review the questions and answers with the class. 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 return?
It’s time to turn our attention to signing an efile return. New for 2007, Form 8453 will no longer be used as a signature document. All electronically field returns will use the selfselect PIN or practitioner PIN method to sign the tax return. Once you have verified that the taxpayer information is correct on the Tax Return Summary screen you are ready to obtain the taxpayer’s electronic signature. 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 TaxWise. It can be any five numbers the taxpayer chooses. The number cannot begin with zero or be all zeros.

Page 32-4

Point out that this is a major change because in the majority of cases, no paperwork at all will be sent to the IRS. Point out that depending on your site’s procedures, taxpayers may use the Self-Select PIN or the practitioner PIN method.

Point out that zip codes are an easy solution. 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 attachments other than Form W-2, Form W-2G or Form 1099R, Form 8453 is used only to transmit supporting paper documents to the IRS. Examples are Form 8283, Noncash Charitable Contributions or Form 8332, Release of Claim to Exemption for Children of Divorced or Separated Parents.

How does the taxpayer create a 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 find the answer to the question: Can 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 information? If you are using TaxWise, after the return is completed, run an initial diagnostic to identify any errors.

Page 32-5

Ask for a student to answer the question.

Respond to inquiries.

Lesson 32 - Page 6 of 10

Next go back to the Main Information Sheet and see if the return qualifies for the selfselect 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 enter their PIN. Note: You are not authorized to 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 sign the return on behalf of the taxpayer. The taxpayer(s) must give permission for this by signing Form 8879. Tell the class that more information is available under the Finishing the Return tab of the Volunteer Resource Guide. Have the class take a few minutes to find and review the information.

Completing the Return in TaxWise
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

Page 32-5

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 TaxWise main toolbar. A box will pop up and show the diagnostic information. Review warnings to see if any changes are needed. If there are any electronic filing errors, click on the red text to open the form where the error occurred, make corrections and rerun diagnostics. Repeat this process (get the red out) until there are no more errors. Point out that there are other ways to run diagnostics in TaxWise: • Hit the F10 key twice while you are in the return. The first hit closes the form you are in; the second hit runs the diagnostic. • Right-click on the 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 efile button again. Are there any questions or comments on 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. Respond as needed.

Lesson 32 - Page 8 of 10

Of course you will need to print the return. To do this, just click the print button on the TaxWise main toolbar. 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 PIN, print two copies of Form 8879 and have the taxpayer(s) sign both copies. It’s time for one more knowledge check.

Tell the class not to use the print button while in the diagnostics screen. This will print only the diagnostics screen.

Remind students for joint returns both spouses must sign, otherwise the return will not be transmitted. 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
To wrap thing up, do the sample interview on page 32-7

Page 32-7
Ask for volunteers or have the 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 discussed in the Screening and Interviewing lesson, such as active listening and building rapport, share the following with the taxpayer: • Which records/documentation they should keep and why • What documentation about them is maintained at the site – why, how long, etc. • Information they need if they overpaid their taxes (i.e., refund due dates, reducing 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 experience and their satisfaction with the volunteer tax return assistance program. Emphasize the need for active listening and paraphrasing with every taxpayer. This will ensure understanding

Emphasize the points (or “bullets”) listed. Part of the whole tax preparation experience is to educate the taxpayer through the entire process.

Making sure the taxpayer has a positive experience is important.

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It can also make next year’s tax preparation easier for taxpayers.

How do I prepare the packet for filing?
Most volunteer tax assistance sites use TaxWise software to create, quality review, and e-file tax returns. Even so, each taxpayer must retain a paper copy of their return. 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 - Place each form, schedule, and attachment in the proper sequence, based on the sequence number shown in the upper right corner.

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Emphasize that every taxpayer must receive a complete copy of his/her return before he/she leaves.

Point out the sequence numbers. An example can be found in the student guide.

Who keeps the records?
Advise the taxpayer to keep a copy of the following documents for at least three years: ƒ Form 1040 with all forms, schedules, and attachments • All other tax-related documents, including 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.

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Emphasize the importance of the taxpayer keeping a copy for his/her records for three years. Also emphasize how helpful it is for him/her to bring it back next year.

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Record any important information on the front of the envelope for the next year’s volunteer preparer. Remind the taxpayer to bring the envelope back to the site next year. The site will not keep copies of taxpayers’ paper-filed returns or any other taxpayerrelated documentation. For e-file returns, the site will keep the following data confidential and in a secure location until December 31 of the current year: • A master backup disk containing all
electronically transmitted returns • One copy of Form(s) W-2 and/or Form(s) 1099 showing federal tax withheld • 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

Tip: If your site does not have storage capability or will not be open after April 15th, make storage arrangements with your local IRS Territory contact. Emphasize the site only keeps the data needed to electronically file the return In some cases, a Form 8453 will need to be sent to the IRS with one or more attachments. If the Form 8453 is sent, one copy should be retained with the other items listed here.

What should I tell the taxpayer about refunds or balances due?
For taxpayers who are due a refund: • Review the 2008 E-file Refund Cycle Chart in your Volunteer Resource Guide 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: • Remind them to send Form 1040-V to the appropriate address if they wish to mail a payment; for e-file returns, Form 1040-V, Payment Voucher, will be generated by the e-file software when the tax return results in a balance due.

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Emphasize that this is not a guaranteed date, but a scheduled date for their refund.

Show a sample of Form 1040-V. Explain each of the bullets to the taxpayer. Educating the taxpayer is an important part of providing a complete, quality return preparation experience.

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• 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 agreement, remind them to submit Form 9465, Installment Agreement Request, as soon as possible. • If the taxpayer can pay a portion of the amount owed by the due date, they won’t be charged interest and penalties on that portion.

Show a sample of Form 9465. TIP: Form 9465 can be e-filed. Explain that they may be charged interest and penalties on the remainder of the unpaid balance.

How can the taxpayer avoid a 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.

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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 withholding?
Taxpayers receiving wage income can provide a new Form W-4, Employee’s 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.

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Briefly go over Forms W-4, W-4P, and W-4V.

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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 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.

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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 return for this year, or b) 100% of the tax shown on their tax return for last year

For awareness only: Refer to Publication 17 for the special rules for farmers, fishermen, and higher income taxpayers.

The decision tree in Publication 17 can help determine if the taxpayer should make estimated tax payments. Look at the example in the middle of page 33-4.

Ask students to locate this decision tree in their Publications 17. Have a student read the example and discuss as needed.

How is estimated tax figured?
Use Form 1040-ES, Estimated Tax for Individuals to compute the amount of estimated tax that should be paid over the year. This form includes worksheets to help the taxpayer estimate their income and tax liability for the year. The current year’s tax return can be used as a starting point, but 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)

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If a taxpayer overpays his/her estimated tax, he/she can receive a refund. However, if the taxpayer underpays the estimated tax, he/she may be charged a penalty.

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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?
Estimated tax payments can be sent electronically to the IRS by direct debit payment from the taxpayer’s checking or savings account, by credit card, or by check 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.

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Always invite questions from the taxpayer so that he/she feels comfortable with the process.

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?
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.

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• 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 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.

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Taxpayer Scenario
Here is one more opportunity to practice interview skills.

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Have two students do a role play using the sample interview on page 33-6 or divide the class in groups of two for this activity.

Summary
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 foster greater accuracy in returns and timeliness in filing.

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Ask if there are questions and respond to any inquiries.

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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 information should service members place on their returns?
What type of identifying information should service members place on their tax returns? Members of the Armed Forces should enter their names, social security numbers, and permanent home addresses on their return. However, taxpayers who are due a refund and do not want it mailed to their permanent home address should enter a current address on the return. A military person living overseas should use an APO or FPO address. Exercises: Q1 page 43-1 True or False? Members of the Armed Forces don’t need to include their social security numbers on their tax return. True False

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Refer to TIP on page 34-1: If the postal service does not deliver to the taxpayer’s street address and the taxpayer has a post office box, enter the post office box number on the line for the present home address.

Ask for a volunteer to answer question number 1.

Answer Q1: False Members of the Armed Forces should include their name, social security number, and permanent home address on their return.

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What action should a service member who has moved take? Taxpayers who changed their mailing address during the year should notify the IRS of the change on Form 8822, Change of Address. Taxpayers who move after filing a tax return should fill out and mail Form 8822 to the IRS service center for the state where their returns were previously filed. The service 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 return from his home address in Florida on March 12. On March 30 he was transferred to Puerto Rico. Where should Tony submit his Form 8822, Change of Address? A. To the IRS service center for Florida B. To the IRS service center for Puerto Rico C. Either of the above Refer to TIP at the bottom of page 34-1. Direct Deposit is fast, simple, safe and secure and removes concerns about mail delivery.

Call the class’ attention to the image of Form 8822 on page 34-1.

Have the class look at Question 2 in the exercise box on page 34-2 as well as the Form 8822.

Answer A2 - Because he already filed his return from his previous address, Tony should 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?
Where should I file the return? Members of the Armed Forces should send their federal returns to the service center for where they currently live. If the military member is stationed overseas and has an APO or FPO address, file the paper tax return with the IRS Service Center in Austin Texas, 73301-0215 (USA). When should I file the return? Most individual tax returns cover a calendar

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Consider showing the students www.irs.gov page for where to file. Note: If you e~file this is all done by computer.

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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 following year.

Note: If you have an individual 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 unable to pay the tax due? Taxpayers who cannot pay the tax due with their tax return should attach Form 9465, Installment Agreement Request. The IRS will try to arrange an installment payment agreement that reflects the taxpayer’s ability to pay the tax owed. However, taxpayers should pay as much as possible with their return to reduce the amount of interest and penalties that will be added to the unpaid balance. Taxpayers can now complete an Online 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 selfqualify, apply for an installment/payment agreement, and receive immediate notification of approval. Exercise Q3 on Page 34-3 True or False? Taxpayers who attach Form 9465, Installment Agreement Request, to their tax return will avoid interest charges on any tax balance they cannot pay by the due date. Options: The Form 9465 Installment Agreement request can be efiled with the tax return. Show the TaxWise version to the students. Refer the students to the image of the Form 9465 on page 34-3. Consider showing the class the Online Payment Agreement at www.irs.gov - show the page to the students if you have internet access.

Discuss exercise 3 with the students. A3: The correct answer is FALSE. Note: The most relevant part of the answer is, “Interest will be charged on the unpaid tax.” The

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taxpayer who files on time will not be charged the failure to file penalty.

What are the extension requirements for taxpayers within 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 is when the combat zone extension applies.

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Remind students that this is a change from the prior 4 month extension. If available, show how the Form 4868 can be e-filed with the TaxWise software. Show the class the image on page 34-3. Refer to TIP on page 34-3: See Publication 3, Armed Forces Tax Guide, for extensions of deadlines and deferrals of taxes due that may apply to members of the Armed Forces.

How does a taxpayer get an automatic extension? Taxpayers living in the United States can receive an automatic six-month extension of time to file their federal tax returns. To get the automatic extension, taxpayers must file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, by the due date for their tax return (usually April 15). Calendar-year taxpayers who take the extension will have until October 15 to file their tax return. Taxpayers cannot use the automatic sixmonth extension if they: ƒ Choose to have the IRS figure their tax, or ƒ Are under a court order to file their returns by the regular due date

Refer to TIP on page 34-4: For more details on penalties, refer to filing information in Publication 17.

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Will the taxpayer owe interest and/or penalties? Although taxpayers are not required to pay their tax due when submitting Form 4868, they will owe interest on any tax not paid by the original due date. Interest will be charged from the due date to the date of 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 taxpayers can receive an automatic sixmonth extension? A. Avery, who filed Form 4868 in February and chose to have the IRS figure his taxes B. Benton, who filed Form 4868 on April 15 and did not include any tax payments C. Calvin, who filed Form 4868 on April 20 and included a tax payment that was over 90% of what he owed D. None of the above

Remind students that an extension of time to file does not extend the time to pay the taxes owed.

A4: B. To get the extension, taxpayers must file Form 4868 by the return’s due date. Remind students that taxpayers should pay the balance owed by the due date of the return to avoid penalty and interest charges.

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”

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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 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.

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Who qualifies for an Automatic Two-Month Extension? U.S. citizens and resident aliens are 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 extension must attach a statement to their return stating that they meet the requirements.

Discuss the requirements with the students.

Advise students that only a statement showing the requirements are met must be attached to the return.

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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 taxpayers has until June 15 to file a tax return? A. Weston, who files a joint return with his wife, Sheila. She was stationed in the Philippines from January through May, and they paid their taxes by credit card on April 2. B. Lilly, who began working for a company in Mexico in January, but whose main home is still in Texas. She filed Form 4868 on April 10. C. Dwayne, who was stationed in South Korea from February through July. D. None of the above A5: The answer is A & C. For Weston and Sheila, who file jointly, only one spouse needs to meet the requirements to take advantage of the automatic extension. Dwayne’s due date is automatically extended to June 15.

Refer to the TIP on page 34-5: Traveling outside the United States and Puerto Rico on the due date does not qualify the taxpayer for an automatic two month extension.

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Exercises (continued) page 34-5 Q6: Pvt. Franklin, a U.S. citizen, is a calendaryear 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

A6: A. April 15

What are the tax options for combat zone participants?
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 x Any period the qualifying individual is hospitalized in the U.S. for injuries

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Demonstrate the concept to the students.

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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 Add the total number above to the date the taxpayer left the combat zone.

Example page 34-6 Captain Kristina Jones entered a combat zone on December 1, 2005. She remained 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, 2008). IRS Publication 3, Armed Forces Tax Guide will provide additional information for combat zone extension of deadline. Exercises (continued) page 34-6 Question 7: If a taxpayer served in a combat zone from December 30, 2005, through May 31, 2007, and was not injured, what would the deadline be for filing a claim for a refund on their 2005 tax return?

A7 page 34-6: The answer is The deadline for filing a claim for the taxpayer’s 2005 tax return is 180 days plus the number of days remaining for the taxpayer to take action when they entered the combat zone. The deadline for 2005 is extended 286 days (180 plus 106) after they leave the combat zone to March 13, 2008. The 106 additional days are the number of days left in the 3-year

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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?
Other options or time that can be counted for taxpayers in a combat zone or qualified hazardous duty area are: x Missing status such as missing in 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

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Discuss options available with students.

What are rules for reservists called to active duty?
Reservists called to active duty or regular military members not in a combat zone may

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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?
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.

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Can other parties assist with a tax return?
If a taxpayer wants a third-party designee to discuss a tax return with the IRS, the “Yes” box in the third party designee area of the return must be checked. Also, the taxpayer 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. Use caution when allowing a representative to sign for someone. See Signatures in the Filing Information chapter in Publication 17 for more information. If it is not possible to obtain a signature for

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Refer students to screen shot of Third Party Designee section at the bottom of the page.

Note: This is in Publication 17 as well. Right hand column, page 21 in the tax year 2006 version under the heading “Spouse in a combat zone”.

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a joint return from a spouse serving in the combat zone, a signed authorization to act on the taxpayer’s behalf can be accepted. The IRS also accepts a written statement 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.

Note: The final return is the one for the year in which the taxpayer dies.

What are the tax forgiveness provisions for decedents?
Special tax-forgiveness provisions apply to individuals who die: ƒ While serving in a combat zone or from wounds incurred while serving in a combat zone, or ƒ From wounds or injuries incurred in a 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.

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Discuss with students the Special tax-forgiveness provisions available for anyone in charge of a deceased person.

For example, for a taxpayer who died in February 2007, the 2006 tax return due April 15, 2007 is not the final return. The final tax return will be the 2007 Form 1040 due April 15, 2008. The final tax return is due at the same time 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.

TaxWise Hint: Type the date of death of the taxpayer or spouse in the appropriate box. If you have not previously done so, go to Name Line 2 in the U.S. address area at the top of the Main Information sheet and enter the name of the person filing the return for the deceased person.

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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 provisions that apply if the taxpayer is serving outside the combat zone.

The combat zone tax forgiveness provision applies for the year of death and for any prior year ending on or after the first day 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 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 incurred: x While a U.S. employee, and 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.

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Remind students that a taxpayer who died because of military or terrorist action liability is forgiven at death.

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EXERCISES Q8 page 34-9 Exercise 8: Mr. Tim Morris, a civilian employee of the United States, died in 2007 as a result of 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

Discuss the answer with the students. A8: The answer is: 2004, 2005, 2006, 2007

What are the rules for filing a return for decedents?
The personal representative must file the 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. To make a claim, the decedent’s representative must file: x Form 1040EZ, Form 1040A, or Form 1040 for each year an income tax return has not yet been filed x Form 1040X Amended U.S. Individual Income Tax Return for each year an income tax return has already been filed.

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Refer to Publication 3 for more information on decedent returns.

Refer to TIP on page 34-9. Only the decedent’s part of the joint tax liability is eligible for the refund or tax forgiveness. Look up information on signing a joint return if one spouse has died or cannot sign the return, in Publication 17 Index, keyword: Signatures.

Summary
ƒ ƒ ƒ Armed Forces members should send their tax returns to the service center for where they currently live. This lesson will help you determine special filing concerns of U.S. Service Members. Most members of the Armed Forces send their federal returns to the service center for where they currently live Most taxpayers who live in the U.S. or Puerto Rico should file their

Page 34-9
Review summary topics with students.

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Lesson 34 - Page 14 of 15

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individual tax returns by April 15 Taxpayers who changed their mailing address should notify the IRS of the change on Form 8822, Change of Address Taxpayers who cannot pay the tax due with their tax return should attach Form 9465, Installment Agreement Request Extension rules vary depending on whether the taxpayer lives in the U.S. or outside the U.S. 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. 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 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 determine how to amend a 2007 return that was originally created using TaxWise at your volunteer site. There are other reasons, but two common reasons a taxpayer may need an amended return are: x x Forms W-2 or 1099 were received after they filed their original return. They may have claimed their personal exemption, but later discovered that their parents were entitled to claim them. Tell students they will have to conduct a probing interview using page 2 of Form 13614. Point out that they can prepare an amended return using TaxWise, but amended returns can’t be filed electronically. Make sure the students have copies of Form 1040X and instructions.

Before preparing an amended return, examine the original return and look for the error. Ask the taxpayer to explain what happened. Be sure that the original return is, in fact, incorrect.

Lesson 35 - Page 1 of 6

When is an amended return required?
Returns are not usually amended for math errors. The IRS corrects computation errors and normally writes the taxpayer and asks 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 require amending? Please read the TIPs on page 35-1. Any questions?

Page 35-1
Tell the students if their site e-files returns, math errors are usually non-existent.

Listen for the responses on page 35-1 of the text and make sure each bullet is covered. An injured spouse claim is filed using Form 8379, not Form 1040X Read the example on page 35-2.

Getting Started
Let’s move on, to get the process underway you will need the taxpayer’s copy of the original return and the information that 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 correspondence from the IRS making changes to the return or if the taxpayer amended the return for another issue. You will need to know this in order to correctly amend the return.

Page 35-2
Note: If the federal return has to be amended, often the state return must be amended as well.

Ask a student to read the second bullet point on the middle of page 35-2.

Lesson 35 - Page 2 of 6

Form 1040X
Before we get started in TaxWise, let’s look at the Form 1040X. This form is not year specific, but you want to be sure you are using the latest version of the form. VITA/TCE clients are calendar year taxpayers. They report income received from January 1 through December 31 and claim allowable deductions paid during the same period. If you were doing the 1040X by hand you would put 2007 after calendar year. 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 Changes. Use this section to explain specific changes being made to the return and the reasons for the changes.

Page 35-2
Have the students look at the upper left corner for the revision date.

Note the sentence under the Form 1040X header. Read it to the class.

Point out that if the original return is on the computer, TaxWise will enter the date for you.

The instructions for Part II have the 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 covered so far?

Note: Explanations should be clear and easy to understand. For example, “taxpayer received another W-2 after they filed original return” or “taxpayer meets the qualifications to file as Head of Household instead of Married Filing Separately”

Respond as needed.

Lesson 35 - Page 3 of 6

What are the time limits on 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 amended return, taxpayers must file the return within three years from the due date of the original return or two years after the date they paid the tax, whichever is later.

Page 35-3

Point out returns filed before the due date, without regard to extensions, are considered filed on the due date. Have a student read the example on page 35-3.

Time periods for claiming a refund are suspended for a period when a taxpayer is financially disabled. These circumstances will be very rare occurrences. There are a few exceptions to the three year rule. Claiming a bad debt for worthless securities is one. There are also some Military issues.

Pub. 17 has the definition. Have the class research and read it in the pub. Point out that if the taxpayer appears to qualify for an exception to the three year time limit, they should refer the taxpayer to a professional tax preparer.

If the taxpayer is due a refund: 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 original refund check (if any) while waiting for any additional refund 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.

Page 35-4

Remind the class that this interest is taxable and will need to be reported as income.

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. The IRS will calculate the interest and send a bill. Interest is calculated based on the amount of tax owed and for each day the balance due is not paid in full. Let’s take a few minutes and complete the exercises at the bottom of page 35-4. Review the answers when done. A1: No, it is not too late. John 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. Point out that the interest rate can change every 3 months.

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Completing the Amended Return in TaxWise

Page 35-5
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 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 after their original filing 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, look in the paper 1040X instructions.

Page 35-5

Make sure that any additional withholding has been included.

Discuss processing time and interest and penalty possibilities.

Summary
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.

Page 35-6

U.S. GOVERNMENT PRINTING OFFICE: 2007–629–017

Lesson 35 - Page 6 of 6

Notes

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