www.cwfphilly.org The Campaign for Working Families, Inc. (CWFI) is - - PowerPoint PPT Presentation

Volunteer Income Tax Assistance (VITA) 1040 Information Presentation

www.cwfphilly.org

• The Campaign for Working Families, Inc. (CWFI) is a non-profit
• rganization

committed to helping working families and individuals achieve economic empowerment by providing free tax preparation, resourcebuilding and asset development.

• In 2017, we had over 850 volunteers prepare over 56,000 tax returns (both

federal and state), which brought in over $46.5 million in refunds to low-to- moderate income families in the region.

1040 1040 Line-by by-Li Line Re Review

Practice Lab: https://vita.taxslayerpro.com/IRSTraining Password: TRAINPROWEB Certify: www.linklearncertification.com Email Volunteer Agreement: taxvolunteer@cwfphilly.org Sign Up for Volunteer Shifts: https://cwfphilly.volunteerhub.com Campaign for Working Families, Inc www.cwfphilly.org

Wages, Salaries, and Tips Line 7 of the 1040 D-4 to D-6 of the 4012

• Are usually reported on a W-2, various taxes are taken out
• Whatever you see on the W-2, enter it exactly into the system
• Federal wages can differ from Social Security wages, Medicare wages, state

wages, and local wages

• All tip income is taxable, whether reported to the employer or not
• Common Box 12 Codes:
• D – Elective contributions to a 401(k) plan
• E – Elective contributions to a 403(b) plan
• W – employer contribution to a health savings account
• DD – Cost of employer-sponsored health coverage
• Common Box 14 Items:
• PA Unemployment Insurance
• NJ FLI/UI/DI
• City of Philadelphia and School District of Philadelphia – Retirement Contributions
• Union dues

Taxable Interest and Tax Exempt Interest Lines 8a and 8b of the 1040 D-7 to D-9 of the 4012

• Common sources of taxable interest income are checking and savings accounts,

certificates of deposit (CDs), savings certificates, U.S. government bonds, interest

• n insurance proceeds, and loans that the taxpayer makes to others. Taxable

interest income is reported on Form 1099-INT.

• Banks do not have to send out 1099-INT if the interest is less than $10, but the

interest is still taxable

• Certain types of interest are exempt from federal income tax. However, they may

be taxable by the state, and sometimes the reverse is true; the interest may be taxable on the federal return and exempt from state income tax.

• Interest from bonds issued by the following are exempt from federal income tax:

state and political subdivisions (county or city), U.S. possessions and political subdivisions, port authorities, toll-road commissions, utility service authorities, community redevelopment agencies, qualified volunteer fire departments, amounts indicated on broker statements as tax-exempt interest or dividends

• Read the taxpayer’s Form(s) 1099-INT carefully; both taxable and tax-exempt

interest may be listed.

Ordinary Dividends and Qualified Dividends Lines 9a and 9b of the 1040 D-11 in the 4012

• Ordinary dividends - corporate distributions paid out of the earnings

and profits of the corporation. Any dividend received on common or preferred stock is an ordinary dividend unless the paying corporation states otherwise. Total ordinary dividends are reported on Form 1099-DIV.

• Qualified dividends are ordinary dividends that qualify for lower, long-

term capital gains tax rates. Also reported on a 1099-DIV.

• Capital gain distributions come from mutual funds and real estate

investment trusts (REITs).They are taxed at the lower long-term capital gains rate, regard-less of how long the taxpayer holds the

• shares. Capital gain distributions are reported to the taxpayer on

Form 1099-DIV. The taxpayer reports these distributions as long-term capital gains on Form 1040, line 13, and on Schedule D if required.

Taxable Refunds, Credits, or Offsets of State and Local Income Taxes Line 10 of the 1040 Page D-12 in the 4012

• Only taxpayers who itemized and received a federal income tax

benefit for deducting their state or local income taxes have to include their state/local tax refunds in income.

• If they itemized and deducted the state sales tax instead of the state

income tax withheld, none of the state/local refund is taxable.

• 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

Alimony Received Line 11 of the 1040 Page D-3 of the 4012

• Alimony is a payment to or for a spouse or former spouse under a

separation or divorce decree. It may include payments on behalf of the spouse or former spouse, such as medical bills, housing costs, and

• ther expenses. The person receiving alimony must include it as
• income. The person paying alimony can subtract it as an adjustment

to income.

• Do not confuse alimony with child support. Child support is not

taxable income, nor does the person paying child support receive an adjustment to income or tax credit.

Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012

• Business income information may come from the following:
• Forms 1099-MISC, Miscellaneous Income, box 7, Nonemployee Compensation - no taxes are

usually withheld

• Forms W-2, Wage and Tax Statement with Statutory Employee checked in box 13
• Taxpayer’s books and records
• Forms 1099-K, Merchant Card and Third Party Payments
• Cash income - Some taxpayers may indicate that they received cash income for self-

employment/independent contractor activity. This income must be reported as business income

• An activity qualifies as a business if the primary purpose for engaging in the activity is for

income or profit and the taxpayer is involved in the activity with continuity and regularity.

• Qualified Medicaid waiver payments are treated as difficulty of care payments and are

excludable from gross income (see page D-62).

• Payments made to child care providers for providing child care services to someone that

they are related to may be treated as other income instead of business income

• Some employers misclassify workers as independent contractors and report their

earnings on Form 1099-MISC. This income must still be reported as business income and the client may contact IRS for help

Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012

• Schedule C-EZ or Schedule C shows the income and expenses and the net

amount is carried to Form 1040, line 12.

• Due to PA tax forms, CWF uses Schedule C with the following VITA limits:
• Have less than $25,000 in business expenses
• Use the cash method of accounting
• Materially participated in the business
• Have no inventory at any time during the year
• Did not have a net loss from the business
• Have no returns or allowances at any time during the year
• Have no employees during the year
• Are not required to file Form 4562, Depreciation and Amortization, for this business

(depreciation and asset write-offs are out of scope for the VITA/TCE programs)

• Do not deduct expenses for business use of a home
• Do not have prior year unallowed passive activity losses from this business
• Did not make any payments in the tax year that would require filing Form 1099-MISC

Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012

• Business expenses should be ordinary and necessary. An ordinary expense

is one that is common and accepted in the taxpayer’s industry. A necessary expense is one that is helpful and appropriate for the taxpayer’s trade or business.

• Good recordkeeping shows income and expenses, and helps clients:
• Monitor the progress of their business
• Prepare their financial statements
• Identify source of receipts
• Keep track of deductible expenses
• Prepare tax returns
• Support items reported on tax returns in case of an IRS audit
• Supporting documents for expenses include sales slips, paid bills, invoices,

receipts, deposit slips, canceled checks, and mileage logs.

• We can help clients with simple record reconstruction

Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012 Expenses

• Advertising - the costs associated with promoting the business through various means
• Car and truck – only the standard business mileage deduction is in scope for VITA. If a

client uses actual car and truck expenses, it is out of scope.

• Standard mileage deduction = business miles x business mileage rate (currently $0.535 for TY

2017)

• Business mileage includes travel between one business/work location to another business/work

location

• Business miles do not include commuting miles between home and the business location
• See chart F-12 in 4012 for more details
• Only tolls and parking fees may be added to the standard business mileage deduction
• Commission and fees - paid to both individuals and businesses.
• If payments to a single individual are $600 or more, the taxpayer must report the payments on

Form 1099-MISC. In this case the taxpayers’ return is out of scope for the VITA/TCE programs.

• Insurance - policies and coverage are deductible for the business operation, such as

property and malpractice.

• Does not include health insurance.
• Automobile insurance for a business vehicle is out of scope for VITA.
• Other Interest – can include interest paid on operating loans, but not mortgage interest

Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012 Expenses

• Legal and professional services - fees paid to professionals, such as

attorneys, accountants, appraisers, and engineers.

• Legal fees paid to acquire business assets are not deductible. These costs are added

to the basis of the property.

• Some accountant fees and attorney fees may be for personal services (e.g., tax

returns, wills, or estates) and are not deductible as business expenses.

• Office expenses – generally includes supplies such as paper, pens, postage
• Rent or lease of vehicle, machinery or equipment - includes rental fees for

cars, trucks, vans, machinery, equipment, and other personal property. Leases of more than 30 days are out of scope.

• Repairs and maintenance – on equipment or office space are some possible

examples

• Supplies – general operating supplies for the business

Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012 Expenses

• Taxes and licenses - state and local sales tax and business taxes, and licenses and

regulatory fees are deductible

• Travel/Meals and Entertainment
• Certain expenses are deductible for when you travel away from home (outside of the normal

commuting area) for business purposes – see F-9 in the 4012 for more details

• Also includes deductible public transportation/cab expenses when traveling from one work

location to another – see F-12 in the 4012

• Ordinary and necessary expenses to entertain a client or customer are deductible if they

meet the directly related test or associated test – see F-10 in the 4012 for more details; 50% limits usually apply

• Any food that is for your own consumption is not a deductible expense
• Utilities - typically consist of normal electric, gas, water, and telephone expenses

for the business (not personal expenses).

• The base rate of the first telephone line to a residence cannot be deducted, but additional

costs incurred for business purposes can be included as an expense

• Other Expenses – if it does not fit into any of the above categories, but is still an
• rdinary and necessary expense, it is still deductible and listed here

Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012 Taxes Incurred

• Self-employment tax has to be paid on net business income greater than

$400

• Two parts of self-employment tax: 12.4% of Social Security tax and 2.9% of Medicare

tax = 15.3%

• Half of the tax (7.65%) is taken as an adjustment to income. This reduces federal

taxes owed, but not the self-employment tax

• TaxSlayer automatically calculates the tax and adjustment
• There may also be state taxes owed (in PA, 3.07%, rates can vary in NJ) –

TaxSlayer will automatically calculate any state taxes owed

• For clients living or doing business in Philadelphia, they need to file the

following forms:

• Business Income and Receipts Tax (BIRT) – gross receipts up to $100,000 is excluded

from this tax

• Net Profits Tax (NPT) – 3.9102% rate on business profit for residents, 3.4828% for

non-residents

Capital Gain or Loss – Schedule D Line 13 of the 1040 Pages D-22 to D-32 in the 4012

• For VITA, covers the sales of stocks, mutual funds, and main personal residence
• Form 1099-B lists the sales of stocks and mutual funds
• Usually has a tax reporting supplement attached – it is important to look at all the documents

that is included with the 1099-B

• Form 1099-S, 1099-A, or settlement papers lists the sale of a home
• 1099-DIV, box 2a, indicate capital gain distributions that will be listed on line 13 of

the 1040

• Two types of capital gains:
• Short-term – assets held for less than a year, and is taxed at the ordinary income rates
• Long-term – assets that are held for more than a year, and is taxed at the lower capital gains

rates; inherited stock is always treated as long-term

• Losses from stocks and mutual funds are limited to $3000/year ($1500 for MFS).
• Any excess loss can be carried forward until used up – clients should bring last year’s return

as proof of a capital loss carryover so it can be inputted

• Losses on the sale of a home are never deductible

Capital Gain or Loss – Schedule D Line 13 of the 1040 Pages D-22 to D-32 in the 4012

• Four pieces of information are needed to determine a capital gain or

loss:

• Basis = original cost of the asset – for stocks purchased in 2011 and after, this

must be listed on Form 1099-B.

• May not be listed for stocks purchased before 2011 – clients need to know the basis or

take a $0 basis

• 1099-B will also list whether the basis was reported to the IRS or not
• Adjusted basis includes original cost plus any increases or decreases to that cost (such as

commissions, fees, depreciation, deductible casualty losses, insurance reimbursements

• r major improvements) – any decreases to basis is out of scope for VITA
• How much the asset was sold for – this is reflected on the 1099-B
• When it was purchased – may not be reflected for stocks purchased before

2011

• When it was sold – this is reflected on the 1099-B

Capital Gain or Loss – Schedule D Line 13 of the 1040 Pages D-22 to D-32 in the 4012

• Taxpayers must report the sale of a home if one of the following is true:
• The taxpayer does not meet the ownership test
• The taxpayer does not meet the use test
• During the two-year period ending on the date of the sale, the taxpayer has excluded the gain

from the sale of another home

• The taxpayer has a gain and does not qualify to exclude all of it
• The taxpayer has a gain and chooses not to exclude it
• The taxpayer received Form 1099-S or Form 1099-A
• Taxpayers may exclude up to $250,000 ($500,000 for MFJ) of the gain from the

sale of their main home if they meet both tests during a five year period preceding the sale:

• Ownership test – they owned the home for two years
• Use test – lived in the home as their main home for two years
• The two years do not have to be continuous, but must add up to at least 2 years in a 5 year

period

• If the home was rented out or used for business purposes at any time, it is out of

scope for VITA

Retirement Income IRA Distributions - Line 15a and 15b of the 1040 Pensions and Annuities – Line 16a and 16b of the 1040 Pages D-33 to D-34 in the 4012

• Retirement income information can be found on Form 1099-R
• Includes benefits from annuities, retirement or profit sharing plans, insurance contracts, IRAS, etc
• Gross amount can differ from the taxable amount – key what we see
• If the taxable amount is not determined, then we must determine the taxable amount using the Simplified

Method

• Box 7 codes are important because it tells us how the distribution should be treated
• Retirement plans are funded with either “before-tax” dollars or “after-tax” dollars
• Traditional IRA – distributions are usually fully taxable, unless nondeductible contributions have been made
• Roth IRA – qualified distributions are nontaxable and are indicated with code Q in box 7. Codes J and T are
• ut of scope

Retirement Income IRA Distributions - Line 15a and 15b of the 1040 Pensions and Annuities – Line 16a and 16b of the 1040 Pages D-33 to D-44 in the 4012

• If the taxable amount is not determined (indicated in box 2b and is either

blank or states “not determined/undetermined in box 2a), we must use the Simplified Method

• The Simplified Method calculates the tax free portion of the pension by

figuring out the taxpayer’s cost basis for each month, and the following pieces of information are needed (see page D-37 in the 4012):

• The cost in the plan = total employee contributions in box 9b of the 1099-R
• The taxpayer’s age on the date the annuity began (and the spouse’s age if

joint/survivor annuity is selected); note if the annuity starting date is before or after the taxpayer’s birthday for that year

• The start date of the pension/annuity
• How many months in the tax year he/she received the pension
• Any amounts recovered tax-free from prior years
• Many federal government pensions do not have the taxable amount

determined; people who have recently retired from the federal government may already have the taxable amount determined

Retirement Income IRA Distributions - Line 15a and 15b of the 1040 Pensions and Annuities – Line 16a and 16b of the 1040 Pages D-33 to D-44 in the 4012

Common Box 7 Codes (see D-41 to D-42)

• 7 = Normal distribution. The client reached 59 ½ years of age or met the required amount of

years of service (determined by the plan administrator)

• 1 = Early distribution. A 10% penalty usually applies for taking money out early. Exceptions to this

may apply:

• If the amount was rolled over into another retirement account within 60 days, it is excluded from taxable
• income. It is usually best to do a trustee-to-trustee transfer than to have to do the rollover yourself
• See page H-2 for the list of exceptions to the 10% penalty. Ask clients why they took the money out and see if

the answer qualifies for one of the exceptions. Examples are distributions made for post-secondary education, death, total and permanent disability, purchase of a first home

• 3 = Disability pension. If the client is under the minimum retirement age, the pension can be

treated as wages for the purpose of the EIC. Once the client reaches 59 ½ years of age, this election stops.

• 4 = Survivor’s pension. If it is from the federal government, we may need to do the Simplified

Method

• G & H = Direct trustee-to-trustee rollovers. Typically nontaxable, unless there is an amount in box

2a

• Q = Qualified distribution from a Roth IRA. Nontaxable distribution

Rental Real Estate, Royalties, Partnerships, S Corps, Etc Schedule E Line 17 of the 1040 Pages D-47 to D-52 in the 4012

• Rental income and expenses is out of scope for the CWF VITA program
• Royalty income without any expenses is within scope for VITA - royalty income

information can be found on Form 1099-MISC, box 2 or on Schedule K-1

• Schedule K-1 is used to report the taxpayer’s share of income, other distributions,

deductions, and credits from partnerships, S corporations, and some estates and trusts.

• These entities typically must file their returns and send out K-1s by March 15
• There are three different types of K-1s (Form 1065, Form 1120S, and Form 1041)
• Only the following K-1 items are in scope:
• Interest income (1040, line 8a)
• Dividend income (1040, line 9a)
• Qualified Dividends income (1040, line 9b)
• Net short-term capital gains and losses (Schedule D, line 5)
• Net long-term capital gains and losses (Schedule D, line 12)
• Tax-exempt interest income (Form 1040, line 8b)
• Royalty income (Schedule E) - In Part I of Schedule E, enter a code 6 for royalties.

Unemployment Compensation Line 19 of the 1040 Page D-3 of the 4012

• Information about unemployment compensation is found on Form

1099-G

• State laws can vary for unemployment compensation, but it is

typically money paid for a short-term period for a job loss due to no fault of your own

• Is taxable income
• Is considered unearned income for the purpose of the EIC

Social Security Benefits Lines 20a and 20b of the 1040 Page D-45 to D-46 of the 4012

• Information about Social Security benefits is found on Form 1099-SSA - include monthly

retirement, survivor, and disability. It does not include SSI.

• If only source of income, it is not taxable and there is no need to file a tax return
• If there is other income, the benefits may or may not be taxable:
• For single people, subtract one-half of the total benefit amount from $25,000. The difference is

the amount of total other income (including tax-exempt interest) he/she can have without the Social Security benefits being taxable

• For married filers, subtract one-half of the total benefit amount from $32,000
• MFS filers typically have a higher portion of taxable Social Security benefits than single filers
• No more than 85% of the total benefit amount is taxable
• TaxSlayer will automatically calculate the taxable amount, if any. Taxable amount goes on line 20b
• Railroad Retirement Benefits (Form 1099-RRB) has two components. The blue form RRB

is treated like Social Security benefits. The green form RRB is treated like a pension

• Lump sum Social Security benefits – a method to reduce the taxable amount of a lump

sum benefit by allocating the amount received for a prior year (s) to the corresponding tax return.

• This requires the prior year (s) filing status and AGI
• May be beneficial if client has other income in the current year

Other Income Line 21 of the 1040 Pages D-53 of the 4012

• Gambling winnings – information can be found on Form W2-G
• Gambling losses can be deducted to the extent of winnings if the client is able to

itemize deductions

• Federal taxes can be withheld from gambling winnings on Form W2-G
• Gambling winnings are still taxable even the client did not receive a W2-G
• Jury duty pay
• Form 1099-MISC, box 3, Other Income – can include value of prizes and

awards

• Form 1099-MISC, box 7, Nonemployee Compensation, if client is a qualified

child care provider (watching someone related to them)

• Cancellation of debt for nonbusiness credit card – Form 1099-C (see page

D-65)

• Only in-scope if the client is solvent = have more assets than liabilities
• If solvent, the entire amount of the debt forgiven is taxable

Adjustments to Income Lines 23-35 of the 1040 Tab E of the 4012

• Educator expenses, line 23 - can deduct up to $250 for qualified educator

expenses, should have receipts for the expenses (page E-2)

• Must be employed for at least 900 hours in a K-12 setting (cannot be home school)

as a teacher, instructor, counselor, or aide

• If taxpayer and spouse are both eligible educators, the maximum deduction amount

is $500, but neither can deduct more than $250 for individual expenses

• Deductible part of self-employment tax, line 27 – TaxSlayer automatically

calculates this amount based off the business income listed on line 13

• Penalty on early withdrawal of savings, line 30 – information can be found
• n Form 1099-INT, box 2
• Alimony paid, line 31 – the recipient’s SSN is needed, since if this is taken as

an adjustment on the payer’s return, it has to be listed on line 11 of the recipient’s return (page E-6)

Adjustments to Income Lines 23-35 of the 1040 Tab E of the 4012

• IRA deduction, line 32 - taxpayers can contribute up to a total of $5500 ($6500 if

age 50 or older) to a traditional IRA and/or Roth IRA (page E-7)

• Contributions to a Roth IRA are reported, but not deductible – enter Roth IRA contributions

in the Credits section of TaxSlayer

• In order to take the IRA deduction, the client needs to have earned income, taxable alimony,
• r taxable scholarships and grants
• Tax year contributions to an IRA can be made up to the filing deadline
• The amount of IRA deduction can be phased out depending on income, filing status, and

whether or not the taxpayer is covered by a retirement plan at work

• MFS cannot make any deductible traditional IRA or Roth IRA if AGI is more than $10,000
• Nondeductible traditional IRA contributions are out of scope
• Information about IRA and Roth IRA contributions are found on Form 5498
• Student loan interest deduction, line 33 – a maximum of $2500 can be deducted
• If more than $2500 is paid, can only deduct $2500
• Subject to phase-outs if AGI is more than $65,000 (HoH, QW, S), $130,000 for MFJ
• MFS cannot claim this deduction
• Form 1098-E shows information about student loan interest
• See page E-8

Adjustments to Income Lines 23-35 of the 1040 Tab E of the 4012

• Jury duty pay returned to employer, Other adjustments
• Health savings account deduction, line 25 – separate HSA certification

covers contributions to a HSA and distributions from a HSA (pages E-3 to E-5)

• The following adjustments are out of scope:
• Certain business expenses of reservists, performing artists, and fee-based

government officials, line 24 – only for military VITA programs

• Moving expenses, line 26 – only for military VITA programs
• Self-employed SEP, SIMPLE, and qualified plans, line 28
• Self-employed health insurance deduction, line 29
• Domestic production activities deduction, line 35

Standard Deduction Line 40 of the 1040 Tab F of the 4012

• Deductions are subtractions from a taxpayer’s adjusted gross income (AGI).
• They reduce the amount of income that is taxed.
• Most taxpayers have a choice of taking a standard deduction or itemizing their

deductions.

• When taxpayers have a choice, they should use the type of deduction that results in

the lower tax – use whichever deduction is greater

• A standard deduction for most taxpayers is a set dollar amount based on

the taxpayer’s filing status that is adjusted yearly for inflation.

• An increased standard deduction is available to taxpayers who are 65 or older or

blind

• There may be limitations on the standard deduction for taxpayers who can be

claimed as a dependent on someone else's return

• Standard deduction amounts for TY 2017:
• Single or Married filing separately - $6350
• Head of household - $9350
• Married filing jointly or Qualifying widow(er) - $12,700

Itemized Deduction – Schedule A Line 40 of the 1040 Tab F of the 4012

• Itemized deductions allow taxpayers to reduce their taxable income based on

specific personal expenses.

• If the total itemized deductions are greater than the standard deduction, it will result in a

lower taxable income and lower tax.

• If you are not able to determine that the amount of itemized deductions is less than the

standard deduction, enter the information in TaxSlayer – the system will calculate the itemized deduction and use the higher of the standard or itemized deduction

• For MFS filers, if one spouse itemizes, the other must, even if the itemized deduction is lower

than the standard deduction

• Medical expenses – only the excess of 10% of AGI is counted (see pages F-5 and

F-6)

• Medical and dental insurance not paid with pre-tax dollars
• Amounts paid to doctors/dentists
• Prescriptions (including eyeglasses and contacts)
• Medical aids, nursing help, qualified long-term care premiums, X-rays, lab work, alcohol/drug

rehab

• Nondeductible medical items: cosmetic surgery, over the counter drugs/vitamins, diet food,

weight loss program not prescribed

Itemized Deduction – Schedule A Line 40 of the 1040 Tab F of the 4012

• Taxes You Paid (page F-6)
• State and local taxes – this information is automatically carried over from any W-2s,

1099s, W2-Gs entered

• State and local sales tax paid – can use actual sales tax paid, or the sales tax
• worksheet. Certain items specified items can be added
• A taxpayer can either take state and local taxes paid, or sales taxes paid, but not both
• PA UI and NJ FLI/UI/DI from box 14 of the W-2 can be entered in Other Taxes
• Real estate taxes paid – information can be found on 1098 Mortgage Interest

Statement (look for escrow disbursements) or on a tax bill directly from the municipality (make sure it is the 2016 bill, not the 2017 bill)

• Personal property taxes – based off the value of personal property such as a car or
• boat. Personal property taxes are usually in states with no state income taxes. PA

and NJ are not personal property tax states.

• Nondeductible items: assessments for services to the property (i.e. sewer, trash),

fees/licenses, homeowner’s association fees, homeowner’s insurance

Itemized Deduction – Schedule A Line 40 of the 1040 Tab F of the 4012

• Interest paid – only mortgage interest and points paid are in scope.

Investment interest is out of scope (page F-7)

• Information about interest and points can be found on Form 1098, Mortgage Interest

Statement

• Points are charges paid by a borrower and/or seller to secure a loan. Only points

paid as a form of interest are deductible

• Gifts to charity – must be made to a qualifying organization, not an

individual (pages F-7 to F-8)

• Cash or check contributions are deductible
• Can also deduct mileage/transportation expenses incurred as a volunteer
• Noncash contributions less than $500 is in scope. Any noncash contribution greater

than $500 is out of scope

• Taxpayer should keep records of all charitable contributions
• Nondeductible contributions: political, raffle/bingo/lottery tickets, tuition, value of

time/services, gifts to lobby groups, civic leagues, social clubs, labor unions

Itemized Deduction – Schedule A Line 40 of the 1040 Tab F of the 4012

• Casualty and theft losses – out of scope for VITA
• Miscellaneous deductions subject to the 2% AGI limit – only the excess of 2% is used:
• Credit or debit card convenience fees incurred when paying income tax, charged by the card

processor

• Union dues and fees /Professional society dues and fees
• Uniforms not adaptable to general use
• Small tools and supplies used for business /Professional books, magazines, and journals
• Employment-related educational expenses
• Expenses of looking for a new job in your present occupation
• Investment counsel fees/Investment expenses
• Safe deposit box rental
• Tax counsel and assistance
• Trustee’s administrative fees for IRA
• Miscellaneous deductions not subject to the 2% AGI limit:
• Gambling losses to the extent of gambling winnings (taxpayers must have a record of their losses)
• Work-related expenses for disabled individuals that enables them to work, such as attendant care

services at their workplace

Excess Advanced Premium Tax Credit Repayment Line 46 of the 1040 H-24 to H-29 of the 4012

• Some taxpayers may have purchased health insurance through the Marketplace and

received a premium tax credit to make their monthly premiums more affordable.

• Information about the advanced premium tax credit is found on Form 1095-A.
• The figures in column A, column B, and column C are used along with household income to

calculate the premium tax credit. If column B is blank, you will need to look up the figures for the SLCSP online

• If someone had insurance at any time during the year through the Marketplace, their return

cannot be prepared without Form 1095-A, since the amount of the advanced premium tax credit must be reconciled and the return will reject without the 1095-A

• If a client does not have a 1095-A, he or she can call the Marketplace or log into his/her online

Marketplace account

• The advanced premium tax credit is based off estimated income for 2016. If a client

underestimated his or her 2016 income, then all or a portion of the premium tax credit must be repaid – this amount is added to the total tax due on line 47

• There are repayment caps based off the federal poverty levels for household size and filing status.

Any household at 400% of the FPL must repay the entire amount

• If there are individuals on the 1095-A that are not listed on the tax return, the return is
• ut of scope
• In TaxSlayer, the 1095-A information is entered in Health Insurance section

Nonrefundable Credits Lines 48-54 of the 1040 Tab G the 4012

• Credits reduce the amount of tax owed dollar for dollar. Deductions only

reduce a percentage of the amount of tax owed.

• The amount of tax owed includes any advanced premium tax credit

repayment

• Nonrefundable credits can only reduce the amount of tax owed to $0
• If a nonrefundable credit is greater than the amount of tax owed, then the

amount of the refundable credit is reduced to the amount of tax owed

• If the total tax owed is $0 on line 47, then the client cannot take any of the

nonrefundable credits, even if they have expenses that qualify for the credit(s)

• Foreign Tax Credit, line 48 – only in scope if less than $300 paid
• If on a 1099-DIV, box 6, the amount is carried over from the dividend screen
• If on a 1099-B, you can key in the foreign tax paid on the credits menu – see page G-

2

Nonrefundable Credits Lines 48-54 of the 1040 Tab G the 4012

• Credit for child and dependent care expenses, line 49 – a portion of child and dependent care

expenses, up to 35% of total expenses paid, can be taken as a credit

• Child and dependent care expenses are monies to paid to a provider that enables the taxpayer to work or look

for work – K-12 education costs (i.e. private school tuition) and overnight camps do not count

• Child care for children 13 and other, or a dependent/spouse any age who is not able to physically or mentally

take care of him or herself

• Taxpayer must have earned income
• In order to complete Form 2441 for the taxpayer must provide a statement with the following:
• The name of the provider and the EIN of the provider. If the provider does not have an EIN, a SSN is

acceptable

• The physical address of the daycare or provider
• The total amount the taxpayer paid to provider. For taxpayers receiving child care subsidies, make sure this

amount is only the amount the taxpayer pays out of pocket

• The amount paid for each dependent
• Some taxpayers may receive child and dependent care benefits through their employer. This is

reflected on the W-2 in box 10. Because this is a tax free amount, the amount paid for child and dependent care expenses is reduced by the tax free benefit.

• TaxSlayer automatically calculates the credit based off amounts paid, AGI, and filing status
• See pages G-5 to G-8 for more details

Nonrefundable Credits Lines 48-54 of the 1040 Tab G the 4012

Education credits from Form 8863, line 50 – two types of education credits (see pages J-4 to J-9 ) can be claimed for the taxpayer/spouse and dependents

• American Opportunity Credit – only for the first 4 years of post-secondary education
• Has both a refundable and nonrefundable portion – nonrefundable portion is up to $1500
• Calculates off a maximum of $4000 in qualified education expenses: tuition and fees not paid for

by scholarships and grants, books, supplies, and equipment. Room and board is never a qualified expense

• Student must be pursuing a degree or other recognized educational credential at least half time
• Student cannot have a felony drug conviction
• Ask probing questions to make sure the credit has not been claimed for the taxpayer or dependent

for any 4 previous tax years, especially for nontraditional students

• Lifetime Learning Credit – no time limits, a purely nonrefundable credit up to $2000
• Calculates off a maximum of $10,000 in qualified education expenses – only tuition and fees not

paid for by scholarships and grants, no books or supplies

• Do not have to be pursuing a degree or enrolled at least half-time
• Felony drug conviction rule does not apply
• Students who are pursuing a graduate degree qualify for the Lifetime Learning credit, not the

American Opportunity Credit (even if never taken)

Nonrefundable Credits Lines 48-54 of the 1040 Tab G the 4012

Education credits from Form 8863, line 50 – continued

• In order to claim either the American Opportunity Credit or the Lifetime Learning Credit,

Form 1098-T is needed

• Be careful when looking at the 1098-T, as preparation varies from each school
• Box 1 shows the amount of qualified expenses paid in the calendar year.
• Box 2 shows the amount billed in the calendar year. It is not uncommon for schools to bill for the

spring semester in the fall semester, but the spring semester is not paid for until January

• To clarify qualified educational expenses paid in the tax year, ask the taxpayer for a statement of

account that lists all of the charges and payments.

• Box 5 shows any scholarships and grants received in the tax year. Qualified educational expenses

must be reduced by this amount. If scholarships and grants equal or exceed the educational expenses, the taxpayer typically cannot take the education credit. Exceptions to this rule are complex, and should be referred to your site manager.

• Certain people cannot take any education credits:
• Filing status of MFS
• Nonresident aliens on a F, M, J, or Q visa – most international students do not qualify for the

education credit

• Anyone who is a dependent on another taxpayer’s return
• Cannot “double-dip” education credits

Nonrefundable Credits Lines 48-54 of the 1040 Tab G the 4012

• Retirement savings contribution credit, line 51 – an incentive to contribute

to a qualified retirement plan, use Form 8880 (pages G-9 to G-11 in 4012)

• Credit can be 10%, 20%, or 50% of total contributions, up to $2000, depending on

filing status and AGI limits – the higher the AGI, the less the amount.

• MFJ can have an AGI up to $62, 000
• HoH can have an AGI up to $46,500
• S, QW, or MFS can have an AGI up to $31,000
• This credit can be reduced or eliminated if the taxpayer took certain retirement

distributions in the tax year

• Cannot be a full-time student
• Information about retirement contributions can be found in box 12 of the W-2: codes

D, E, F, G, H, S, AA, or BB.

• Also check box 14 for any retirement contributions (City of Philadelphia, School District of

Philadelphia). Click the drop-down for retirement contributions to go to form 8880

• The system pulls information from box 12 to form 8880
• Traditional and Roth IRA contributions also qualify for the credit and needs to be

entered on the retirement saving contributions credit screen – traditional IRA contributions qualify for both the IRA deduction and retirement credit

Nonrefundable Credits Lines 48-54 of the 1040 Tab G the 4012

• Child tax credit, line 52 – up to a $1000 for each qualified dependent

child ages 16 and under, see pages G-12 to G-13 in 4012

• If the taxpayer does not qualify for the full amount of the child tax credit, they

may qualify for a refundable additional child tax credit

• This nonrefundable child tax credit is applied last, so make sure all other

nonrefundable credits the taxpayer is eligible for is applied first – this helps calculate both the refundable additional child tax portion

• Other Credits, line 54 – Credit for the Elderly and Disabled (Schedule

R). See page G-14 to G-15

• Rare credit - Most taxpayers do not qualify because they receive more than

$5000 in nontaxable social security benefits

• Must manually calculate in TaxSlayer if taxpayer appears to qualify

Other Taxes Lines 57-62 Tab H in the 4012

• Any taxes listed in this section cannot be reduced by any nonrefundable

credits – only payments and nonrefundable credits can reduced or eliminate the tax

• Other taxes are added to line 56 of the 1040 to get the total tax due on line

63

• Self-employment tax, line 57 – the full 15.7% tax, based off the net

business income on line 12 is listed here. Net business income must be $400 or greater. TaxSlayer automatically calculates the percentage

• Unreported social security and Medicare tax, line 58 – only Form 4137 is in

scope, for taxpayers who receive a W-2 and have unreported tips of more than $20 in a month (see page H-1).

• They must pay Social Security and Medicare taxes on those tips.
• If they have less than $20 in unreported tips, they do not have to pay the Social

Security and Medicare taxes on those tips.

• All unreported tips for W-2 workers from Form 4137 are included in line 7

• Additional tax on IRAs, other qualified plans, line 59 – Form 5329 (see

pages H-2 to H-3)

• Only part I is in scope – additional tax on early distributions
• If there is no exception, a 10% penalty applies. The system automatically calculates

the penalty

• If there is an exception, complete part I, line 2. Access Form 5329 from the credits

menu, enter the amount exempt from the 10% penalty, and select the appropriate exception

• Remember that even if a taxpayer qualifies for an exception to the 10% penalty, the

full amount is still federally taxable

• First-time homebuyer repayment credit, line 60b – Form 5405 (see page H-

1)

• If taxpayers claimed the first-time homebuyer credit for up to $7500 in 2008, they

have to repay the credit in yearly installments of $500 for 15 years.

• This repayment started in TY 2010. IRS has identified the individuals who need to

repay the credit, and the return will reject if Form 5405 is not attached

Other Taxes Lines 57-62 Tabs H and ACA in the 4012

Other Taxes Lines 57-62 Tab H in the 4012

Health care: individual responsibility, line 61

• The Affordable Care Act requires most people to have health insurance, or

minimal essential coverage, all year (see page H-5)

• In the Health Insurance Section of TaxSlayer, if a taxpayer did not have full year

coverage for everybody in the tax household, they must indicate the months they had coverage

• Check to see if anyone in tax household qualifies for any exemptions if they had

no coverage or part-year health coverage (see pages H-10 to H-14):

• Gross income is below the filing threshold – no code required
• Went without health care coverage for no more than 2 consecutive months
• Not lawfully present in the United States
• Coverage is considered unaffordable – the minimum amount paid for premiums is more than

8.16% of household income (see pages H-16 to H-20)

• If they were not eligible for insurance from an employer, you must go to the Marketplace to determine

what was the lowest cost bronze plan premium. The Marketplace will also take into account any premium tax credits the taxpayer may have been eligible for. If eligible for employer insurance, use that rate.

• Exemptions from the Marketplace requires a code that must be inputted on Form 8965

Other Taxes Lines 57-62 Tab H in the 4012

Health care: individual responsibility, line 61 – continued

• If the taxpayer does not have health coverage or an exemption for all

members in the tax household, then a shared responsibility payment must be made

• For 2017, it is $695 for each adult individual and $347.50 for each child

under 18 OR 2.5% of household income, whichever is greater

• Household income includes all the income of dependents who had a filing

requirement

• The shared responsibility payment is pro-rated for each month – therefore it is

possible to have someone with part year coverage, an exemption for a few months, and a shared responsibility payment

• Do not need to see proof of coverage unless it is from the Marketplace

(Form 1095-A)

• Any information about health insurance coverage and exemptions is

entered in the Health Insurance Section of TaxSlayer

Payments Line 64: Federal Income Tax Withheld Line 65: Estimated Tax Payments Line 70: Amount Paid with Request for Extension

• Any federal income tax withheld that was entered on Forms W-2, 1099-INT, 1099-

DIV, 1099-R, 1099-SSA, W2-G in TaxSlayer is automatically calculated on line 64

• Any federal income tax was withheld on a 1099-B must be entered in the Other Federal

Withholdings section of the Payments and Estimates Menu

• If the taxpayer made any quarterly estimated tax payments to the IRS, it is

entered in the Federal Estimated Tax Payments section and is calculated on line 65

• A taxpayer with self-employment income may wish to make quarterly estimated payments to

make it easier to pay the self-employment tax

• Any amount from the 2015 refund the taxpayer elected to apply to the 2016

return is also entered in the Federal Estimated Tax Payments Section and carried to Line 65

• Taxpayers may file an extension for various reasons if they feel they cannot

submit their return by the due date. This amount is inputted directly on line 70

• If an extension is filed, they have until October 15 to submit form 1040. However, any taxes
• wed is still due by April 15. To avoid penalties and interests, taxpayers can pay some or all

what they expect to owe when they file an extension.

• Refer taxpayers to your site manager for extension issues

Payments – Refundable Credits Line 66a – Earned Income Credit (EIC) Tab I in the 4012

• The EIC is one of the federal government’s largest anti-poverty measures
• It a valuable refundable credit for low to moderate income working families by reducing their tax

burden and supplementing their wages

• Eligible taxpayers can receive a refund with this credit even if they have no filing requirement,
• we no tax, and had no federal taxes withheld
• Must have earned income, such as wages, self-employment income, or a disability pension that

can be treated as wages for EIC. If there is no earned income, the person is not eligible for EIC, even if they meet other requirements

• Everyone in the tax household must have a SSN that is valid for employment. If anyone has an

ITIN, they cannot get EIC

• Filing status cannot be married filing separately
• Must be a US citizen or resident alien all year
• Cannot exclude foreign income from total income – this issue can appear at military/international

VITA sites

• Must have less than $3450 in investment income – capital gains, dividends, and interest are

considered investment income

• You cannot be a EIC qualifying child of another person

Payments – Refundable Credits Line 66a – Earned Income Credit (EIC) Tab I in the 4012

• If the taxpayer has a qualifying child for EIC:
• Child must be related to the taxpayer – a taxpayer cannot claim a parent or cousin

for EIC

• Child must either be 18 or younger (and younger than the taxpayer), 19-23 and a full-

time student (and younger than the taxpayer), or any age if totally and permanently disabled

• Child must have lived with the taxpayer for more than 6 months out of the year,

excluding temporary absences from the home

• The same child cannot be claimed by two taxpayers for EIC
• NO support test – an adult disabled person that provides more than half of his or her
• wn support can be claimed as a “qualified EIC child/dependent” provided he or she

meets the other tests

• If a taxpayer has no qualifying child for EIC:
• Must be between ages 25-64
• Can’t be a dependent or qualifying EIC child of another person
• Must have lived in the US for more than 6 months

Payments – Refundable Credits Line 66a – Earned Income Credit (EIC) Tab I in the 4012

• EIC is primarily geared towards families with children.
• EIC increases with AGI until it reaches the plateau amounts for the

maximum amount, and then decreases as AGI increases

Number of Qualifying Children Maximum Amount

• f EIC

Earned Income and AGI Limitations Band Amount for Maximum EIC (2015 Figures) $510 $15,010 ($20,600 MFJ) $6,550 - $8,250 1 $3,400 $39,617 ($45,207 MFJ) $9,850 - $18, 150 2 $5,616 $45,007 ($50,597 MFJ) $13,850 - $18, 150 3 $6,318 $48,340 ($53,930 MFJ) $13, 850 - $18, 150

Payments – Refundable Credits Line 66a – Earned Income Credit (EIC) Tab I in the 4012

• Some taxpayers may need to file Form 8862 if they incorrectly

claimed EIC in previous tax years and are eligible to claim the EIC in the current tax year

• IRS will not release any refunds in which the taxpayer claimed the EIC
• r additional child tax credit until at least February 15, 2018
• This is to help deter people improperly claiming and receiving EIC and the

additional child tax credit

• If IRS determines a taxpayer wrongly claimed EIC, they have to repay back the

amount of the EIC, any other credits claims, plus penalties and interest.

Payments – Refundable Credits Line 67 – Additional Child Tax Credit G-8 in the 4012

• This credit is for certain individuals who get less than the full amount of the nonrefundable child

tax credit.

• The additional child tax credit may give taxpayers a refund even if they do not owe any tax.
• The additional child tax credit allows eligible taxpayers to claim up to $1,000 for each qualifying

child after subtracting the allowable amount of the nonrefundable child tax credit

• For taxpayers with earned income over $3,000 and at least one qualifying child, the credit is

based on the lesser of:

• 15% of the taxpayer’s taxable earned income that is over $3,000 or
• The amount of unused child tax credit (caused when tax liability is less than allowed credit)
• Taxpayers with three or more qualifying children may be eligible for the additional child tax credit

regardless of income

• TaxSlayer will calculate the amount of the additional child tax credit – remember that any other

nonrefundable credits must have been entered previously to calculate correct amount

• IRS will not release any refunds from returns claiming the additional child tax credit or the EIC

before February 15, 2018

• A net premium tax credit can be realized if the taxpayer underestimated his or

her income (see pages H-24 to H-28)

• He or she will receive the difference of the premium tax credit that was supposed to be

received minus the actual advanced premium tax credit as a refundable credit on line 69

• Taxpayers can also elect not to take any advanced premium tax credit when they

choose health insurance through the Marketplace.

• Instead they pay the full amount of the premium
• Columns B and C will be blank on the 1095-A. You will need to look up the figures for column

B, second lowest cost silver plan premium online at the Marketplace

• The taxpayer will receive the full amount of the premium tax credit on line 69 as long as his
• r her income is between 101%-400% of the federal poverty level for his or her household

size

• Information about Marketplace insurance is found on 1095-A, and goes on Form
• 8962. It is entered in the Health Insurance information of TaxSlayer
• Remember if the taxpayer had insurance at any time during the year through the

Marketplace, we cannot prepare the return without the 1095-A

Payments – Refundable Credits Line 69 – Net Premium Tax Credit Tab H

• If total payments and refundable credits (line 74) is greater than the total tax owed (line

63), the taxpayer gets a refund on line 75

• Direct deposit is strongly encouraged, as taxpayers can receive their refund faster than if

they opted for a paper check

• If a taxpayer does not have a bank account, CWF offers a very low fee prepaid debit card.

Ask your site manager for more details.

• If a taxpayer wish to split their refund between two bank accounts or purchase a savings

bond, use Form 8888

• Any refunds with the EIC or the additional child tax credit will not be released before

February 15

• A taxpayer’s refund will be offset (intercepted) to pay outstanding federal income tax

debts, child support, federal non-tax debts (i.e. default on student loans), state income tax debts, and unemployment compensation debts.

• When a tax refund is offset, the taxpayer will receive a letter explaining how the refund was

applied to his or her debt

• MFJ filers in which one spouse has such debts and the other does not – file Form 8379, Injured

Spouse Allocation, so the injured spouse can request his or her portion of a joint refund

Refund Line 75 Tab K of 4012

Amount Owed Line 78 Tab K of the 4012

• If total payments and refundable credits (line 74) is less than the total tax owed (line 63), then the

taxpayer has a balance due

• If the balance due is more than $1000, an additional tax penalty is factored into the amount owed
• The amount owed is due by the filing deadline. If afterwards, penalties and interest start to

accrue - taxpayers are advised to pay as much as they can with the return to reduce penalties and interest

• Taxpayers can pay what they owe through electronic debit (can schedule the date of the

withdrawal), IRS Direct Pay, check or money order, credit card, Electronic Federal Tax Payment System (EFTPS), or cash using PayNearMe

• If they cannot pay the full amount, they can contact IRS for alternatives: Agreement to pay within

120 days, Monthly installment agreement, Request an extension of time to pay if paying by due date will be an undue hardship, Offer in Compromise

• To avoid owing in the future, taxpayers can either:
• Increase the amount of taxes withheld from by submitting a revised W-4 or W-4P/W-V
• If self-employed, or have large investment income, they can make quarterly estimate tax payments
• If receiving insurance through the Marketplace, they should contact the Marketplace when they have changes

in income or family size

• Multiple sources of income can add up and place a taxpayer in a higher tax bracket

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Next Steps

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