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Western Governors University *

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C237

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Law

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Jan 9, 2024

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DEPENDENTS & EXEMPTIONS Can a married taxpayer claim their spouse as a dependent? NO A spouse is never considered the dependent of the other spouse. Martin and Regina were married until their divorce in November of the tax year. Can they take an exemption for each other since they were married most of the year? NO Taxpayers who are divorced or legally separated at the end of the tax year cannot claim their (former) spouse as an exemption. Allen can be claimed as a dependent on his mother's tax return, but his mother is not claiming him as a dependent. Can Allen claim his personal exemption on his own tax return? NO Allen cannot claim a personal exemption for himself if he can be claimed on a taxpayer's return, even if the other taxpayer chooses not to claim him as a dependent. RESIDENCY AND HOUSEHOLD QUALIFICATIONS Todd has lived all year with his girlfriend, Eva, and her two children in his home. This cohabitation does not violate local laws. Eva is not required to file, and does not file, a tax return this year. Eva and her two children pass the "not a qualifying child test" to be Todd's qualifying relatives. Can Todd can claim them as dependents if he meets all the other tests? However, there is an exception to this statement. A child may qualify as the taxpayer's dependent under the tests for qualifying relative, even if that child is the qualifying child of another taxpayer. This is allowed only when the child's parent (or other person for whom the child is a qualifying child) is not required to file an income tax return and either does not file a return, or only files to get a refund of income tax withheld or estimated tax paid. Bob and Judy live together and are not married. They have one child together, Katie, who is 4 years old. Bob, Judy, and Katie are U.S. citizens and have SSNs. Katie did not provide any of her own support and lived with Bob and Judy all year. Bob's AGI is $18,500 and Judy's AGI is $14,000. They had no other income. Neither Bob nor Judy can be claimed as a dependent by any other taxpayer. Bob pays for Katie's daycare so he and Judy can work. Bob pays over half of the costs of maintaining their home. Who may claim Katie as their qualifying child, and what can be claimed on the return? Katie is a qualifying child for both Bob and Judy. They can decide who will claim Katie and all the benefits. Katie is a qualifying child for both Bob and Judy. If they agree and Bob claims Katie, he can claim the Head of Household filing status, the child tax credit, the child and dependent care credit, and the earned income credit if all other rules are met. Phil is a widower who works full-time and has an AGI of $35,000. He supports his 16-year-old daughter, Mariah, who lives with him in California. Phil's parents also live with him. Phil's parents always file a joint return to pay tax on their pension income, investment income, and Social Security benefits. Phil's parents' AGI is $42,321. Everyone in Phil's family is a U.S. citizen and has SSNs. This tax year, Mariah earned $10,000 working part-time. She put the $10,000 in a college savings account. If Phil and his parents both claim Mariah as a dependent on their returns, who would be entitled to claim Mariah as a dependent based on the tie-breaker rule? Phil wins the tie-breaker rule because he is Mariah's parent. Questions Saturday, October 14, 2023 5:27 PM Basic Notes Page 1

RESIDENTS & NONRESIDENTS Raul is a 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, 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? Raul can claim Head of Household status because his children are his qualifying persons. If Raul did not have a qualifying person, he would have to use the Married Filing Separately filing status since his wife chose not to file a joint return. When Edward Chambers and his wife Lucia got married in January, Lucia was a nonresident alien. In June, Lucia obtained her green card and became a resident alien. She remained a resident for the rest of the year. Lucia wants to be treated as a resident alien for the entire year for tax purposes. Can she use the Married Filing Separately status? Taxpayers and their spouses who choose to be treated as resident aliens must file a joint return for the year that they make the choice, but can file joint or separate returns for later years. Mark Gibson, a U.S. citizen, lives in Italy. His wife, Liliana, is an Italian citizen and has never lived in the U.S. She earned income in the tax year by working full time at her family's restaurant in Italy. She has an ITIN and no other taxpayer can claim her as a dependent. Which of the following statements is true? Mark can file a Married Filing Separate return and report only his own income and deductions. Sal Catron is a U.S. citizen and his wife, Reina, is a nonresident alien. They file a joint return, to which they attach a statement declaring their choice to treat Reina as a resident alien. Which of the following events would end the selection for later years? The choice to treat a nonresident alien spouse as a resident alien may be suspended later if neither spouse is a U.S. citizen nor a resident alien during that year. The choice may be ended due to revocation of the will, death, divorce, legal separation, or inadequate records. Ian Dawson was a nonresident alien when he married Judy Miller on December 31, 2020. They chose to treat Ian as a resident alien and filed joint tax returns for 2020 and 2021. To their 2020 return, they attached the required signed declaration stating that they both choose to be treated as resident aliens. In January 2022, Ian returned home to Scotland to take care of his father, who was gravely ill. For part of the 2022 tax year, he was a nonresident alien. Was Ian and Judy's choice to treat Ian as a resident alien suspended for this reason? Once the choice is made to treat a nonresident alien as a resident alien for tax purposes, the option is suspended during a later year only if neither spouse is a U.S. citizen nor a resident during that year. William Burke's wife is a Greek citizen. Her sister, Athena, a Greek citizen, lived in the Burkes' home in Greece for the entire tax year. William provided more than 50 percent of Athena's total support. Can William claim his sister-in-law as a dependent? His sister-in-law was not a citizen or resident of the United States at any time during the year. Therefore, William cannot claim her as a dependent. REVIEW Is a person who holds an alien registration card considered a lawful permanent resident of the United States? YES Individuals are generally granted lawful permanent residence in the United States if the BCIS Basic Notes Page 2

Individuals are generally granted lawful permanent residence in the United States if the BCIS has issued an alien registration card, also known as a green card, to them. Juan is a citizen of the Philippines and does not have a green card. He came to the United States for the first time on November 1, 2020, and was here for 30 days. In 2021, Juan was in the United States for 60 days. Juan returned to the Philippines and returned to the United States on September 1, 2022. He stayed in the United States for the rest of the year. Does Juan meet the substantial presence test? NO Juan does not meet the substantial presence test because he was present in the United States for only 147 days over three years. In 2022, he was present 122 days; in 2021, 20 days are counted toward the test (1/3 of 60); in 2020, 5 days are counted (1/6 of 30). Julio Isanti was a resident alien on December 31 of the tax year and married to Mary, a nonresident alien. Can they choose to treat Mary as a resident alien and file a joint income tax return? YES When a taxpayer is a citizen or resident alien whose spouse does not meet the green card or substantial presence test, the couple may choose to file as Married Filing Jointly and treat the nonresident spouse as a resident alien. Paul Stone, a U.S. citizen, is married to a Chinese citizen. Their daughter was born in China during the tax year. Does his daughter meet the citizen/resident test? YES Paul's daughter is considered a U.S. citizen because her father is a U.S. citizen. Lilith, a U.S. citizen, lives in Japan. She is married to Kenji, a Japanese citizen who has never been to the United States, and the couple has never elected to treat Kenji as a resident alien for tax purposes. They have two children, for whom they provide total support. Lilith has decided that using the Head of Household filing status on her tax return would result in a lower tax. Can Lilith file as Head of Household? YES Even though Lilith is married, she can be considered unmarried for tax purposes since her husband is not a U.S. citizen or resident. Therefore, she can use the Head of Household filing status. Jay is in the U.S. Army in Germany. His wife and children live with him, and he can claim the children as dependents. Jay's wife (a citizen of Germany) chooses to be treated as a resident alien for tax purposes. Jay meets all of the qualifications for Head of Household. Even though he is married, can he claim Head of Household status (assuming he meets the other requirements for filing as Head of Household)? NO Jay cannot claim the Head of Household status because his spouse chooses to be treated as a resident alien for tax purposes. If she were being treated as a nonresident alien, Jay would be considered unmarried for tax purposes and could claim Head of Household status. INCOME When are employees required to report their tip income to their employer? Individuals who receive $20 or more monthly tips from one job must report their tip income to their employer. Bonuses that are reported to employers are included as wages on Form W-2. U.S. Savings Bonds Co-owners IF… THEN tax on the bond's interest must be paid by… Basic Notes Page 3

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by… Pat uses his funds to buy a bond in his name and the name of Tracy as co-owners Pat Pat buys a bond in the name of Tracy, who is the sole owner of the bond Tracy Pat and Tracy buy a bond as co-owners; Pat contributes 75% of the purchase price; Tracy 25% Both: Pat pays taxes on 75% of the interest; Tracy, 25% Spouses Pat and Tracy, who live in a community property state, buy a bond that is community property Both spouses: If Pat and Tracy file separate returns, they generally pay one-half each. STATE & LOCAL REFUNDS In your interview with Nancy, you learn that she received a refund of the previous tax year's state income taxes. What do you need to know to determine if Nancy owes taxes on her state tax refund? You need to ask Nancy: Did you itemize your deductions last year? Did you include the state and/or local income taxes you paid that year? If the answer to both questions is yes, complete the state tax refund worksheet in the software . The software calculates the taxable part of the refund (if any) and enters the amount on Form 1040. REVIEW Is income produced by investments, such as interest on savings or dividends on stock, considered earned income? NO Income produced by investments is considered unearned income. Earned income is any income accumulated by personal effort, such as wages or business/self-employment income. Keith has received Form W-2 for his part time job, but did not receive Form W-2 for a taxable college scholarship he won last year. Does Keith need to report the scholarship as income on his tax return? YES Even though Keith did not receive Form W-2 for his taxable scholarship income, he must include the amount on Form 1040 as income. If entered in the software correctly, "SCH" and the scholarship amount will appear to the left of the wages line on his printed tax return. Wally claimed the standard deduction on last year's tax return for a state refund. Does he have to include the refund in his taxable income? NO Taxpayers who claimed the standard deduction on the tax return for the year they received a refund of state or local income taxes do not have to include the refund in their taxable income. Wendy holds a traditional IRA to which she makes contributions each year. Throughout the year, Wendy gets statements listing the interest earned. Is she supposed to pay taxes on any of this interest income? NO Interest on a traditional IRA is tax-deferred. No tax is owed on that interest until the taxpayer makes withdrawals from the IRA. UNEMPLOYMENT COMPENSATION Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state in the U.S. It is not considered earned income for the purposes of calculating EITC, but in most cases, unemployment compensation is taxable. Basic Notes Page 4

purposes of calculating EITC, but in most cases, unemployment compensation is taxable. If taxpayers contribute to a governmental unemployment compensation program or a governmental paid family leave program and the contributions are not deductible, amounts received under the program are not included as unemployment compensation until the taxpayers recover their contributions. If the taxpayer has already deducted all of the contributions to the program, the entire amount received under the program is taxable. Unemployment compensation is reported to the recipient on Form 1099-G. Enter the amount of unemployment compensation received in box 1 or box 5 RTAA of Form 1099-G on Form 1040, Schedule 1. Enter the amount of withholding from Form 1099-G, box 4 in the payment section on Form 1040. If the taxpayer has more than one Form 1099-G, total the amounts from each box on all the Forms(s) 1099-G and enter on the return. SOCIAL SECURITY BENEFITS AND RAILROAD RETIREMENT Jacob is a retired railroad switchyard operator. Using the intake and interview sheet, the volunteer determined that Jacob received Railroad Retirement Benefits. He received Form RRB-1099 and Form RRB-1099-R. The amount from Form RRB-1099 will be added to any amount of Social Security benefits. 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 Form RRB-1099. 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 several years ago. This tax year he sold all of his stock and moved into senior housing. Hank received $31,896 of taxable income from the sale of the stock. 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? The maximum amount that could ever be taxable on the net benefits is 85% or $9,965. The taxable portion of Social Security benefits is never more than 85% of the net benefits the taxpayer received. In many cases, the taxable portion is less than 50% Last year, Jane applied for Social Security disability benefits but was told she was ineligible. She appealed the decision and won. In 2020, she received a lump-sum payment of $6,000, of which $2,000 was for 2019 and $4,000 was for 2020. Jane also received $5000 in Social Security benefits in 2020, so her 2020 Form SSA-1099 shows benefits paid of $11,000. Jane had other taxable income in 2019 and 2020. She should figure her taxable benefits under the lump- sum election method to see if it is lower. Under the lump-sum election method, refigure the taxable part of all the benefits for the earlier year (including the lump-sum payment) using that year's income, then subtract any taxable benefits for that year that were previously reported. The remainder is the taxable part of the lump-sum payment and is added by the software to the taxable part of the benefits for the current year (figured without the lump-sum for the earlier year). In order to compute the taxable benefits, you will need copies of the taxpayer's prior year returns. For additional information on the lump-sum election, see Publication 915. Basic Notes Page 5

REVIEW The taxable amount, if any, of a taxpayer's Social Security benefits depends upon filing status and other reportable income. YES Generally, if Social Security (or Social Security equivalent) 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. Generally if Social Security benefits are the only source of income, then the benefits are not taxable. YES Taxpayers may not be required to file a return. However, if the taxpayers are Married Filing Separately and lived with their spouse at any time during the tax year, 85% of the benefits will be taxable. Tier 1 railroad retirement benefits are not treated like Social Security equivalent benefits. NO For tax purposes Tier 1 railroad retirement benefits are treated like Social Security benefits and are shown on the Blue Form RRB-1099, box 5. If a taxpayer is filing a joint return and one spouse receives Social Security benefits and the other spouse does not, the spouse's other income does not need to be included in the tax return. NO If the taxpayer files a joint return, enter the amounts from each Form SSA-1099 and the software will compute the portion that is taxable, if any. The taxable portion of Social Security benefits is never more than 85% of the net benefits the taxpayer received. YES In many cases, the taxable portion is less than 50%. However, if the taxpayers are Married Filing Separately and lived with their spouse at any time during the tax year, 85% of the benefits will be taxable. QUALIFIED MEDICAID WAIVER PAYMENTS True or False? Taxpayers who receive payments described in Notice 2014-7 means that their qualified Medicaid waiver payments may be excluded from gross income. IRS Notice 2014-7 addresses the income tax treatment of certain payments to an individual care provider under a state Home and Community-Based Services Waiver (Medicaid waiver) program. The notice provides that "qualified Medicaid waiver payments" as difficulty of care payments are excludable from gross income. Are distributions from Educational Savings Accounts, such as a Coverdell ESA and a 529 plan, taxable? A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. The taxable amount must be reported as other income on the tax return. DEDUCTIBLE EDUCATOR EXPENSES Tracy is a 5th and 6th grade teacher who works full-time in a year-round school. She had 1,800 hours of employment during the tax year. She spent $262 on supplies for her students. Of that amount, $212 was for educational software. The other $50 was for supplies for a unit she teaches 6th graders on health. What Basic Notes Page 6

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for educational software. The other $50 was for supplies for a unit she teaches 6th graders on health. What expenses can she deduct? Only the $212 is a qualified expense. She can deduct $212. Expenses that qualify include books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. Qualified expenses also includes amounts paid or incurred after March 12, 2020, for personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of coronavirus. Expenses that do not qualify are home schooling, nonathletic supplies for physical education, or health courses Debbie is a part-time art teacher at an elementary school. She spent $185 on qualified expenses for her students. During the tax year, she has 440 hours of documented employment as an educator at the school. How much of her expenses can she deduct? Because she has only 440 hours of documented employment as an educator during the tax year, she cannot deduct her educator expenses. The required minimum is 900 hours during the school year. FORM 1099-INT or 1099-OID Gloria withdrew $5000 from a one-year, deferred-interest certificate of deposit in the current tax year. She had to pay a penalty of three months' interest and claim the penalty amount as an adjustment to income. Taxpayers can adjust their income by deducting penalties they paid for withdrawing funds from a deferred interest account before maturity. Ask if the taxpayer and/or spouse made any early withdrawals during the tax year. If so, ask to see Form 1099-INT, Interest Income, or Form 1099-OID, Original Issue Discount, documenting the penalty. PENALTY ON EARLY WITHDRAWAL OF SAVINGS Trudy has one Form W-2 and one Form 1099-INT and no other income. Her Form 1099-INT shows both interest income and an early withdrawal penalty. Trudy does not pay alimony, and she did not make a contribution to a traditional IRA. Trudy can claim the adjustment for the penalty on early withdrawal of savings on Form 1040. The early withdrawal penalty amount should be entered in the interest income section if it is listed on Form 1099-INT. Otherwise, go to the Deductions section, then Adjustments, and click begin on the Penalty on Early Withdrawal of Savings or CD line in the software. DEDUCTIONS The student loan interest deduction is generally the smaller of $2,500 or the interest paid that year on a qualified student loan. This amount is gradually reduced (phased out) or eliminated, based on the taxpayer's filing status and MAGI. Robert has taken his first job after completing law school. His filing status is Single. He paid $3,000 in interest on his student loans during the tax year. With all adjustments to income (except student loan interest adjustment), his MAGI is below the MAGI limits. He can deduct $2,500 of his student loan interest as an adjustment to income. Veronica and her husband are filing jointly. Their MAGI is above the fully deductible income limits. She completed her doctoral degree last year and paid $2,400 in student loan interest during the tax year. Due to their high MAGI, their deduction must be calculated; it will be less than the full amount of interest that she paid. Todd and Janet have a MAGI below the threshold limit. They are married and file a joint return. Two years ago, they took out a loan so Todd's mother could earn her RN degree at night school. Todd could not claim her as a dependent on his return. This year, they paid $1,000 in interest on the loan. Does his mother meet the student qualifications? NO Basic Notes Page 7

NO Todd's mother was not their dependent at the time they took out the loan. Darla obtained a qualified student loan to attend college. After Darla's graduation from college, she worked as an intern for a nonprofit organization. As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. This payment was treated as additional compensation and reported in box 1 of her Form W-2. Assuming all other qualifications are met, Darla can deduct this payment of interest on her tax return. Ethan obtained a qualified student loan to attend college. After graduating from college, the first monthly payment on his loan was due in December. As a gift, Ethan's mother made this payment for him. No one is claiming Ethan as a dependent on his or her tax return. Assuming all other qualifications are met, Ethan can deduct this payment of interest on his tax return. Cassandra's mother obtained a loan for her daughter's qualified educational expenses. Cassandra, who is her mother's dependent, has agreed to pay the interest on the loan. Who can claim the deduction for student loan interest? Cassandra's mother, who is legally liable for the loan Correct. Because Cassandra made interest payments on behalf of her mother, who is legally obligated to pay the loan, then Cassandra's mother is treated as receiving payments from Cassandra and then making the payments, so the mother is allowed to deduct the payments. ELIGIBLE STUDENT Last year, Jeremy paid interest on a loan that allowed his 21-year-old daughter, Kate, to complete a program in holistic medicine. Kate, who qualifies as Jeremy's dependent, is a full-time student at Southwestern College of Synergistic Therapy and the loan paid for books, supplies, and equipment. The college, however, is not accredited. Jeremy cannot deduct the interest on the student loan. An eligible student is someone who is enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. The standard for what is half the normal full-time workload is determined by each eligible educational institution STUDENT LOAN INTEREST DEDUCTION Latricia's qualified expenses for her student loan interest deduction came to a total of $7,200 for the year. The same year, she received a gift of $1,000 from her aunt, and $1,000 in veterans' educational assistance. What amount of qualified expenses should Latricia use to figure her student loan interest deduction? $6200 Correct. Nontaxable payments received for education expenses, including veteran's assistance benefits, must be subtracted from the taxpayer's education expenses. Gifts, bequests, and inheritances do not have to be subtracted. Latricia's MAGI for the year was $46,900 (line 4 of the Student Loan Interest Deduction Worksheet). The amount of student loan interest she paid as reported on her Form 1098-E was $354. Can Latricia report the entire $354 as her student loan interest deductible YES Correct. Because Latricia's MAGI is not more than $70,000, she can deduct all her student loan interest up to $2,500. Basic Notes Page 8

loan interest up to $2,500. You are helping Latricia report her student loan interest deduction of $354. She files as single on Form 1040. Qualified student loan interest deductions are reported on Form 1040, Schedule 1. Line 20: $354 JURY PAY Does an employee still have to report the entire amount of jury duty pay as taxable income if they continued to receive their regular wages when they served on jury duty? YES The employee still has to report the entire amount of jury duty pay as taxable income, but may claim the amount of jury duty pay given to the employer as an adjustment to income. Employees who turn jury duty pay over to their employers can claim the deduction on Form 1040 as an adjustment to income. The amount is shown as a write-in adjustment. See Form 1040 Instructions for more information. REVIEW During the tax year, Max, who files as head of household, paid interest of $2,800 on a qualified student loan. His modified AGI is $49,000 (line 4 of the Student Loan Interest Deduction Worksheet). How much can Max claim for the student loan interest deduction? $2500 Because Max's modified AGI is not more than $70,000, he can claim the maximum allowable deduction of $2,500. David files as a qualified widower with a dependent child. His modified AGI for the year was $83,000 (line 4 of the Student Loan Interest Deduction Worksheet). The amount of student loan interest he paid as reported on his Form 1098-E was $2,700 for the year. How much can David claim for the student loan interest deduction? $0 To claim the student loan interest deduction, taxpayers who file as a qualified widow(er) must have a modified AGI less than $70,000. A penalty for early withdrawal of funds from a savings account may be charged when the depositor withdraws funds _____. Before the maturity date for a time deposit The penalty applies when a depositor withdraws funds before a time deposit account matures. Eric received a Form 1098-E with student loan interest His loan was for a qualified education expenses with an eligible institution. His filing status is Single. Can he claim the deduction? YES The student loan interest deduction is generally the smaller of $2,500 or the interest paid that year on a qualified student loan. This amount is gradually reduced (phased out) or eliminated, based on the taxpayer's filing status and MAGI. Is it true that taxpayers may subtract the deductible portion of their self-employment tax from their income? YES Self-employed taxpayers can subtract a deductible portion of their self-employment tax from their income. The deductible portion of the self-employment tax is automatically calculated from Schedule SE. Basic Notes Page 9

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from Schedule SE. Joe, age 35, made an excess contribution of $1,500, which he withdrew by the due date of his return. At the same time, he also withdrew the $75 income earned on the $1,500. Does Joe have to pay an additional tax on the on the early distribution? YES He must pay an additional tax of $7.50 the 10% additional tax on early distributions because he is not yet 59½ years old. STANDARD DEDUCTION - OLDER THAN 65 AND BLIND Sherman is 73 years old and blind. He files as Single using Form 1040. Because Sherman is over 65 and blind, check the appropriate box on Form 1040 or Form 1040-SR. What is his standard deduction? The standard deduction is higher if the taxpayer is 65 or older. It is also higher if the taxpayer is blind. Use the Standard Deduction for People 65 or Older or Who are Blind Chart to apply these rules and to calculate the amount of the taxpayer's standard deduction. Sherman's standard deduction would be $16,450. Information about age and blindness are reported in the check boxes located on Form 1040 or Form 1040-SR. The more check boxes marked, the higher the standard deduction. Tim is 67 and is filing as Single. He is not blind and he cannot be claimed as a dependent on someone else's return. What is Tim's standard deduction? Tim is entitled to the regular standard deduction for single ($12,950) plus an additional amount for being older than 65 ($1,750). He can take a standard deduction of $14,700. This amount can be found using the Standard Deduction for People 65 or Older or Who are Blind Chart in the Volunteer Resource Guide, Tab F, Deductions. Kevin and Jane are both 60, and Jane is blind. They are filing as Married Filing Jointly. Neither can be claimed as a dependent on someone else's return. What is the standard deduction for Kevin and Jane? They are entitled to the regular standard deduction for Married Filing Jointly ($25,900) plus an additional amount for being blind ($1,400). Kevin and Jane can take a standard deduction of $27,300. This amount can be found using the Standard Deduction for People 65 or Older or Who are Blind Chart in the Volunteer Resource Guide, Tab F, Deductions. TAXPAYERS WHO CAN BE CLAIMED AS DEPENDENTS Janet is single, 22, a full-time student, and not blind. Her parents claimed her as a dependent on their current year tax return. On the intake and interview sheet, Janet marked the check box for a dependent being claimed by another taxpayer. She has no itemized deductions, so you will compute her standard deduction using the Standard Deduction Worksheets for Dependents. The standard deduction is generally lower for an individual who can be claimed as a dependent on another person's tax return. Taxpayers that can be claimed as a dependent must use the Standard Deduction for Dependents Worksheet to determine their standard deduction. The worksheet can be found in the Volunteer Resource Guide, Tab F, Deductions. REVIEW For which of the following individuals would you use the Standard Deduction Chart to figure their standard deduction? Mary, who is 69, blind, and not a dependent Dependent taxpayers who are 65 or older or blind can use the Standard Deduction Worksheet to determine their standard deduction. Nondependent taxpayers who are 65 or older or blind can use the Standard Deduction Chart to determine their standard deduction. Roderick is 64 and blind. Can he claim an additional deduction? Basic Notes Page 10

Roderick is 64 and blind. Can he claim an additional deduction? YES Roderick is entitled to an additional amount for blindness. Leticia died in May just before reaching her 65th birthday. Does she qualify as age 65? NO Leticia does not qualify for the higher standard deduction given to those 65 or older because she was not 65 when she died. Bernard and his wife, Sofia, file as Married Filing Separately. Sofia will be itemizing her deductions. Can Bernard claim a standard deduction? NO Because the taxpayers are filing as Married Filing Separately and one spouse itemizes, the other cannot take the standard deduction. Douglas is 65 and his spouse, Terry, is 64. Neither are blind, nor can they be claimed as a dependent on someone else's return. They are filing as Married Filing Jointly. Is $27,300 the correct standard deduction for the couple? YES Douglas is entitled to an additional $1,400 for being age 65 or older, but Terry is not. The correct standard deduction for the couple is $27,300. CHILD & DEPENDENT CARE EXPENSES CREDIT Both spouses must have earned income in order to claim the child and dependent care credit. TRUE Both spouses must have earned income in order to claim the credit. Complete the additions to income for taxpayer or spouse if the taxpayer or spouse was either a full time student or disabled The Child and Dependent Care Credit is a nonrefundable credit, which means the credit may _____. Reduce the tax liability to zero but does not result in a tax refund True or False? The dollar amount of the child and dependent care credit is equal to the taxpayer's qualifying expenses. FALSE The credit is a percentage (20 to 35%) of the qualifying child and dependent care expenses. EARNED INCOME CREDIT Phillip and Martha are married. Phillip was a full-time student from January 1 through June 30 of the tax year. He earned $10,000 over the summer as a bartender. Martha also attended school full time during the same time period. She was unemployed during the summer months. For which months can Martha be treated as having earned income? January through June Martha should be treated as having earned income for the months she attended school full- time, which were January through June of the tax year. WORK-RELATED EXPENSE TEST Audrey is a stay-at-home mom. Her husband works and had earned income for the tax year. They have a young son with autism who must be supervised at all times. Audrey volunteers 12 hours a week at a local Basic Notes Page 11

young son with autism who must be supervised at all times. Audrey volunteers 12 hours a week at a local autism information hotline. She and her husband pay a caregiver to stay with their son during the hours she does her volunteer work. Do they qualify for the child and dependent care credit? They do not qualify because the caregiver expense is not work-related; that is, Audrey is not using it in order to work or to look for work. Also, to qualify for the credit, Audrey and her husband must both have earned income for the tax year. LIMITS TO CREDIT Mary has three qualifying children for the Credit for Child and Dependent Care Expenses. She spent $6,500 in qualified expenses, which was well under her earned income for the year. What would be the maximum amount Mary can use to figure the credit limit: If she received no dependent care benefits through her employer? If she received $4,800 in dependent care benefits through her employer? The dollar limit on the amount of work-related expenses that can be used to figure the credit is $3,000 for one qualifying person or $6,000 for two or more qualifying persons. This $6,000 limit doesn't need to be divided equally among them. If the taxpayer received dependent care benefits from an employer, the amount of the benefits excluded from income must be subtracted from the dollar limit. So, the maximum amount Mary can use to figure the credit limit would be: $6,000 if she received no dependent care benefits through her employer $1,200 if she received $4,800 in dependent care benefits through her employer ($6,000 - $4,800) REVIEW Celina and Dave have been divorced since 2013. They have three boys, ages 11, 9 and 7. All the boys are U.S. citizens, have SSNs and live with Celina. Dave and Celina both work and the boys need child care before and after school. The boys attend the Happy Days Day Care Center. Celina uses her alimony to pay the child care expenses. Dave also pays Celina $1,000 a month for child support. Dave and Celina have the name, address and taxpayer identification number for the day care center. Celina's AGI is $37,000 and Dave's AGI is $42,000. Celina will claim two of the boys as dependents and Dave will claim one. This was agreed to during the divorce and Celina signed Form 8332. Who can take the child and dependent care credit? Celina can claim the child and dependent care credit for all three boys. Dave cannot claim the credit because he is the noncustodial parent, even though he can claim one of the children as a dependent Barb and Adam have been divorced for 5 years. They have two children, Carol, age 6, and Patty, age 11. The children live with Barb except for one weekend a month plus one full month during summer vacation, which they spend with their father. Adam can claim the girls as dependents because Barb signed Form 8332. Barb works full-time and the girls go to church day care in the morning and evening. She pays St. John's Day Care $260 a week. She has the name and address of the day care, but they are tax exempt and she does not have a taxpayer ID. True or False? Barb can take the child and dependent care credit. TRUE Barb is eligible to take the credit. The children are under 13, and the rules for children of divorced or separated parents apply. She paid the expenses to a tax-exempt care provider, so she does not need the taxpayer ID. She can write "Tax-Exempt" in the space where the tax form calls for the number Vince's wife, Valerie died in March of the tax year. His daughter, Britney, is permanently and totally disabled. Britney received disability income that provided more than half of her own support. Basic Notes Page 12

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disabled. Britney received disability income that provided more than half of her own support. Vince lost his job in December of the tax year and received unemployment income. He cashed in his 401(k) savings and used the money for household expenses. He does not qualify for any exception to the additional tax on early distributions. His son, Wendell, attended summer day-care while Vince worked. Can Vince claim the credit for child and dependent care expenses? Vince can claim the credit for the day-care expenses he paid for Wendell. He cannot claim the credit for Britney because he did not pay more than half of her support. Do taxpayers who received benefits under a dependent care program need to complete Form 2441, Part III? YES Taxpayers who received benefits under a dependent care program need to complete Form 2441, Part III, before they complete Part II . Do you need to update the intake and interview sheet if you determine that a taxpayer is eligible for the child and dependent care credit? YES Update the Intake/Interview sheet under Expenses, make sure the box is checked to indicate that the taxpayer had child or dependent care expenses. Note anything unusual that the quality reviewer may need to know when reviewing this part of the tax return. For the purposes of the child and dependent care credit, is a spouse who attended school full time is considered to have earned income? YES A spouse who is either a full-time student for 5 months of the year or is incapable of self-care for some period of the year is considered to have earned income on a month-by-month basis. Taxpayers filing Married Filing Separately cannot claim deductions for the American opportunity credit, lifetime learning credit, or student loan interest deductions. The taxpayer filing status must not be Married Filing Separately. Taxpayers can file an amended return to claim the American opportunity credit if they received a valid identification after the due date of the return. FALSE Taxpayers cannot file an amended return to claim the credit for a year that the taxpayer and/or student did not originally have a required identification number by the return due date. NONQUALIFYING EXPENSES This tax year, Jackie paid $3,000 for tuition and $5,000 for room and board at her local university. To pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. The scholarship is a qualified scholarship that is excludable from Jackie's income — in other words, it is tax-free. For purposes of the education credit, she must first subtract the tax-free scholarship from her tuition (her only qualified expense). The student loan is not considered tax-free educational assistance, so it does not reduce the qualified expenses. Jackie is treated as having paid only $1,000 in qualified expenses ($3,000 tuition - $2,000 scholarship). Higher education emergency financial aid grants are not taxable to the student and do not reduce the student's qualified educational expenses. QUALIFYING EXPENSES Basic Notes Page 13

QUALIFYING EXPENSES Donna and Charles, both first-year university students, are required to have certain books and other reading materials to use in their mandatory first-year classes. Charles bought his books from a friend and Donna bought her materials at the university bookstore. Do Donna's and Charles' payments for books qualify as a related expense? YES Because of the American opportunity credit, "qualified tuition and expenses" were expanded to include expenditures for course materials. The term "course materials" means books, supplies, and equipment needed for a course whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance EXCLUDED AMOUNTS Joan Smith received Form 1098-T from the college she attends. It shows her tuition was $9,500 and that she received a $1,500 scholarship. She had no other scholarships or nontaxable payments. What is her maximum qualifying expense for the education credit? Taxpayers who pay qualified higher education expenses with tax-free parts of scholarships and fellowships cannot claim a credit for those amounts. Qualified expenses must be reduced by the amount of any tax-free educational assistance taxpayers receive. Her maximum qualifying expenses for the education credit would be $8,000 ($9,500 - $1,500). However, it may benefit the taxpayer to choose to include otherwise tax-free scholarships or fellowship grants in income. This may increase the education credit and lower the total tax or increase the refund. KIDDIE TAX Juan, a student, receives a grant equal to his qualifying education expenses. He otherwise has no filing requirement. He has $9,600 from a summer job, $4,000 education expenses, and a $4,000 Pell grant. Juan's parents file a return claiming Juan as a dependent and he has income that is within the allowable range for the American opportunity credit. Because Juan has no filing requirement, the kiddie tax does not apply. He does not need to file Form 8615, Tax for Certain Children Who Have Unearned Income. In another scenario, the student Juan uses the grant to pay the education expenses. Neither shows up on his tax return or his parents' return. Juan has no filing requirement and files only to get his withholding (from his summer job) back. His parents' qualified education expenses would be zero. Gross income = $9,600, no filing requirement, tax = 0. The kiddie tax does not apply. In another scenario, the student Juan chooses to declare $2,000 of the grant as income on his return and his parents use the education expenses toward the American opportunity credit. Juan's gross income is $9,600 + $2,000 = $11,600. As a dependent, Juan has no filing requirement and he has no tax. His parents claim $2,000 as qualified education expenses. Again, because Juan has no filing requirement, the kiddie tax does not apply. He does not need to file Form 8615. In another scenario, the student Juan chooses to include the entire grant as income on his return. Juan's parents can claim the entire $4,000 education expenses toward the American opportunity credit. Juan's gross income is $9,600 + $4,000 = $13,600. As a dependent, Juan now has a filing requirement and unearned income (the taxable scholarship) over the kiddie tax ceiling amount. The kiddie tax applies in this scenario and Juan will use Form 8615 to compute his tax. Form 8615 is out of scope. His parents claim $2,500 for the American opportunity credit. Note: The kiddie tax ceiling amount is adjusted for inflation each year. PREPAID EXPENSES Thomas paid $1,500 in December for qualified tuition for the winter semester that begins in January. Thomas can use the $1,500 paid in December to compute his credit for the current tax year. He cannot use it again next tax year. Basic Notes Page 14

it again next tax year. Taxpayers can claim payments that were prepaid for the academic period that begins in the first three months of the next calendar year. Expenses paid for an academic period starting in 2022 or the first 3 months of 2023. Carol paid $2,000 in December for qualified tuition for the spring semester, which begins in January. Is this prepaid amount a qualifying expense for the current tax year? YES Carol may use the $2,000 in figuring her credit. Taxpayers who prepaid qualified tuition and related expenses for an academic period that begins in the first three months of the following year can use the prepaid amount in figuring the credit. Ben and Lucy file a joint tax return. Their dependent, Amanda, was enrolled full time in college in 2021 and dropped out of college in 2022. Ben and Lucy obtained a personal loan in 2021 and used the proceeds to pay for tuition and related fees in 2021. The loan was repaid in 2022. Which year will they be entitled to claim an education credit? 2021 Ben and Lucy are eligible to claim an education credit for the 2021 tax year. The credit should be calculated for the year in which the taxpayer paid the expenses, not the year in which the loan is repaid. AMERICAN OPPORTUNITY CREDIT Toby had receipts for books and supplies his first year at college. He spent $1,291 for required books, lab supplies, and rock-hunting equipment he needed for his introductory chemistry and geology courses. The school does not require that these books and equipment be purchased from the college in order to enroll. Are these qualified expenses for the American opportunity credit? These are qualified expenses for the American opportunity credit. The American opportunity credit allows taxpayers to claim a credit of up to $2,500 based on qualified tuition and related expenses paid for each eligible student. The credit covers 100% of the first $2,000 and 25% of the second $2,000 of eligible expenses per student, up to the amount of tax. Forty percent of the American opportunity credit is a refundable credit, which means the taxpayer can receive up to $1,000 even if no taxes are owed. LIFETIME LEARNING CREDIT COVERAGE Jill attends Wanda's School of Beauty, an eligible institution. She paid $4,400 for the course of study, which included tuition, equipment, and books required for the course. The school requires that students pay for the books and equipment when registering for the course. What education expenses are eligible education expenses? The entire $4,400 is an eligible educational expense. The lifetime learning credit can be up to $2,000 per tax return, depending on the amount of eligible expenses and the amount of tax liability. The credit is 20% of up to $10,000 in eligible expenses paid for all students, up to the amount of tax on the return. Samantha, a professional photographer, enrolls in an advanced photography course at a local community college. Although the course is not part of a degree program, she enrolls in it to improve her job skills. The course fee paid by Samantha is considered qualified tuition for the purpose of claiming the lifetime learning credit. The taxpayer can take the lifetime learning credit if the expenses meet the requirements described in the Volunteer Resource Guide, Tab J, Education Benefits. The student is not required to be enrolled at least half-time or in a degree program, and a felony drug conviction does not disqualify the student. George, an engineer, plans to vacation in Europe next year. In preparation for the trip, he enrolls in a Basic Notes Page 15

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George, an engineer, plans to vacation in Europe next year. In preparation for the trip, he enrolls in a noncredit photography class at a local community college. Because George is not taking the course as part of a degree program or to acquire or improve his job skills, the cost of the course is not a qualifying expense for claiming the lifetime learning credit. Do not include expenses such as: Any course of instruction or 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 to acquire or improve job skills Room and board, insurance, medical expenses (including student health fees), transportation costs, or other similar personal, living, or family expenses Clark is an older student who has gone back to college half-time after serving 18 months in prison for felony drug possession. Which credit is appropriate for him? LIFETIME LEARNING CREDIT Clark's felony drug conviction prevents him from using the American opportunity credit; it does not bar him from taking the lifetime learning credit. Jake, a math teacher, is single and will take a three-month sabbatical during the tax year. During the sabbatical, he will take several specialized courses in advanced mathematics. His modified adjusted gross income is $30,000 and his tax liability is $4,000. Now assume that Jake plans to deduct his tuition expenses as job education on his Form 1040, Schedule C, in addition to claiming the lifetime learning credit. How much can he claim as a deduction? $0 Because Jake is claiming the lifetime learning credit, he cannot also deduct his higher education expenses on Schedule C of his Form 1040. This is considered to be a double benefit, which is two or more education-related benefits. REVIEW Mark paid $3,900 for his son's tuition last year. What is the maximum potential amount of his American opportunity credit? $2475 Mark's American opportunity credit is $2,475 because the credit is 100% of the first $2,000 and 25% of the second $1,900 of eligible expenses per student, up to the amount of tax. The lifetime learning credit is different from the American opportunity credit. However, they do share some of the same requirements. Which of the following requirements is true for both education credits? Taxpayers who use the filing status of Married Filing Separately are not eligible to claim either the American opportunity or lifetime learning credits. Do education credits reduce the amount of tax due? YES The amount of the credit is based on qualified education expenses the taxpayer paid during the tax year. Bob was a full-time student and a fifth-year senior. He has only claimed the American opportunity and Hope credit in three earlier years. Does he qualify for the American opportunity credit? YES Bob qualifies for the American opportunity credit because he only claimed the credit in three previous tax years. To claim qualified education expenses for the American opportunity credit, taxpayers may include required Basic Notes Page 16

To claim qualified education expenses for the American opportunity credit, taxpayers may include required course-related fees, books, supplies, and equipment even if they are not purchased from an educational institution. YES The American opportunity credit allows taxpayers to claim qualified education and related expenses, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. Karen Roberts is single and works full-time as a nurse's assistant in a hospital. Her modified AGI was $32,000. During the current tax year, she enrolled part-time in nursing school and took half the required course load. Her tuition was $4,000. As part of her employer-provided educational assistance, her employer reimbursed her for $1,000 in education expenses. The amount of her qualified education expenses is $1,000. NO Karen may be eligible for either the lifetime learning credit or the American opportunity credit. Her qualified education expense is the net of $4,000 minus $1,000, which is $3,000. CHILD TAX CREDIT For tax year 2022, families claiming the CTC will receive up to $2,000 per qualifying child under age 17 at the end of the tax year. Of the $2,000 amount, up to $1,500 may be refundable through the additional CTC per eligible child. Taxpayers must have earned income to be eligible for the additional child tax credit. A taxpayer electing to exclude foreign earned income from tax is eligible to claim the additional child tax credit? The additional child tax credit cannot be claimed by taxpayers electing to exclude foreign earned income from tax. Mary and Ralph got divorced in 2013. They have one child together, Amy, who lives with Mary. All are U.S. citizens and have SSNs. Mary and Ralph provide more than half of Amy's support. Mary's AGI is $31,000, and Ralph's AGI is $39,000. Amy is 12 years old. The divorce decree does not state who can claim the child. Mary signed Form 8332 to give the dependency exemption to Ralph. Ralph can claim Amy as a dependent and the child tax credit. Mary can use Amy to file as Head of Household and claim the earned income credit and the child and dependent care credit as long as she meets the requirements for those specific benefits. Since Mary signed Form 8332, the dependency exemption and the child tax credit is given to Ralph, the noncustodial parent. However, Mary can still file as Head of Household and claim the earned income credit and child and dependent care credit based on Amy, as long as she otherwise qualifies for them. Jose and Yolanda Alameda are Married Filing Jointly and have five dependent children under the age of 17. Jose and Yolanda both have valid SSNs. Their children have Individual Taxpayer Identification Numbers (ITINs). Are their children qualifying children for the purpose of the child tax credit? NO The children do not qualify for the child tax credit because they do not have valid SSNs. However, they may qualify for the credit for other dependents. May and Bob file as Married Filing Jointly and have two children who qualify for the child tax credit. Their MAGI is $56,000 and their tax liability is $954, which is less than the threshold limit for a married couple who files a joint return. What is the maximum amount that May and Bob can claim for the child tax credit? Basic Notes Page 17

If May and Bob's tax liability is $954, they can only claim $954, reducing their tax to zero. In this case, Bob and May may be eligible for the additional child tax credit. Stan files as Head of Household and has three children under age 17 who qualify for purposes of the child tax credit. Stan's MAGI is $54,000 and his tax liability is $4,000. The child tax credit Stan can claim on his return is $4,000. Stan is eligible for a child tax credit of $4,000, which reduces his tax to zero. He may also receive an additional child tax credit for the remaining $2,000. Paul and Marie are married with two dependent children. They will file a joint Form 1040 for the year. The children are qualifying children for purposes of the child tax credit. Paul and Marie's MAGI $160,000. Based on this information, Paul and Marie Are eligible to claim a full child tax credit CREDIT FOR OTHER DEPENDENTS Robert and Susan file a joint return and they both have SSNs. Their tax liability is $2,000. They have three qualifying dependents. Tom is their 18-year-old son, has an SSN, and meets the qualifying child dependent test. Jill is their 17-year-old adopted child, has an ATIN, and meets the qualifying child dependent test. Robert's mother, Esther, is 65 years old, has a valid SSN, and meets the qualifying relative test. They are all U.S. residents. Are Tom, Jill, and Esther qualifying dependents for the credit for other dependents? YES Each dependent must be a U.S citizen, U.S. national, or resident of the U.S. The dependent must have a valid identification number (ATIN, ITIN, or SSN). The $500 non-refundable credit covers dependents who don't qualify for the child tax credit, such as children who are age 17 and above or dependents with other relationships (such as elderly parents). REVIEW Mary Moore is a single parent with two dependent children. The children are qualifying children for purposes of the child tax credit. Her AGI is $202,000 and her tax is $8,200. She is able to take the child tax credit. Based on this information, and on Table 1, which of these statements is true for Mary? She will have to use Schedule 8812 to figure her credit Correct. Mary's AGI is over the threshold of $200,000. Therefore, she is not eligible to claim a full child tax credit and can use Schedule 8812 to calculate a reduced credit. Can taxpayers whose tax liability is zero take the child tax credit? YES Taxpayers with a zero tax liability may be able to claim an additional child tax credit. Denise files as Head of Household. She has a modified AGI of $84,000. She has three dependent qualifying children, ages 8, 10 & 12. Is she eligible for the full $2,000 child tax credit for each child? YES Denise meets the taxpayer requirements for receiving the full child tax credit. Is the additional child tax credit refundable? YES The additional child tax credit may result in a refund even if the taxpayer doesn't owe any tax. Can a taxpayer be banned from claiming the child tax credit or additional child tax credit? YES Basic Notes Page 18

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YES A taxpayer can be banned for 2 or 10 years for disregarding CTC or ACTC rules. MISCELLANEOUS CREDITS Joe and Mary have been married for five years and always file a joint return. In the previous tax year, Mary changed jobs and cashed in a small 401(k) from her former employer. In the current tax year, both Joe and Mary made eligible contributions to their IRAs and otherwise qualify for the retirement savings credit. They both must reduce the amount of their eligible contributions by the amount of the distribution that Mary received last year. This calculation is completed on Form 8880. Even if taxpayers qualify for the credit, their eligible contributions will be reduced by certain distributions received during the "testing period." The testing period includes: The tax year The two preceding tax years, and The period between the end of the tax year and the due date of the return, including extensions The types of retirement plan distributions that reduce the eligible contributions include a 401(k) distribution. If either spouse has a distribution during the testing period, both spouses must reduce their eligible contribution by that amount. CREDIT FOR ELDERLY OR DISABLED Julie, 47, is retired on disability from her job as a sales clerk. She now works as a full-time babysitter at the minimum wage. Might Julie be able to claim the credit for the elderly or the disabled? Although Julie's disability forced her to retire from her sales clerk job, she is now paid for her babysitting services. She cannot take the credit because she is engaged in a substantial, gainful activity. INCOME LIMITS John, who is 67 years old, is unmarried and will file as Single. He received $12,000 in nontaxable Social Security benefits in the tax year. His AGI is $9,000. Is he eligible to claim the credit for the elderly or the disabled? Even though John is a qualified individual, he is not eligible to claim the credit since his nontaxable Social Security benefits exceed $5,000. REVIEW True or False? Jason is 22 and earned $40,000 during the year. He is single and contributed $3,000 to his 401(k) plan at work. Jason is eligible for qualified retirement savings contributions. FALSE Jason is not eligible for the retirement savings contributions credit because his income exceeds the threshold limit of $34,000. True or False? Taxpayers may be able to take the credit for the elderly or the disabled if they are: Under age 65 at the end of the tax year Retired on permanent and total disability Under the mandatory retirement age on January 1 of the tax year, and Receiving taxable disability income TRUE A taxpayer who is under age 65 at the end of the tax year, retired on permanent and total disability, had not reached mandatory retirement age, and who receives taxable disability income, may be able to take the credit for the elderly or the disabled. All these conditions must first be met before a taxpayer who is under age 65 can be considered for this credit. Basic Notes Page 19

must first be met before a taxpayer who is under age 65 can be considered for this credit. OTHER TAXES - DISTRIBUTIONS, PENSIONS & ANNUITIES John, who is 39 years old, received Form 1099-R with code 1 in box 7. John has qualified education expenses that he paid during the year. He can reduce the amount of the early distribution that is subject to the additional tax by the amount of qualified education expenses Qualified education expenses are an exception to the 10% additional tax for early distribution. Also note that John can use the qualified education expenses for another education benefit if he meets those requirements. See the Education Benefits lesson. Qualified individuals that receive coronavirus-related distributions are not subject to the 10% additional tax on early distributions. Laura is 41 years old and received an early distribution from her 401(k) account. The volunteer determines that Laura used the money for unreimbursed qualified medical expenses that meet the requirements for code 05. In this case Form 5329, Part I, would be completed. Laura would not have to pay the additional tax on this distribution. Form 5329, Part 1, line 3 the amount subject to additional tax is line 2 subtracted from line 1. Line 4 is the additional tax that is carried over to the Other Taxes section of the return. Volunteers need to be aware of the exceptions to the additional tax on early distributions and complete Form 5329, Part I, if an exception applies. Line 2 is the amount that qualifies for the exception and where the applicable code is entered. Review the Materials Tray for a copy of the Volunteer Resource Guide, Form 5329, Part I exception codes. Code 5 exception states that qualified retirement plan distributions up to (1) the amount you paid for during the year minus (2) 10% (7.5% if TP or Spouse is 65 or older) of your unreimbursed medical expenses adjusted gross income for the year. REVIEW Jack earned more than $400 in net earnings from his home business. He must pay self-employment tax. YES Generally, taxpayers who are independent contractors and receive Form 1099-MISC must file Schedule C and Schedule SE. Since taxes are not withheld from independent contractors' pay, it is the taxpayer's responsibility to pay income and SE tax. Taxpayers should make quarterly estimated tax payments during the year to pay these taxes. An employee is not required to report their tip income to their employer if they receive $20 or more per month in tips from their job. NO Individuals who receive $20 or more per month in tips from any one job must report their tip income to their employer. 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. A taxpayer aged 35 doesn't have to pay income tax and an additional tax if they take a distribution from an IRA and it is rolled into another qualified plan or IRA. YES The taxpayer must pay income tax plus an additional tax if a distribution is taken before the individual reaches the age of 59½ and is not rolled over into another qualified plan or IRA and no other exception applies. A taxpayer who claimed the 2008 homebuyer credit doesn't have to pay back a portion of the credit each year. NO Basic Notes Page 20

NO The credit functions like a no-interest loan and must be paid back. Taxpayers who received the credit in 2008 continue to repay the credit over a 15-year period that began with the 2010 tax return. ESTIMATED TAXES Taxpayers who overpay their income taxes in one year can apply all or part of their overpayment to the next year's tax. This is done by indicating on their return the amount to apply to the next year's estimated tax. For more information about estimated taxes, refer to Form 1040-ES, Estimated Tax for Individuals. Estimated tax payments for 2021 are due on April 18, 2022, June 15, 2022, September 15, 2022, and January 17, 2023. Note: Taxpayers don't have to make the payment due January 17, 2023, if they file their tax return by January 31, 2023, and pay the entire balance due with their return. EXTENSIONS Taxpayers can get an automatic 6-month extension by submitting 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 15. This is only an extension to file, not an extension to pay. If taxpayers do not pay their taxes due by April 18, they will owe interest and may be charged penalties. Refer to Form 4868 instructions, How To Make a Payment With Your Application. Roger is a U.S. citizen living in Virginia. In early April this tax year, he realized that he would not be able to file his tax return on time. He knew that he owed approximately $950 in taxes. He paid $650 by credit card through an authorized service provider who charged a "convenience fee" for the transaction, and Roger got an automatic 6-month extension. Roger filed his tax return three months later. On the applicable line of Form 1040, Schedule 3, he listed the $650 he paid but did not include the convenience fee. He enclosed a check for the additional $300 due Roger will have to pay interest on the $300 and may be subject to a penalty for paying less than 90 percent of his tax due. REVIEW Federal income tax withheld is reported to taxpayers on all the following forms: Forms 1099, Form W-2, Form W-4, Forms RRB-1099, and SSA-1099. FALSE Forms W-2, 1099-R, 1099-INT, 1099-DIV, 1099-G, SSA-1099, RRB-1099, and RRB-1099-R all include income tax withheld. (Form W-4 is used to adjust withholding.) If a taxpayer receives several Forms W-2 and 1099, then the amount of income tax withheld reported on the return is the total of all income tax withheld from all the Forms W-2 and all Forms 1099. TRUE You report the total of all federal income tax withholding from all Forms W-2 and all Forms 1099-R, 1099-INT, 1099-DIV, 1099-G, SSA-1099, RRB-1099, and RRB-1099-R. The amount of tax due and paid with this year's tax return qualifies as an estimated payment. Basic Notes Page 21

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The amount of tax due and paid with this year's tax return qualifies as an estimated payment. FALSE The amount paid with the return is not included with estimated payments. Estimated tax payments include (1) payments already made during the tax year using Form 1040ES or (2) an overpayment shown on last year's tax return that the taxpayer elected to apply to the next year EARNED INCOME CREDIT Be sure to review the Intake/Interview sheet: Part 1 Your Personal Information, question 10: If answered Yes, probe to find out more. A taxpayer who is the dependent of another person is not eligible for EIC. • Part II Marital Status and Household Information, question 2, anyone you supported but did not live with you last year: Always verify that the taxpayer did not support anyone • Part II Marital Status and Household Information, question D: verbally confirm the number of months each person listed lived in the taxpayer's home. • Part V Life Events, question 4, Have Earned Income Credit (EIC) disallowed in a prior year? Special rules apply if the taxpayer was previously denied EIC. Be sure to get the answer to this question for each listed person. • A taxpayer's earned income is only $7,000. He has interest income of $4,500. He is single, has a valid SSN and is not the qualifying child of anyone else. Can he qualify for the EIC? YES He does qualify for EIC as his investment income is less than the threshold amount for the current tax year. EIC ELIGIBILITY Roger is single and has two qualifying children. He earned $23,247 in taxable wages and his adjusted gross income is $26,928. Based on the table of EIC income requirements, is Roger eligible for the earned income tax credit? YES Roger may be able to claim the earned income credit because his earned income and adjusted gross income are each less than $49,399. Before deciding whether Roger can claim the EIC, you need to check all of the following EXCEPT _____. FILING STATUS Because Roger is single, filing status is not an issue. The only filing status not allowed for the EIC is Married Filing Separately without a qualifying dependent. Roger may be eligible for the EIC. Part of Roger's income was $855 that he earned while in Canada for two weeks. He's heard about Form 2555, which is used to exclude foreign income from gross income and thereby decrease the amount of income tax. Roger: Should I file Form 2555 to exclude my foreign income from my gross income so I can pay less income tax? How would you respond? Not if you want to receive the earned income tax credit. You cannot receive the EIC if you exclude from gross income any income you earned in a foreign country. Taxpayers who file Form 2555 are not eligible for the EIC. QUALIFYING CHILDREN Robyn Smith is 25 years old. She and her 2-year-old son, Aiden, lived with Robyn's mother all year. Aiden has a valid SSN. Basic Notes Page 22

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has a valid SSN. Following are Robyn's responses to the questions in the EIC with a Qualifying Child Chart in the Volunteer Resource Guide, Tab I, Earned Income Credit: Step 1: Does your qualifying child have an SSN that allows him or her to work? (YES) Step 2: Is the child your son, daughter, stepchild, adopted child, or eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them? (YES) Step 3: Was the child any of the following at the end of the tax year: Under age 19, or under age 24 and a full-time student, or any age and permanently and totally disabled? (YES) Under age 19 and younger than the taxpayer; Under age 24, a full-time student and younger than the taxpayer; or Any age and permanently and totally disabled? (YES) Step 4: Did the child file a joint return for the year? (NO) Step 5: Did the child live with you in the United States for more than half (183 days) of the tax year? (YES) Step 6: Is the child a qualifying child of another person? (Robyn replies that she does not know) What does the tax preparer do next to determine if Aiden is a qualifying child for EIC? Because the taxpayer, Robyn, does not know the answer to Step 6, "Is the child a qualifying child of another person?", the tax preparer must ask probing questions to clarify the child's status. For example, if you ask who else lived in the house that is related to Aiden, Robyn would tell you that her mother also lives with them. The tax preparer then needs to go through the steps to see if Aiden can be a qualifying child for Robyn's mother and then review the Qualifying Child of More than One Person rules. MORE THAN ONE PERSON TRYING TO CLAIM CREDIT Randy and Cara are U.S. citizens who were married and lived together until August when they divorced. They have two children, Jimmy, 7, and Anna, 5. The children lived with both of their parents until August, and then they lived with their mother after the divorce. Randy's earned income and adjusted gross income are $19,251. Cara's earned income is $14,751, and her adjusted gross income is $15,362. For the purposes of the EIC, Jimmy and Anna might be qualifying children for _____. Either parent The children meet all three tests for both parents, and the income for both parents is within the threshold of EIC requirements. Suppose Randy claims the EIC based on Anna as a qualifying child, and Cara claims the EIC based on both Anna and Jimmy. Which parent would be entitled to the credit based on Anna and why? Cara, because Anna lived with her longer than with Randy The tiebreaker rule says Cara would be entitled to the credit because the children lived with her for a longer period of time during the tax year. NO QUALIFYING CHILDREN Which of the following single taxpayers with no qualifying children may be eligible for the EIC? Adam, with earned income more than $15,820, but AGI less than $21,500 Brea, with earned income less than $15,820, but AGI more than $21,500 Carmen, whose earned income and AGI are each more than $22,000 None of the above NONE For a single taxpayer with no children to be eligible for the EIC, the earned income and Basic Notes Page 23

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For a single taxpayer with no children to be eligible for the EIC, the earned income and AGI must each be less than $16,480. REVIEW Would earning income in a foreign country prevent a taxpayer from being eligible for the EIC? NO Taxpayers who do not exclude their foreign income from their gross income (by filing Form 2555) may still be eligible for the EIC. Would receiving investment income prevent a taxpayer from being eligible for the EIC? NO A taxpayer may receive up to $10,000 in investment income and still be eligible for EIC. Would filing a joint return with a spouse who has an Individual Taxpayer Identification Number (ITIN) instead of a Social Security number prevent a taxpayer from being eligible for the EIC? YES Both spouses on a joint return must have valid Social Security numbers. Would being married to a nonresident alien prevent a taxpayer from being eligible for the EIC? NO Nonresidents may qualify for the EIC if they file a joint return with a U.S. citizen or resident. Twila, age 32, lives alone, is single, and earns $10,250. Her adjusted gross income is $10,950. She is not the qualifying child of another person. Is Twila eligible to claim the EIC? YES Twila meets the age requirements; her earned income and her AGI are both less than $16,480; she cannot be claimed as a dependent; and she is not a qualifying child of another person. Antonio has $23,050 in earned income, and his adjusted gross income is $23,175. His filing status is single. Antonio's 20-year-old daughter, Maria, lived with him for eight months of the year. Maria is not married and is a full-time college student. Can Antonio claim the EIC? YES Antonio can claim the EIC because he has a qualifying child who lived with him more than half the year, and his earned income and adjusted gross income are both under $43,492. ERRORS THAT AFFECT THE REFUND Joan's return shows a refund of $300 and she asks the IRS to split her refund among three accounts with $100 to each account. Due to an error, her refund is decreased by $150. The IRS will adjust her direct deposits as follows: Requested Direct Deposits Actual Direct Deposits Account 1 $100 $100 Account 2 $100 $50 Account 3 $100 $0 If an adjustment results in a smaller refund than indicated on the return, the IRS applies a bottom-up rule and deducts the difference from the direct deposit amount designated for the last account shown on Form 8888. - If the difference exceeds the amount designated for the last account, the IRS deducts the remainder from the amount designated to the next account, until the amount due is paid. - Basic Notes Page 24

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OFFSETS Melanie is due a refund of $1,000; $700 of the refund is an earned income credit. She asks that her refund be split into three different accounts: $500 into Account 1, $300 into Account 2, and $200 into Account 3. Melanie's EIC amount of $700 was held pending a review; $300 went to Account 1 and $0 went to Accounts 2 and 3. Later, when the IRS allowed her EIC refund amount, it was deposited into Account 1. The IRS applies the same bottom-up rule to adjust direct deposits for refund offsets if the Earned Income Credit (EIC) portion of the taxpayer's refund is withheld pending further review. - After the EIC review, if a refund is allowed, it will be direct-deposited in the account listed first on Form 8888. - BALANCE DUE There are fees charged by the IRS on installment agreement requests that are approved. The amount of the fee varies depending on the method used to establish the agreement (Form 9465, Installment Agreement Request, Direct Debit Installment Agreement (DDIA), or Online Payment Arrangement (OPA). The fee for establishing an installment agreement using OPA on IRS.gov is lower. - ESTIMATED TAX PENALTY Mark's total tax is $1,657 for the current tax year. He had $417 in withholding. Mark owes $1,240. His prior year's tax was $2,000. Will Mark be charged an estimated tax penalty? Mark will probably be charged an estimated tax penalty because he owes over $1,000, and his withholding and credits are less than 90% of his current year's tax or 100% of his prior year tax. - FORM W-4 Mary claimed her son as a dependent on this year's return. Mary cannot claim her son as a dependent on next year's return. Mary will change her Form W-4 to increase her withholding by reducing the number of dependents she claims and submit it to her employer. Taxpayers may submit a new Form W-4 whenever they want to increase or decrease the withholding amount. - Life events such as a change in marital status, birth of a child, modification of a child's dependence status, or purchase of a home will change adjustments, deductions, and credits on the tax return. These taxpayers should submit a revised Form W-4 to their employer. - ESTIMATED TAX PAYMENTS Maria is retired; her only income is from a pension and some investments. She had no withholding and is not eligible for any tax credits. When you complete her return this year, she has a balance due of $1,300. Maria should begin making estimated payments since her balance due next year will be more than $1,000, and she has no withholding. If Maria does not want to make estimated payments, she could submit Form W-4P to request withholding from her pension. Taxpayers with significant income not subject to withholding (such as investments, interest, dividends, capital gains, or self-employment income) often need to make estimated tax payments. - The decision tree in Publication 17, Your Federal Income Tax for Individuals, and Publication 505, Tax Withholding and Estimated Taxes, can help determine if the taxpayer should make estimated tax payments. - Use Form 1040-ES, Estimated Tax for Individuals, to compute the estimated tax amount that should be paid over the year. This form includes worksheets to help taxpayers calculate their income and tax liability for the year. - Basic Notes Page 25

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income and tax liability for the year. REVIEW Direct deposit saves postage and is almost always faster than receiving a refund through the mail. TRUE - Taxpayers will receive their refund faster if they use direct deposit. - When entering an account number for direct deposit, do not include spaces and symbols. TRUE - Enter the account number from left to right, leaving out all spaces and special characters. - Taxpayers whose installment agreement request is granted may have to pay an additional fee to make monthly payments through electronic funds transfer. TRUE - The amount of the fee varies depending on the method used to establish the agreement (Form 9465, Installment Agreement Request, Direct Debit Installment Agreement (DDIA), or Online Payment Arrangement (OPA). The fee for establishing an installment agreement using OPA on IRS.gov is lower. - Taxpayers with a balance due elect to pay in full within 180 days will pay interest and a penalty for payments received after the tax filing deadline (generally, April 15). TRUE - Taxpayers must pay interest and a penalty on payments made after the tax filing deadline. - Basic Notes Page 26

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