This domain covers the items that a preparer must
consider during the first steps of the return preparation
process: taxpayer data, filing status, individual tax forms,
and filing requirements.





A. Filing Requirements and Forms
B. Taxpayer Data and Filing Status
C. Exemptions and Dependents
D. Overview of Preliminary Tax Data
E. Return Review Process

This study guide covers rules for gathering
taxpayer data and determining filing status.
Certain taxpayer information is required for
filing a tax return. Items such as taxpayer
identification number, name, and address,
age/date of birth, residency, and dependency
status can affect the requirements for filing.
In addition, taxpayer data such as marital or
family circumstances can affect the filing
status selected on the return.

Taxpayer Name(s)
Taxpayers must be sure the name(s) entered on the
tax return, including dependents, match records on
file with the IRS and/or Social Security Administration.
Review the taxpayer's, spouse's and dependent's
Social Security Cards and/or Birth Certificates to
verify name, date of birth, and social security number
information. Keep a copy or scanned image of these
documents for your preparer records.
If the name or SSN on the taxpayer's social security
card is incorrect, contact the Social Security
Administration. Many e-file rejections are a result of
name and SSN mismatches between IRS and Taxpayer
records.

This domain reviews the treatment of income
and assets on the tax return and includes the
taxability of the various types of income,
including wages, interest income, rental
income, retirement income, and more. This
domain covers short-term and long-term
capital gains, basis, and the sale of a
residence. It also looks at adjustments to
income, including moving expenses and
tuition and fees

This study guide covers the filing
requirements for most taxpayers,
dependents, and other situations where filing
is necessary. Form types and requirements
are also discussed, along with important
filing dates.
Who Must File
If a taxpayer is a U.S. citizen or resident alien,
determining whether or not they are required to
file a federal income tax return depends on their
gross income, their filing status, their age, and
whether they are a dependent.
NOTE: The filing requirements apply even if the
taxpayer owes no tax. Taxpayers may have to pay
a penalty if they are required to file a return but
fail to do so. Willfully failing to file a return could
be subject to criminal prosecution.




at the end of 2011 you were...* THEN file a
return if your gross income was at least...
Single under 65 $9,500 65 or older $10,950
head of household under 65 $12,200 65 or
older
$13,650 married, filing jointly*** under 65
(both spouses) $19,000 65 or older (one
spouse) $20,150 65 or older (both spouses)
$21,300
Married, filing separately any age $3,700
qualifying widow(er) with dependent child
under 65 $15,300 65 or older $16,450

Keith and Donna are married and plan to file
a joint return. Keith is 47 and had a gross
income of $15,000 for the tax year. Donna is
44. Her gross income was $2,500 for the
year. Since their combined gross income is
$17,500, they do not have to file a return

Katie is 36 years old, single, and her gross
income is $10,700. She must file a tax return
and will use the Single filing status

A person who is a dependent may still have to
file a return. This depends on the amount of
the dependent's earned income, unearned
income, and gross income as shown in Table
1-2. A dependent may also have to file if one
of the situations described in Table 1-3
applies

Responsibility of parent - A child is responsible for filing his or her own
return and paying any tax owed. If a dependent child who must file an
income tax return cannot file it for any reason, such as age, a parent,
guardian, or other legally responsible person must file it for the child. If
the child cannot sign the return, the parent or guardian must sign the
child's name followed by the words "By (your signature), parent for minor
child."
Child's earnings - Amounts a child earns by performing services are
included in his or her gross income. This is true even if under local law
the child's parents have the right to the earnings and may actually have
received them. If the child does not pay the tax due on this income, the
parent is liable for the tax.
Election to report child's unearned income on parent's return Taxpayers may be able to include their child's interest and dividend
income on their tax return. If they choose to do this, their child will not
have to file a return. For more information, see Form 8814 Parent's
Election to Report Child's Interest Dividends and Publication 929 Tax
Rules for Children and Dependents.








Even if a taxpayer does not have to file, they should file a
tax return if they can get a tax refund. Taxpayers should
file if one of the following examples apply:
Income tax was withheld from their pay.
They made estimated tax payments for the year or had any
of their overpayment for last year applied to this year's
estimated tax.
They qualify for the earned income credit.
They qualify for the additional child tax credit.
They qualify for the health coverage tax credit.
They qualify for the refundable credit for prior year
minimum tax.
They qualify for the American opportunity credit.
Generally, a taxpayer must use one of three
forms to file a tax return: 1040EZ, 1040A and
1040. Each form has different requirements.
The RTRP Competency exam provides the
Form 1040 Instructions and a sample 1040
form for reference when answering questions.

Form 1040EZ is the simplest form to use.
Taxpayers can use Form 1040EZ if all of the following apply



Their filing status is single or married filing jointly. If a
nonresident alien at any time in 2011, the taxpayer's filing status
must be married filing jointly.
The taxpayer (and spouse if married filing a joint return) were
under age 65 and not blind at the end of 2011. Anyone born on
January 1, 1947, is considered to be age 65 at the end of 2011.
They do not claim any dependents.







Their taxable income is less than $100,000.
Their income is only from wages, salaries, tips,
unemployment compensation, Alaska Permanent Fund
dividends, taxable scholarship and fellowship grants, and
taxable interest of $1,500 or less.
They do not claim any adjustments to income, such as a
deduction for IRA contributions or student loan interest.
They do not claim any credits other than the earned
income credit.
They do not owe any household employment taxes on
wages paid to a household employee.
They are not a debtor in a Chapter 11 bankruptcy case
filed after Oct 16, 2005.
If they earned tips, they are included on boxes 5 and 7 of
the W-2.

1.
They only had income from the following sources:
a. Wages, salaries, tips.
b. Interest and ordinary dividends.
c. Capital gain distributions.
d. Taxable scholarship and fellowship grants.
e. Pensions, annuities, and IRAs.
f.
Unemployment compensation.
g. Taxable social security and railroad retirement
benefits.
h. Alaska Permanent Fund dividends.

2.
The only adjustments to income they can claim are:
a. Educator expenses.
b. IRA deduction.
c. Student loan interest deduction.
d. Tuition and fees deduction.

3.
They do not itemize deductions.
4.
Their taxable income is less than $100,000.
5.
Their taxes are only from the tax table, alternative
minimum tax, recapture of an education credit, Form
8615, qualified dividends and the capital gains tax
worksheet.
6.
The only tax credits claimed are:
a. Child tax credit.
b. Additional child tax credit.
c. Education credits.
d. Earned income credit.
e. Credit for child and dependent care expenses.
f.
Credit for the elderly or the disabled.
g. Retirement savings contribution credit.
7. They did not have an alternative minimum tax
adjustment on stock acquired from the exercise of an
incentive stock option.





If a taxpayer cannot meet the requirements of a
1040EZ, or 1040A, then they must use a 1040. An
examination of each section of Form 1040 will be
presented throughout the course, as this form is the
reference source during the competency exam.
Some common reasons for using Form 1040 include:
Taxable income over $100,000.
Itemizing deductions on Schedule A.
Recapture of First-Time Homebuyer Credit.
Employer did not withhold Social Security and
Medicare tax.
Ann is 34 years old, is unmarried and has two
dependents. She plans to itemize deductions
and has taxable income of $85,000. She
plans to take the credit for Child and
Dependent Care Expenses.
Although Ann meets most of the
qualifications to file using Form 1040A, she
must use Form 1040 because she is going to
itemize deductions on Schedule A

Use Form 1040X if taxpayers made a mistake
on their originally filed return.
Errors may delay a refund or result in notices
being sent. If a taxpayer discovers an error,
they can file an amended return or claim for
refund

1. They did not report some income,
2.
They claimed deductions or credits they should not
have claimed,
3.
They did not claim deductions or credits they could
have claimed, or
4.
They should have claimed a different filing status.
(Once a joint return is filed, a taxpayer cannot choose to
file separate returns for that year after the due date of the
return. However, an executor may be able to make this
change for a deceased spouse.)
5.
They need to make certain elections after the
prescribed deadline.
6.
They wish to modify any amounts previously adjusted
by the IRS. (Do not include interest or penalties on Form
1040X; the IRS will adjust these amounts accordingly.)
7.
They need to make a claim for a carryback due to a
loss or unused credi



On Form 1040X, enter income, deductions, and
credits as originally reported on the return, changes
that are being made, and the corrected amounts.
Then figure the tax on the corrected amount of
taxable income and the amount owed or to be
refunded.
Taxpayers who owe tax should pay the full amount
with Form 1040X.
If due a refund, it will be sent separately from any
refund shown on the original return.
A separate Form 1040X must be filed for each tax
year involved

Almost a year after Luke filed his current year
tax return, he found a Form 1099-R from his
employer for money he took out of his
pension at work. Luke checked his tax return
and found the income wasn't included on his
original return. Luke must file Form 1040X to
include the additional 1099-R income on the
current year return.

The deadline for filing 2011 Individual 1040 tax returns is
April 17th, 2012.
Typically 1040 Income tax returns for calendar year filers
must be filed on or before April 15th. the filing due date
for fiscal year filers is the 15th day of the 4th month
following the end of the tax year.
Exceptions to this deadline may include:
1. When the 15th falls on a weekend.
2. When the 15th falls on the Emancipation Day holiday
in the District of Columbia.
3. When the IRS has extended the filing deadline for
taxpayer's residing in a federally declared
Disaster Area.
4. Members of the armed services serving in a combat
zone

The deadline for filing a tax return, paying any
tax owed, and filing a claim for refund is
automatically extended if a taxpayer is serving in
a combat zone. This applies to members of the
Armed Forces, as well as merchant marines
serving aboard vessels under the operational
control of the Department of Defense, Red Cross
personnel, accredited correspondents, and
civilians under the direction of the Armed Forces
in support of the Armed Forces.

Generally, a taxpayer must file a claim for a
credit or refund within three years of the later
of, the due date of their original return, or
when their original return was filed, or within
2 years after the date they paid the tax,
whichever is later. Returns filed before the
due date (without regard to extensions) are
considered filed on the due date (even if the
due date was a Saturday, Sunday, or legal
holiday).
To obtain an extension of time to file a return for
up to six months, complete Form 4868,
Application for Automatic Extension of Time to
File US Individual Income Tax Return.
For tax year 2011, individual returns are due on
April 17, 2012. With an extension to file, the
return is due on October 15, 2012.
If tax will be owed, payment of tax is due by the
regular due date to avoid interest and penalties.



Why should a person who is not required to
file a tax return according to the three tables
want to file a tax return?
A. They had taxes withheld from a part time
job.
B. They can claim a credit for Childcare
Expense.
C. They purchased a second home.



Walt and Lisa are filing a joint return and have
two dependents. Their combined income was
$31,000, which included $35 in taxable
interest, two months of unemployment
income for Lisa and $2,500 of net selfemployment income for Walt. They want to
take the standard deduction. Which form(s)
can Walt and Lisa use for their tax return?
A. Form 1040
B. Form 1040A
C. Form 1040EZ





The following taxpayers should file Form 1040X
Amended US Individual Income Tax Return except:
They did not file because they were not required, but
realized two years after their filing deadline they are
eligible for the Earned Income Credit.
They received an additional W-2 form after filing their
return.
They determined it would be advantageous to file
Married Filing Joint rather than their original filing
status of Married Filing Separate.
The IRS adjusted their tax return and they need to
make changes to the adjustmen

Taxpayers must be sure the name(s) entered on the
tax return, including dependents, match records on
file with the IRS and/or Social Security Administration.
Review the taxpayer's, spouse's and dependent's
Social Security Cards and/or Birth Certificates to
verify name, date of birth, and social security number
information. Keep a copy or scanned image of these
documents for your preparer records.
If the name or SSN on the taxpayer's social security
card is incorrect, contact the Social Security
Administration. Many e-file rejections are a result of
name and SSN mismatches between IRS and Taxpayer
records.

Age is a factor in determining if a taxpayer must
file a return only if they are 65 or older at the end
of the tax year. For 2011, a taxpayer is 65 or
older if they were born before January 1, 1947. A
taxpayer is considered 65 on the day before their
65th birthday.
If the taxpayer is 65 or older at the end of the
year, he or she can generally have a higher
income amount than other taxpayers before he
or she must file.

Howard turned 65 on his birthday on January
1, 2012. He is considered 65 for tax year
2011.




IRS regulations require that each person listed on
a U.S. federal income tax return have a valid
taxpayer identification number (TIN). These
identifying numbers must be included on the tax
return where indicated. The types of Taxpayer
Identification Numbers are:
Social Security Number (SSN)
Individual Taxpayer Identification Number (ITIN)
Adoption Taxpayer Identificaton Number (ATIN)



Address
Taxpayers should include their current
mailing address on their tax return.
Guidelines for addresses include:
P.O. Box - If the post office does not deliver
mail to the physical street address and a
taxpayer has a P.O. Box, use the P.O. Box
number on the line for the present home
address instead of the street address.
Foreign address - If a taxpayer's address is
outside the United States or its possessions
or territories, enter the information on the
line for "City, town or post office, state, and
ZIP code" in the following order:

1. City,
2. Province or state, and
3. Name of foreign country. (Do not
abbreviate the name of the country.)

If taxpayers move after they filed their return,
they should give the IRS clear and concise
written notification of their change of
address. Send the notification to the Internal
Revenue Service Center serving their old
address using Form 8822 Change of Address.

For purposes of determining whether a
taxpayer must file a return, they must include
in their gross income all of the income earned
or received abroad, including any income
excluded under the foreign earned income
exclusion. For more information on special
tax rules that may apply, see Publication 54
Tax Guide for U.S. Citizens and Resident
Aliens Abroad.

Generally, if a taxpayer is a U.S. citizen and a bona fide
resident of Puerto Rico, they must file a U.S. income tax
return if they meet the income requirements. This is in
addition to any legal requirement to file an income tax
return with Puerto Rico.
For taxpayers who are bona fide residents of Puerto Rico
for the whole year, their U.S. gross income does not
include income from sources within Puerto Rico. However,
include in U.S. gross income any income received for
services as an employee of the United States or any U.S.
agency. For income received from Puerto Rican sources
that is not subject to U.S. tax, a taxpayer must reduce their
standard deduction, which reduces the amount of income
they can have before they must file a U.S. income tax
return.

Juan is a resident of Puerto Rico for the entire
year. He has income from sources within
Puerto Rico that is not subject to U.S. tax. He
also receives income from sources within the
U.S. Juan must file a U.S. tax return but does
not have to include his income from sources
within Puerto Rico. However, Juan must
reduce his standard deduction because the
income from Puerto Rican sources was not
subject to U.S. tax.

For taxpayers who had income from Guam, the
Commonwealth of Northern Mariana Islands,
American Samoa, or the U.S. Virgin Islands,
special rules may apply when determining
whether they must file a U.S. federal income tax
return. In addition, they may have to file a return
with the individual possession government.
For more information, see Publication 570 Tax
Guide for Individuals with Income from U.S.
Possessions.

Aliens
The taxpayer's status as an alien determines whether
and how they must file a return.
Resident Alien - If the taxpayer is a resident alien for
the whole year, they must file a return following the
same rules that apply to U.S. citizens.
Nonresident Alien - If the taxpayer is a nonresident
alien, the rules that apply are different from those
applying to U.S. citizens. For more information, view
Pub 519, U.S. Tax Guide for Aliens.
Dual-Status Taxpayer - If the taxpayer is a resident
alien for a portion of the year and a nonresident alien
for the rest of the year, then the taxpayer is
considered dual-status. Different rules apply for each
part of the year, and Pub 519 should be referenced




Taxpayers must file an income tax return for
a decedent (a person who died) if both of the
following are true.
They are the surviving spouse, executor,
administrator, or legal representative.
The decedent met the filing requirements
described in Pub 17 at the time of his or her
death.
For more information, see Final Return for
Decedent in Publication 559 Survivors,
Executors, and Administrators.

Dependents that met the dependency tests
and have certain income amounts may be
required to file a return. Dependency tests
and requirements will be covered in the
"Exemptions and Dependents" section of this
course.
REMINDER: Table 1-2 provides details on
whether a dependent must file a return.

Everyone who files a federal tax return must determine
which filing status applies to them. Filing status impacts
the calculation of income tax, affects the amount of the
standard deduction, and determines allowance or
limitation of certain credits and deductions. Filing status
selection can be complex for taxpayers who are separated
or in the process of a divorce.
There are five filing statuses:
1. Single
2. Married Filing Jointly
3. Married Filing Separately
4. Head of Household
5. Qualifying Widow(er) with Dependent Child
For additional information see Publication 501
Exemptions, Standard Deduction and Filing Information.

In general, a taxpayer's filing status depends
on whether they are considered unmarried or
married. For federal tax purposes, a marriage
means only a legal union between a man and
a woman as husband and wife. The term
"spouse" refers to a person of the opposite
sex who is legally a husband or a wife.




Taxpayers are considered married for the whole year
if on the last day of their tax year they and their
spouse meet any one of the following tests.
They are married and living together as husband and
wife.
They are living together in a common law marriage
that is recognized in the state where they now live or
in the state where the common law marriage began.
They are married and living apart, but not legally
separated under a decree of divorce or separate
maintenance agreement. They are separated under an
interlocutory (not final) decree of divorce. For
purposes of filing a joint return, they are not
considered divorced.

Unmarried Persons
Taxpayers are considered unmarried for the whole year if,
on the last day of their tax year, they are unmarried or
legally separated from their spouse under a divorce or
separate maintenance decree. State law governs whether a
taxpayer is married or legally separated under a divorce or
separate maintenance decree.
Divorced Persons - If a taxpayer is divorced under a final
decree by the last day of the year, they are considered
unmarried for the whole year.
Annulled Marriages - If the taxpayer obtains an
annulment, which holds that no marriage ever existed, the
taxpayer is considered unmarried. The taxpayer may be
required to file amended returns claiming single or head
of household status for all years affected by the annulment
not closed by the statute of limitations for filing a return.

If a taxpayer's spouse died during the year,
they are considered married for the whole
year for filing status purposes.
If they did not remarry before the end of the
tax year, they can file a joint return for
themselves and their deceased spouse. For
the next 2 years, they may be entitled to the
special benefits described later under
Qualifying Widow(er) With Dependent Child


A taxpayer is considered single if, on the last
day of the tax year, the taxpayer was
Never married,Legally separated or divorced,
or Widowed before the first day of the tax
year and not remarried during the
year.Although a taxpayer is considered
single, the taxpayer may qualify for another
filing status that gives a lower tax, such as
Head of Household or Qualifying Widow(er)
with Dependent Child


Married taxpayers can select this status even if
one of the spouses did not have any income or
any deductions. Taxpayers may use the Married
Filing Jointly status if they are married and one of
the following applies on the last day of the tax
year:
They lived together as husband and wife.They
lived apart but are not legally separated or
divorced.They live together in a recognized
common law marriage.They are separated under
an interlocutory (not final) divorce decree.The
taxpayer's spouse died during the year and the
taxpayer has not remarried


Both taxpayers may be held responsible, jointly
and individually, for the tax and any interest or
penalty due on their joint return. One spouse
may be held responsible for all the tax due even
if all the income was earned by the other spouse.
Taxpayers who file a joint return must combine
their income and deductions on the same return.
Both husband and wife: Must sign the return
Are responsible for any tax owed on the return
The Married Filing Separately status is for
taxpayers who qualify as married and either



Choose to file separate returns, or
Cannot agree to file a joint return.
Taxpayers who are married may choose the
Married Filing Separately status, which means
the husband and wife report their own
incomes and deductions on separate returns,
even if one spouse had no income.
Unless a taxpayer is required to file separately,
they should figure their tax both ways (on a
joint return and on separate returns). This
way they can make sure they are using the
filing status that results in the lowest
combined tax. However, taxpayers will
generally pay more combined tax on separate
returns than they would on a joint return due
to special rules







If taxpayers choose married filing separately as their filing
status, the following special rules apply. Because of these special
rules, they will usually pay more tax on a separate return than if
another filing status that they qualify for was used.
The tax rate generally will be higher than it would be on a joint
return.
The exemption amount for figuring the alternative minimum tax
will be half that allowed to a joint return filer.
In most cases, they cannot take the credit for child and
dependent care expenses.
They cannot take the earned income credit.
They cannot take the exclusion or credit for adoption expenses
in most cases.
They cannot take the education credits (the American
opportunity credit, Hope credit, and lifetime learning credit), the
deduction for student loan interest, or the tuition and fees
deduction.


They cannot exclude any interest income from qualified U.S.
savings bonds that they used for higher education expenses.
If a taxpayer lived with their spouse at any time during the tax
year:
◦ They cannot claim the credit for the elderly or the disabled,
◦ They will have to include in income more (up to 85%) of any social security
or equivalent railroad retirement benefits they received, and

The following deductions and credits are reduced at income
levels that are half those for a joint return:
◦ The child tax credit,
◦ The retirement savings contributions credit,


Their capital loss deduction limit is $1,500 (instead of $3,000 if
you filed a joint return).
If the spouse itemizes deductions, the taxpayer cannot claim the
standard deduction. If they can claim the standard deduction, the
basic standard deduction is half the amount allowed on a joint
return.

Separate to Joint - The taxpayers may change
their filing status by amending the return using
Form 1040X. If the original return was a separate
return, it can generally be amended to a joint
return any time within three years from the due
date of the original return.
Joint to Separate - Once a joint return is filed, the
taxpayers may NOT choose to file a separate
return for that year after the due date of the
return

Separate to Joint - The taxpayers may change
their filing status by amending the return using
Form 1040X. If the original return was a separate
return, it can generally be amended to a joint
return any time within three years from the due
date of the original return.
Joint to Separate - Once a joint return is filed, the
taxpayers may NOT choose to file a separate
return for that year after the due date of the
return.


Taxpayers may be able to file as head of household if
they meet all the following requirements:
They are unmarried or "considered unmarried"
(covered later) on the last day of the year. They paid
more than half the cost of keeping up a home for the
year.A "qualifying person" lived with them in their
home for more than half the year (except for
temporary absences, such as school). However, if the
"qualifying person" is a dependent parent, he or she
does not have to live with you. See Table 2-1 for
details on Qualifying Persons

To qualify for head of household status, a taxpayer must
be either unmarried (defined earlier) or considered
unmarried on the last day of the year. Taxpayers are
considered unmarried on the last day of the tax year if
they meet ALL the following tests: They file a separate
return.They paid more than half the cost of keeping up
their home for the tax year.Their spouse did not live in
their home during the last 6 months of the tax year. Their
spouse is considered to live in their home even if he or she
is temporarily absent due to special circumstances.Their
home was the main home of their child, stepchild, or
foster child for more than half the year. They must be able
to claim an exemption for the child

Include costs such as rent, mortgage, interest, real
estate taxes, insurance on the home, repairs, utilities,
and food eaten in the home. If the taxpayer used
payments received under Temporary Assistance for
Needy Families (TANF) or other public assistance
programs to pay part of the cost of home upkeep,
they cannot count them as money paid by the
taxpayer.
Do not include expenses such as clothing, education,
medical treatment, vacations, life insurance, or
transportation. Also, do not include the rental value
of a home owned or the value of the taxpayer's
services or those of a member of their household.

If the qualifying person is a father or mother,
taxpayers may be eligible to file as head of
household even if their father or mother does
not live with them. However, they must be
able to claim an exemption for their father or
mother. Also, taxpayers must pay more than
half the cost of keeping up a home that was
the main home for the entire year for their
father or mother

Kelly is unmarried. Her mother, for whom she
can claim an exemption, lived in an apartment by
herself. Her mother died on September 2. The
cost of the upkeep of her apartment for the year
until her death was $6,000. Kelly paid $4,000
and her brother paid $2,000. Her brother made
no other payments toward Kelly's mother's
support. Her mother had no income. Because
Kelly paid more than half the cost of keeping up
her mother's apartment from January 1 until her
death, and she can claim an exemption for her,
Kelly can file as head of household.

A taxpayer and their qualifying person are
considered to live together even if one or
both of them are temporarily absent from
their home due to special circumstances such
as illness, education, business, vacation, or
military service. It must be reasonable to
assume that the absent person will return to
the home after the temporary absence. The
taxpayer must continue to keep up the home
during the absence

A taxpayer may be eligible to file as head of
household if the individual who qualifies
them for this filing status is born or dies
during the year. They must have provided
more than half of the cost of keeping up a
home that was the individual's main home for
more than half the year or, if less, the period
during which the individual lived.

A widow or widower with one or more dependent
children may be able to use the Qualifying
Widow(er) with Dependent Child filing status.
This filing status yields as low a tax amount as
Married Filing Jointly, and is available for only
two years following the year of the spouse's
death. If the taxpayer's spouse died during 2010,
and the taxpayer has not remarried, the taxpayer
may be able to claim this filing status for 2011
and 2012





To qualify for the Qualifying Widow(er) with
Dependent Child filing status, the taxpayer must: Not
have remarried before the end of the tax year
Have been eligible to file a joint return for the year
the spouse died; it does not matter if a joint return
was actually filed
Have a child, stepchild, or adopted child who qualifies
as the taxpayer's qualifying child for the year
The child lived in the home all year, except for
temporary absences
The taxpayer paid more than half the cost of keeping
up a home for the year

John Reed's wife died in 2009. John has not
remarried. During 2010 and 2011, he
continued to keep up a home for himself and
his child, who lives with him and for whom he
can claim an exemption. For 2009 he was
entitled to file a joint return for himself and
his deceased wife. For 2010 and 2011, he can
file as qualifying widower with a dependent
child. After 2011 he can file as head of
household if he qualifies





In summary, consider these guidelines when selecting
the correct filing status:
The marital status on the last day of the year
determines a taxpayer's marital status for the entire
year.
If more than one filing status applies, choose the one
that gives the lowest tax obligation.
Single filing status generally applies to anyone who is
unmarried, divorced or legally separated according to
state law.
A married couple may file a joint return together or
separate returns.



If a taxpayer's spouse died during the year and they did
not remarry during 2011, they may still file a joint return
with that spouse for the year of death, provided the joint
return election is not revoked by a personal representative
for the deceased spouse.
Head of Household generally applies to taxpayers who are
unmarried. Taxpayers must also have paid more than half
the cost of maintaining a home for them and a qualifying
person to qualify for this filing status. There are also
provisions for married taxpayer's separated from their
spouse who meet these and other requirements.
Taxpayers may be able to choose Qualifying Widow(er)
with Dependent Child as their filing status if their spouse
died during 2009 or 2010, they have a dependent child
and they meet certain other conditions.

This domain reviews the treatment of income
and assets on the tax return and includes the
taxability of the various types of income,
including wages, interest income, rental
income, retirement income, and more. This
domain covers short-term and long-term
capital gains, basis, and the sale of a
residence. It also looks at adjustments to
income, including moving expenses and
tuition and fees

A. Taxability of Wages, Salaries, Tips, and
Other Earnings B. Interest and Dividend
Income C. Self-employment Income and
Expenses D. Rental Income and Expenses E.
Retirement Income F. Social Security Benefits
G. Real and Personal Property H. Other
Income I. Adjustments to Income

This Study Guide reviews the taxability of
compensation received as an employee,
including wages, salaries, fringe benefits, and
retirement plan contributions. It will also
cover the special rules for certain employees
and sickness and injury benefits.

Form W-2
All employed taxpayers should receive Form W-2 from
their employer showing the pay received for services.
Pay is included on line 7 of Form 1040 or Form 1040A, or
on line 1 of Form 1040EZ, even if the taxpayer doesn't
receive a Form W-2. If services are performed, other than
as an independent contractor, and the employer did not
withhold social security and Medicare taxes from the pay,
file Form 8919, Uncollected Social Security and Medicare
Tax on Wages, with the Form 1040. These wages must be
included on line 7 of Form 1040. See Form 8919 for more
information.

Childcare Providers
Taxpayers that provide childcare, either in the child's home, the
taxpayer's home or other place of business, the pay received
must be included in income. Childcare providers that are not
employees are considered self-employed and must include
payments for services on Schedule C (Form 1040). Taxpayers are
generally not an "employee" unless they are subject to the will
and control of a person who employs them.
NOTE: Childcare provider rules apply to any taxpayer that
babysits relatives or neighborhood children, whether on a
regular basis or only periodically.
Example
A stay at home mom who watches another child in her home
twice a week for extra money must report those earnings on a
Schedule C.

Foreign Income
Whether a U.S. citizen or resident alien, all income from
sources outside the United States (foreign income) must
be reported on the tax return unless it is exempt by U.S.
law. This is true for taxpayers that reside either inside or
outside the United States and whether or not they received
a Form W-2, Wage and Tax Statement, or Form 1099 from
the foreign payer. This applies to earned income (such as
wages and tips) as well as unearned income (such as
interest, dividends, capital gains, pensions, rents, and
royalties).
NOTE: Taxpayers that reside outside of the United States
may be able to exclude part or their entire foreign source
earned income. For details, see Publication 54, Tax Guide
for U.S. Citizens and Resident Aliens Abroad.

Miscellaneous Compensation
This section discusses the different types of employee
compensation. These may or may not be included as
income on the W-2.
Advance Commissions and Other Earnings
Advance commissions or other amounts received for
services to be performed in the future must be included in
income for the year they are received.
If unearned commissions or other amounts are repaid in
the same year they are received, reduce the amount
included in income by the repayment amount. If repaid in
a later tax year, deduct the repayment amount as an
itemized deduction on Schedule A (Form 1040), or the
taxpayer may be able to take a credit for that year.

Back Pay Awards
Include in income amounts awarded in a settlement or
judgment for back pay. These include payments made for
damages, unpaid life insurance premiums, and unpaid
health insurance premiums. These amounts should be
reported by the employer on Form W-2.
Bonuses and Awards
Bonuses or awards received for outstanding work are
included in income and should be shown on Form W-2.
These include prizes such as vacation trips for meeting
sales goals. If the prize or award received is for goods or
services, include the fair market value of the goods or
services in income.
NOTE: Bonuses or awards are not taxable until received or
until made available to the taxpayer.



Employee Achievement Award
If the taxpayer received tangible personal property (other than
cash, a gift certificate, or an equivalent item) as an award for
length of service or safety achievement, its value can generally
be excluded from income. However, the amount excluded is
limited to the employer's cost and cannot be more than $1,600
($400 for awards that are not qualified plan awards) for all such
awards received during the year.
The exclusion does not apply to the following awards:
A length-of-service award if received for less than 5 years of
service or if the taxpayer received another length-of-service
award during the year or the previous 4 years.
A safety achievement award if the taxpayer is a manager,
administrator, clerical employee, or other professional employee,
or if more than 10% of eligible employees previously received
safety achievement awards during the year.

Example
In July of 2011, James received $2,500 in advance
commissions and in December repaid $1,000 for
commissions unearned. $1,500 would need to be
included in income for 2011.
Example
Jill received two nonqualified plan awards valued
at $250 each, and one qualified plan award of a
watch valued at $1,000. Each award can be
excluded from income. However, because the
value of the nonqualified awards exceeds $400,
($250 + $250 = $500), $100 must be included in
income ($500 - $400 = $100).

Differential Wage Payments
This is any payment made by an employer for any period during which
the taxpayer, for a period of more than 30 days, is an active duty
member of the uniformed services and represents all or a portion of the
wages that would have been received from the employer during that
period. These payments are treated as wages and are subject to income
tax withholding, but not FICA or FUTA taxes. The payments are reported
as wages on Form W-2.
Government Cost-of-Living Allowances
Cost-of-living allowances generally are included in income. However,
cost-of-living allowances are not included in income if the taxpayer was
a federal civilian employee or a federal court employee who was
stationed in Alaska, Hawaii, or outside the United States. Beginning
January 1, 2010, these federal employees are being transitioned from a
nontaxable cost-of-living adjustment to a taxable locality-based
comparability payment.
Allowances and differentials that increase basic pay as an incentive for
taking a less desirable post of duty are part of compensation and must
be included in income.

Nonqualified Deferred Compensation Plans
Employers will report the total amount of deferrals
for the year under a nonqualified deferred
compensation plan. This amount is shown on Form
W-2, box 12, using code "Y". This amount is not
included in income.
However, if at any time during the tax year, the plan
fails to meet certain requirements, or is not operated
under those requirements, all amounts deferred
under the plan for the tax year, and all preceding tax
years, are included in income for the current year.
This amount is included in wages shown on Form W2, box 1. It is also shown on Form W-2, box 12,
using code "Z"

Note Received for Services
If the taxpayer receives a secured note as payment for
services, include the fair market value of the note in
income for the year it was received. Later, when the
taxpayer receives payments from the note, a proportionate
part of each payment is the recovery of the fair market
value previously included in their income. Do not include
that part again in income. Include the rest of the payment
in income in the year of payment.
If the taxpayer receives a non-negotiable unsecured note
as payment for services, payments on the note that are
credited toward the principal amount of the note are
compensation income when they are received.

Severance Pay
Include in income amounts received as severance pay and any
payment for the cancellation of an employment contract.
Accrued Leave Payment
Federal employees that receive a lump-sum payment for accrued
annual leave when they retire or resign must include this amount
as wages on Form W-2.
If the taxpayer resigns from one agency and is re-employed by
another agency, the lump-sum annual leave payment to the
second agency may have to be repaid. Reduce the wages by the
amount repaid in the same tax year in which it was received.
Attach to the tax return a copy of the receipt or statement given
by the agency repaid to explain the difference between the
wages on the return and the wages on Form W-2.

Outplacement Services
For taxpayers that choose to receive a reduced amount of severance pay
so that they may receive outplacement services, the unreduced amount
of the severance pay must be included in income.
The value of the outplacement services can be deducted (up to the
difference between the severance pay included in income and the
amount actually received) as a miscellaneous deduction (subject to the
2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040).
Example
Roxy, a federal employee, received a lump sum of $2,000 for accrued
annual leave when she resigned from the Early Head-Start Program to
move to another city in 2011. In the same year, Roxy was hired by the
Early Head-Start program in her new city of residence. Since it was the
same program offering the same annual leave, Roxy was required to pay
back $500 of the accrued leave payment to her new employer. Roxy
should include $1,500 in wages since the payment and repayment
occurred in the same year.







Sick Pay
Pay received from employers while sick or injured is
part of salary or wages. In addition, include in income
sick pay benefits received from any of the following
payers:
A welfare fund.
A state sickness or disability fund.
An association of employers or employees.
An insurance company, if your employer paid for the
plan.
Miscellaneous Compensation
NOTE: If the taxpayer paid premiums on an accident
or health insurance policy, the benefits received
under the policy are not taxable.






A welfare fund.
A state sickness or disability fund.
An association of employers or employees.
An insurance company, if your employer paid
for the plan.
Miscellaneous Compensation
NOTE: If the taxpayer paid premiums on an
accident or health insurance policy, the
benefits received under the policy are not
taxable.

Social Security and Medicare Taxes Paid by Employer
If the taxpayer and the employer have an agreement that the
employer pays the social security and Medicare taxes without
deducting them from the taxpayer's gross wages, report the
amount of tax paid as taxable wages on the tax return. The
payment also is treated as wages for figuring social security and
Medicare taxes and social security and Medicare benefits.
However, these payments are not treated as social security and
Medicare wages if the taxpayer is a household worker or a farm
worker.
Stock Appreciation Rights
Do not include a stock appreciation right granted by an employer
in income until the right is exercised. When used, the taxpayer is
entitled to a cash payment equal to the fair market value of the
corporation's stock on the date of use minus the fair market
value on the date the right was granted. Include the cash
payment in income in the year the right is used.

Fringe Benefits
Fringe benefits received in connection with the
performance of services are included in income as
compensation unless the fair market value for them is
paid, or they are specifically excluded by law. This section
will review fringe benefits and whether or not they should
be included in income.
Form W-2
Taxable fringe benefits are reported in box 1 of Form W-2.
The total value of fringe benefits also may be noted in box
14. The value of fringe benefits may be added to other
compensation on one Form W-2, or the taxpayer may
receive a separate Form W-2 showing just the value of the
fringe benefits in box 1 with a notation in box 14.



Accounting Period
Use the same accounting period the employer uses to report
taxable noncash fringe benefits. Employers have the option to
report taxable noncash fringe benefits by using either of the
following rules.
The general rule, where benefits are reported for a full calendar
year.
The special accounting period rule, where benefits provided
during the last 2 months of the calendar year (or any shorter
period) are treated as paid during the following calendar year.
The employer does not have to use the same accounting period
for each fringe benefit, but must use the same period for all
employees who receive a particular benefit.
Use the same accounting period used to report the benefit to
claim an employee business deduction (for use of a car, for
example).


Accident or Health Plans
In many cases, the value of accident or health plan coverage provided by
an employer is not included in income. Benefits received from the plan
may be taxable, as explained later (see "Sickness and Injury Benefits").
Long-Term Care Coverage - Employer contributions to provide coverage
for long-term care services generally are not included in income.
However, contributions made through a flexible spending or similar
arrangement (such as a cafeteria plan) must be included in income. This
amount is reported as wages in box 1 of Form W-2. Archer MSA
Contributions - Employer contributions to an Archer MSA generally are
not included in income. The total is reported in box 12 of Form W-2
with code "R". Report this amount on Form 8853, Archer MSAs and
Long-Term Care Insurance Contracts. File the form with the
return.Health Flexible Spending Arrangement (Health FSA) - Employer
contributions to a health FSA that qualify as an accident or health plan,
the amount of the salary reduction, and reimbursements of medical care
expenses, in most cases, are not included in income




Health Reimbursement Arrangement (HRA) - The coverage and
reimbursements of medical care expenses from an Employer
provided HRA are not generally included in income.
Qualified HSA Distribution - This distribution is a direct transfer
from an HRA or FSA to an HSA trustee by the employer. In most
cases, the distribution is not included in income and is not
deductible.
Health Savings Accounts (HSA) - Contributions, other than
employer contributions, are deductible on the return whether or
not the taxpayer itemizes. Contributions made by the employer
are not included in income. Distributions from the HSA that are
used to pay qualified medical expenses are not included in
income. Distributions not used for qualified medical expenses
are included in income.
Qualified HSA Funding Distribution - A one-time distribution
from an individual retirement account (IRA) to an HSA generally
does not need to be included in income.

Example
Pat had a one-time distribution of $5,000 from an IRA to
her HSA to help cover the cost of knee surgery. In
addition, she contributed $50 a week to the HSA. It is not
necessary for her to include the $5,000 distribution in
income and the $2,600 in HSA contributions are
deductible on her return.
Example
Amy's employer contributes $2,500 a year to an HSA.
During the year, $2,100 of the savings was used to pay
qualified medical expenses toward doctor visits for Amy's
3 month old baby. A distribution of $400 was used for
diaper services, an unqualified medical expense. Amy
must include the $400 in income and pay a 20% penalty on
the unqualified medical expense.

Adoption Assistance
Taxpayers may be able to exclude from income amounts paid or
expenses incurred by an employer for qualified adoption
expenses in connection with the adoption of an eligible child.
Adoption benefits are reported by the employer in box 12 of
Form W-2 with code "T". They are also included as social security
and Medicare wages in boxes 3 and 5. However, they are not
included as wages in box 1. To determine the taxable and
nontaxable amounts, complete Part III of Form 8839, Qualified
Adoption Expenses. File the form with the return.
De Minimis (Minimal) Benefits
If the employer provides the taxpayer with a product or service
and the cost of it is so small that it would be unreasonable for
the employer to account for it, the value is not included in
income

Holiday Gifts
Taxpayers that receive from their employers a turkey,
ham, or other item of nominal value at Christmas or other
holidays, should not include the value of the gift as
income. However, those that receive cash, a gift certificate,
or a similar item that could be exchanged for cash, should
include the value of that gift as extra salary or wages
regardless of the amount involved.
Educational Assistance
Exclude from income up to $5,250 of qualified employerprovided educational assistance. For more information,
see Publication 970, Tax Benefits for Education.

Group-Term Life Insurance
In most cases, the cost of up to $50,000 of group-term
life insurance coverage provided by an employer (or
former employer) is not included in income. However, you
must include in income the cost of employer-provided
insurance that is more than the cost of $50,000 of
coverage reduced by any amount you pay toward the
purchase of the insurance.
There are exceptions to the exclusion, which will be
discussed in a moment.
If the employer provided more than $50,000 of coverage,
the amount included in income is reported as part of
wages in box 1 of Form W-2. Also, it is shown separately
in box 12 with code "C".

Group-Term Life Insurance (continued)
This insurance is provided by an employer to
a group of employees for a fixed period of
time and provides a general death benefit.
Insurance that provides accidental or other
death benefits but does not provide general
death benefits (travel insurance, for example)
is not group-term life insurance



Permanent benefits - If the group-term life insurance policy includes
permanent benefits, such as a paid-up or cash surrender value, include
in income as wages the cost of the permanent benefits minus the
amount paid for them by the taxpayer.
Former employer - If a former employer provided more than $50,000 of
group-term life insurance coverage during the year, the amount is
reported as wages in box 1 of Form W-2 and is shown separately in box
12 with code "C". Box 12 also shows the amount of uncollected social
security and Medicare taxes on the excess coverage, with codes "M" and
"N". These taxes must be paid. Include them on line 60, Form 1040, and
enter "UT" and the amount of the taxes on the dotted line next to line
60. For more information, see the Instructions for Form 1040.
Two or more employers - The exclusion for employer-provided groupterm life insurance coverage cannot exceed the cost of $50,000 of
coverage, whether it's provided by a single employer or multiple
employers. If two or more employers provide insurance coverage that
totals more than $50,000, the amounts reported as wages on Forms W2 will not be correct. Figure the amount to include in income.

Group-Term Life Insurance - Example
Bill is 42 years old and works for two employers,
both of which provide him group-term life
insurance coverage for the entire year. Employer
A covers $25,000 and Employer B cover $35,000.
Bill pays a premium of $6.00 a month under the
employer B group plan.
Use Table 5-1 and Worksheet 5-1 to figure the
amount to include in income. Bill must include
$60 in income.

The taxpayer is permanently and totally disabled and has permanently
ended employment.The employer is the beneficiary of the policy for the
entire period the insurance is in force during the tax year. A charitable
organization to which contributions are deductible is the only
beneficiary of the policy for the entire period the insurance is in force
during the tax year. The plan existed on January 1, 1984, and the
taxpayer retired before January 2, 1984, and was covered by the plan at
the time of retirement, or the taxpayer reached age 55 before January 2,
1984 and was employed by the employer or its predecessor in 1983 The
taxpayer is permanently and totally disabled and has permanently ended
employment.The employer is the beneficiary of the policy for the entire
period the insurance is in force during the tax year. A charitable
organization to which contributions are deductible is the only
beneficiary of the policy for the entire period the insurance is in force
during the tax year. The plan existed on January 1, 1984, and the
taxpayer retired before January 2, 1984, and was covered by the plan at
the time of retirement, or the taxpayer reached age 55 before January 2,
1984 and was employed by the employer or its predecessor in 1983


The insurance is provided by the employer
through a qualified employees' trust, such as a
pension trust or a qualified annuity plan.
The qualified retirement plan and qualified
retirement planning services provided to the
taxpayer (and spouse) are not included in
income. Qualified services include retirement
planning advice and information about the
retirement plan. The value of any tax
preparation, accounting, legal, or brokerage
services provided by the employer cannot be
excluded.

Transportation
Employees provided with a qualified
transportation fringe benefit can exclude that
benefit from income, up to certain limits. A
qualified transportation fringe benefit is
transportation in a commuter highway vehicle
(such as a van) between the employee's home
and work place, a transit pass, qualified
parking, or qualified bicycle commuting
reimbursement.

Cash reimbursement by an employer for
these expenses under a bona fide
reimbursement arrangement also is
excludable. However, cash reimbursement for
a transit pass is excludable only if a voucher
or similar item that can be exchanged only
for a transit pass is not readily available for
direct distribution to the taxpayer.
The following exclusion limits apply:
.




The exclusion for commuter vehicle
transportation and transit pass fringe benefits
cannot be more than $230 a month.
The exclusion for the qualified parking fringe
benefit cannot be more than $230 a month.
The exclusion for qualified bicycle commuting in
a calendar year is $20 multiplied by the number
of qualified bicycle commuting months that year.
If the benefits have a value that is more than
these limits, the excess must be included in
income. Taxpayers are not entitled to these
exclusions if the reimbursements are made under
a compensation reduction agreement.

Retirement Plan Contributions
Employer contributions to employee qualified retirement
plans are not included in income at the time contributed.
However, the cost of life insurance coverage included in
the plan may have to be included (See Fringe Benefits).
Employer contributions to a nonqualified plan generally
must be included in income as wages for the tax year in
which the contributions are made. However, if interest in
the plan is not transferable or is subject to a substantial
risk of forfeiture at the time of the contribution, it is not
necessary to include the value of interest in income until it
is transferable or is no longer subject to a substantial risk
of forfeiture.

Elective Deferrals
If covered by certain kinds of retirement plans,
taxpayers can choose to have part of the
compensation contributed by the employer to a
retirement fund, rather than have it paid to the
taxpayer. The amount set aside is called an
elective deferral, and is treated as an employer
contribution to a qualified plan. An elective
deferral, other than a designated Roth
contribution, is not included in wages subject to
income tax at the time contributed. However, it is
included in wages subject to social security and
Medicare taxes.







Cash or deferred arrangements (section
401(k) plans).
The Thrift Savings Plan for federal employees.
Salary reduction simplified employee pension
plans (SARSEP).
Savings incentive match plans for employees
(SIMPLE plans).
Tax-sheltered annuity plans (403(b) plans).
Section 501(c)(18)(D) plans.
Section 457 plans.

Elective Deferrals (continued)
Elective deferrals include elective contributions to the
following retirement plans:
. Cash or deferred arrangements (section
401(k) plans). The Thrift Savings Plan for
federal employees. Salary reduction simplified
employee pension plans (SARSEP). Savings
incentive match plans for employees (SIMPLE
plans). Tax-sheltered annuity plans (403(b)
plans). Section 501(c)(18)(D) plans. Section
457 plans

Overall Limit On Deferrals
For 2011, in most cases, taxpayers should not
have deferred more than a total of $16,500 of
contributions to the plans listed in (1) through (3)
and (5) on the previous page. The limit for
SIMPLE plans is $11,500. The limit for section
501(c)(18)(D) plans is the lesser of $7,000 or 25%
of the employee's compensation. The limit for
section 457 plans is the lesser of the includible
compensation or $16,500. Amounts deferred
under specific plan limits are part of the overall
limit on deferrals

Designated Roth Contributions
Employers with section 401(k) and section 403(b) plans
can create qualified Roth contribution programs so
employees can elect to have part or all of their elective
deferrals to the plan designated as after-tax Roth
contributions. Designated Roth contributions are treated
as elective deferrals, except that they are included in
income.
If more than the limit is set aside, the excess generally
must be included in income for that year, unless it's an
excess deferral of a designated Roth contribution.
Catch-Up Contributions
The taxpayer may be allowed catch-up contributions
(additional elective deferrals) if he or she is age 50 or
older by the end of the tax year.

Stock Options
If a taxpayer receives a nonstatutory option to buy or sell
stock or other property as payment for services, they
usually will have income when the option is received,
exercised (used to buy or sell the stock or other property),
or when the option is sold or disposed of.
However, if the option is a statutory stock option, the
taxpayer does not have any income until the stock is sold
or exchanged.
The employer can tell the taxpayer what kind of option
they hold.

Restricted Property
In most cases, when property is received for services, its fair market value must be
included in income in the year the property is received. However, if the taxpayer
receives stock or other property that has certain restrictions that affects its value,
do not include the value of the property in income until it has substantially vested.
The taxpayer can choose to include the value of the property in income the year it
is transferred.
Dividends Received On Restricted Stock
Dividends received on restricted stock are treated as compensation and not as
dividend income. These payments should be included on Form W-2.
Stock Included as Income by Choice
Dividends received on restricted stock and included in income in the year
transferred are treated the same as any other dividends. Report them on the
return as dividends.
For more information on this topic, view the Interest and Dividend Income study
guide.



Special Rules for Certain Employees
The following section reviews the special rules
for people in certain types of employment.
Clergy
Members of clergy must include in income
offerings and fees received for marriages,
baptisms, funerals, masses, etc., in addition to
salary. If the offering is made to the religious
institution, it is not taxable to the taxpayer.
Members of clergy that give their outside
earnings to the organization still must include
the earnings in income. However, they may be
entitled to a charitable contribution deduction for
the amount paid to the organization.
Pension or retirement pay for a member of the
clergy usually is treated as any other pension or
annuity. It must be reported on lines 16a and
16b of Form 1040.

Special rules for housing apply to members of
the clergy. Under these rules, do not include in
income the rental value of a home (including
utilities) or a designated housing allowance
provided as part of pay.
◦ The exclusion cannot be more than the reasonable pay
for service.
◦ The home or allowance must be provided as
compensation for your services as an ordained, licensed,
or commissioned minister.
◦ The rental value of the home or the housing allowance
as earnings from self-employment on Schedule SE (Form
1040) if you are subject to the self-employment tax.

Example
Rev. Joanna Baker is a full-time minister. The church
allows her to use a parsonage that has an annual fair
rental value of $24,000. The church pays her an
annual salary of $67,000, of which $7,500 is
designated for utility costs. Her actual utility costs
during the year were $7,000.
For income tax purposes, Rev. Baker excludes
$31,000 from gross income ($24,000 fair rental value
of the parsonage plus $7,000 from the allowance for
utility costs). She will report $60,000 ($59,500 salary
plus $500 of unused utility allowance). Her income
for SE tax purposes, however, is $91,000 ($67,000
salary + $24,000 fair rental value of the parsonage).



Services performed for the order - If performing the services as an agent
of the order in the exercise of duties required by the order, do not
include the amounts turned over to the order in income. If the order
directs the member to perform services for another agency of the
supervising church or an associated institution, the member is
considered to be performing the services as an agent of the order. Any
wages earned as an agent of an order that is turned over to the order are
not included in income.
Services performed outside the order - If directed to work outside the
order, services are not an exercise of duties required by the order unless
they are the kind of services that are ordinarily the duties of members of
the order and they are part of the duties that must be exercised for, or
on behalf of, the religious order as its agent.
If employed by a third party, the services performed for the third party
will not be considered directed or required by the order. Amounts
received for these services are included in income, even if the member
has taken a vow of poverty.

Foreign Employer
Special rules apply for taxpayers that work for a foreign
employer.
Any U.S. citizen who works in the United States for a
foreign government, an international organization, a
foreign embassy, or any foreign employer, must include
their salary in income.
Taxpayers are exempt from social security and Medicare
employee taxes if employed in the United States by an
international organization or a foreign government.
However, self-employment tax on earnings from services
performed in the United States must be paid, even though
the taxpayer is not self-employed. This rule also applies to
employees of a qualifying wholly owned instrumentality of
a foreign government.

Compensation for official services to a foreign government is exempt from
federal income tax if all of the following are true



:
The taxpayer is not a citizen of the United States or is a citizen of the
Philippines (regardless of whether or not they are a US citizen).
The work is like the work done by employees of the United States in
foreign countries.
The foreign government gives an equal exemption to employees of the
United States in its country.

Military
Payments received as a member of a military service generally are taxed as wages
except for retirement pay, which is taxed as a pension. Allowances generally are
not taxed.
Differential wage payments - Any payments made by an employer during the time
a taxpayer is performing services in the uniformed services are treated as
compensation. These wages are subject to income tax withholding and are
reported on Form W-2.
Military retirement pay - If the retirement pay is based on age or length of
service, it is taxable and must be included in income as a pension on lines 16a
and 16b of Form 1040. Do not include in income the amount of any reduction in
retirement or retainer pay to provide a survivor annuity for a spouse or children
under the Retired Serviceman's Family Protection Plan or the Survivor Benefit Plan.
Veterans' benefits - Do not include in income any veterans' benefits paid under
any law, regulation, or administrative practice administered by the Department of
Veterans Affairs (VA).
Click to view a list of amounts paid to veterans or their families that are not
taxable

Volunteers
Amounts received for services as a volunteer
worker, may or may not be taxed.
Peace Corps - Living allowances received for
housing, utilities, household supplies, food, and
clothing are exempt from tax for Peace Corps
volunteers or volunteer leaders.
The following allowances must be included in
income and reported as wages

Allowances paid to the volunteer's spouse and
minor children while in volunteer leader training
in the United States. Living allowances
designated by the Director of the Peace Corps as
basic compensation. These are allowances for
personal items such as domestic help, laundry
and clothing maintenance, entertainment and
recreation, transportation, and other
miscellaneous expenses. Leave allowances.
Readjustment allowances or termination
payments. These are considered received by the
volunteer when credited to their account

Volunteers in Service to America (VISTA) VISTA volunteers must include meal and
lodging allowances paid in income as wages.
National Senior Services Corps programs - Do
not include in income amounts received for
supportive services or reimbursements for
out-of-pocket expenses from the following
programs:




Retired Senior Volunteer Program (RSVP).
Foster Grandparent Program.
Senior Companion Program.
Service Corps of Retired Executives (SCORE) - Amounts received
for supportive services or reimbursements for out-of-pocket
expenses from SCORE are not included in income.
Volunteer tax counseling - Do not include in income any
reimbursements received for transportation, meals, and other
expenses incurred for training for, or actually providing,
volunteer federal income tax counseling for the elderly (TCE).
Unreimbursed out-of-pocket expenses incurred while taking
part in the volunteer income tax assistance (VITA) program can
be deducted as charitable expenses.

Example
Ellie, a Peace Corps volunteer, gets $180 a month as a
readjustment allowance during her period of service, to be
paid to her in a lump sum at the end of her tour of duty.
Although the allowance is not available to Ellie until the
end of her service, she must include it in her income on a
monthly basis as it is credited to her account.
Example
Emily works as a volunteer tax counselor for the local
Retired Adult Services annex and was reimbursed for the
mileage incurred going to and from training classes being
offered by the VITA program at the county community
college. Emily isn't required to report the reimbursements
as income and can include any additional unreimbursed
expenses incurred as a charitable expense.



Sickness and Injury Benefits
This section reviews the taxability of sickness and injury benefits including
disability pensions, long-term care insurance contracts, workers' compensation,
and other benefits.
In most cases, report as income any amount received for personal injury or
sickness through an accident or health plan that is paid for by the employer. If
both the taxpayer and the employer pay for the plan, only the amount received
due to the employer's payments is reported as income. There are certain
payments that may not be taxable to the taxpayer. For example, amounts paid to
reimburse the taxpayer for medical expenses incurred after the plan was
established are not reported as income.
Cost paid by the taxpayer - If the taxpayer pays the entire cost of a health or
accident insurance plan, do not include any amounts received from the plan for
personal injury or sickness as income on the tax return. If the plan reimburses the
taxpayer for medical expenses deducted in an earlier year, some, or all, of the
reimbursement may need to be reported as income.
Cafeteria plans - In most cases, if the taxpayer is covered by an accident or health
insurance plan through a cafeteria plan, and the amount of the insurance
premiums are not included in their income, they are not considered to have paid
the premiums and must include any benefits received in their income. If the
amount of the premiums is included in income, the taxpayer is considered to have
paid the premiums, and any benefits received are not taxable.

Disability Pensions
Taxpayers who retire early on disability must include in income any disability
pension received under a plan paid for by their employer.
Until the taxpayer reaches the minimum retirement age, taxable disability
payments are reported as wages on line 7 of Form 1040. Minimum retirement age
generally is the age at which a non-disabled taxpayer first receives a pension or
annuity.
Beginning on the day after the taxpayer reaches minimum retirement age,
payments received are taxable as a pension or annuity on lines 16a and 16b of
Form 1040.
Retirement and profit-sharing plans - Payments received from a retirement or
profit-sharing plan that do not provide for disability retirement are not treated as
a disability pension. The payments must be reported as a pension or annuity.
Accrued leave payments - For taxpayers that retire on disability, any lump-sum
payment received for accruing annual leave, is a salary payment. The payment is
not a disability payment and must be included as income the year it is received.

Military and Government Disability Pensions
Certain military and government disability
pensions are not taxable.
Service-connected disability
The taxpayer may be able to exclude from
income amounts received as a pension, annuity,
or similar allowance for personal injury or
sickness resulting from active service in one of
the following government services:




The armed forces of any country
The National Oceanic and Atmospheric
Administration.
The Public Health Service.
The Foreign Service.






Do not include the disability payments in income if any of the following conditions
apply.
Taxpayer was entitled to receive a disability payment before September 25, 1975.
Taxpayer was a member of a listed government service or its reserve component,
or was under a binding written commitment to become a member, on September
24, 1975.
Taxpayer received the benefits for a combat-related injury.
Taxpayer would have been entitled to receive disability compensation from the
Department of Veterans Affairs (VA) if an application was submitted. The exclusion
under this condition is equal to the amount that would have been received from
the VA.
Pension based on years of service - If a taxpayer receives a disability pension
based on years of service, in most cases it must be included in income. However,
if the pension qualifies for the exclusion for a service-connected disability
(discussed earlier), do not include in income the part of the pension that would
have been received if the pension had been based on a percentage of disability.
Include the rest of the pension in income.

Retroactive VA determination - If a taxpayer retires from the armed services based
on years of service and is later given a retroactive service-connected disability
rating by the VA, the retirement pay for the retroactive period is excluded from
income up to the amount of VA disability benefits they would have been entitled
to receive. Claim a refund of any tax paid on the excludable amount (subject to
the statute of limitations) by filing an amended return on Form 1040X for each
previous year during the retroactive period. You must include with each Form
1040X a copy of the official VA Determination letter granting the retroactive
benefit. The letter must show the amount withheld and the effective date of the
benefit.
NOTE: In most cases, under the statute of limitations, a claim for credit or refund
must be filed within 3 years from the time a return was filed. However, for
taxpayers that receive a retroactive service-connected disability rating
determination, the statute of limitations is extended by a 1-year period beginning
on the date of the determination.
Terrorist attack or military action - Do not include in income disability payments
received for injuries resulting directly from a terrorist or military action.

Long-Term Care Insurance Contracts
Long-term care insurance contracts in most cases are treated as accident and
health insurance contracts. Amounts received from them (other than policyholder
dividends or premium refunds), in most cases, are excludable from income as
amounts received for personal injury or sickness.
Generally, up to $300 a day can be excluded from income.
A long-term care insurance contract is an insurance contract that only provides
coverage for qualified long-term care services. The contract must:




Be guaranteed renewable,
Not provide for a cash surrender value or other money that can be paid, assigned,
pledged, or borrowed,
Provide that refunds, other than refunds on the death of the insured or complete
surrender or cancellation of the contract, and dividends under the contract may be
used only to reduce future premiums or increase future benefits, and
In most cases, not pay or reimburse expenses incurred for services or items that
would be reimbursed under Medicare, except where Medicare is a secondary payer
or the contract makes per diem or other periodic payments without regard to
expenses.


Necessary diagnostic, preventative,
therapeutic, curing, treating, mitigating, and
rehabilitative services, and maintenance and
personal care services, and
Required by a chronically ill individual and
provided pursuant to a plan of care as
prescribed by a licensed health care
practitioner.



Chronically Ill Individuals
A chronically ill individual is one who has been
certified by a licensed health care practitioner within
the previous 12 months as one of the following:
An individual who, for at least 90 days, is unable to
perform at least two activities of daily living without
substantial assistance due to loss of functional
capacity. Activities of daily living are eating, toileting,
transferring, bathing, dressing, and continence.
An individual who requires substantial supervision to
be protected from threats to health and safety due to
severe cognitive impairment

Workers' Compensation
Amounts received as workers' compensation for an occupational
sickness or injury are fully exempt from tax if they are paid
under a workers' compensation act or a statute in the nature of a
workers' compensation act. The exemption also applies to the
taxpayer's survivors. The exemption, however, does not apply to
retirement plan benefits received based on age, length of
service, or prior contributions to the plan, even if the taxpayer
retired because of an occupational sickness or injury.
If the taxpayer returns to work after qualifying for workers'
compensation, salary payments received for performing light
duties are taxable as wages.
NOTE: If part of the workers' compensation reduces social
security or equivalent railroad retirement benefits received, that
part is considered social security (or equivalent railroad
retirement) benefits and may be taxable.

Other Sickness and Injury Benefits
In addition to disability pensions and annuities, taxpayers may receive other
payments for sickness or injury.
Railroad sick pay
Payments received as sick pay under the Railroad Unemployment Insurance Act are
taxable and must be included in income. However, do not include them in income
if they are for an on-the-job injury.
Federal Employees' Compensation Act (FECA)
Payments received under this Act for personal injury or sickness, including
payments to beneficiaries in case of death, are not taxable. However, taxpayers
are taxed on amounts received under this Act as continuation of pay for up to 45
days while a claim is being decided. Report this income on line 7 of Form 1040.
Also, pay for sick leave while a claim is being processed is taxable and must be
included in income as wages.
NOTE: If part of the payments received under FECA reduces the social security or
equivalent railroad retirement benefits received, that part is considered social
security (or equivalent railroad retirement) benefits and may be taxable.

Federal Employees' Compensation Act (FECA)
(continued)
Deduct the amount spent to buy back sick
leave for an earlier year to be eligible for
nontaxable FECA benefits for that period. It is
a miscellaneous deduction subject to the 2%of-AGI limit on Schedule A (Form 1040). If
sick leave is bought back in the same year it
is used, the amount reduces the taxable sick
leave pay. Do not deduct it separately.





Compensatory damages received for physical injury or physical
sickness, whether paid in a lump sum or in periodic payments.
Benefits received under an accident or health insurance policy on
which either the taxpayer paid the premiums or the employer
paid the premiums but they still had to be included in income.
Disability benefits received for loss of income or earning capacity
as a result of injuries under a no-fault car insurance policy.
Compensation received for permanent loss or loss of use of a
part or function of the body, or for permanent disfigurement.
This compensation must be based only on the injury and not on
the period of absence from work. These benefits are not taxable
even if the employer pays for the accident and health plan that
provides these benefits.
Reimbursement for Medical Care
A reimbursement for medical care is generally not taxable.
However, it may reduce the medical expense deduction.

Tip Income
All tips received are income and are subject to federal income
tax. Include in gross income all tips received directly, charged
tips paid by the employer, and the share of any tips received
under a tip-splitting or tip-pooling arrangement. The value of
noncash tips, such as tickets, passes, or other items of value, is
also income and subject to tax.
Keeping a Daily Tip Record
It is recommended that taxpayers who receive tips should keep a
daily record. If using an electronic system provided by the
employer to record daily tips, taxpayers should get a paper copy
of this record.
Recording tips ensures the taxpayer can accurately report tips to
the employer, accurately report tips on their tax return, and
prove their tip income if the return is ever questioned.





Cash tips from customers or from other employees.
Tips from credit and debit card charge customers that were paid
to the taxpayer by the employer.
The value of any noncash tips received, such as tickets, passes,
or other items of value.
The amount of tips paid out to other employees through tip
pools or tip splitting, or other arrangements, and the names of
the employees to whom the tips were paid.
NOTE: When keeping track of tip income, taxpayers should not
include the amount of any service charge added to the bill by the
employer that is paid to the taxpayer and treated as wages.
Employers can withhold federal income tax and social security
and Medicare taxes or railroad retirement tax, and can also
report the correct amount of earnings to the Social Security
Administration or Railroad Retirement Board.

Tips Reported to the Employer
Taxpayers can use Form 4070 to report tips if
the employer doesn't provide a different
method of reporting. Tip reports must be
submitted to employers by the 10th of the
next month (or the next day that is not a
Saturday, Sunday, or legal holiday).
Taxpayers should follow these guidelines for
reporting tips to employers





Only report cash, check, and debit and credit
card tips received.
For tip-splitting or tip-pooling arrangements,
only report the tips received and retained.
All tips received from other employees must be
reported.
It's not necessary to report the value of any
noncash tips, tickets or passes, to the employer.
If the total tips for any one month from any one
job are less than $20, the tips do not need to be
reported.

Penalty for not reporting tips - Taxpayers who do
not report tips are subject to a penalty equal to
50% of the social security and Medicare taxes or
railroad retirement tax owed on the unreported
tips. The penalty amount is in addition to taxes
owed.
Unpaid taxes - If the taxpayer's regular pay is not
enough for the employer to withhold all the taxes
owed on the pay or the reported tips, taxpayers
have until the close of the calendar year to pay
the rest of the taxes.

Reporting Tips on the Tax Return
Tips are reported as wages on Form 1040, line 7; Form 1040A, line 7; or
Form 1040EZ, line 1.
All tips received during the year must be reported on the tax return,
including both cash tips and noncash tips. Tips reported to the employer
by the taxpayer for 2011 are included in the wages shown in box 1 of
Form W-2. Add to the amount in box 1 any tips not reported to the
employer.
Reporting Uncollected Social Security and Medicare Taxes
If the employer could not collect all the social security and Medicare
taxes or railroad retirement tax owed on tips reported for 2011, the
uncollected taxes are shown in box 12 of Form W-2 (codes "A" and "B").
These amounts must be reported as additional tax on the return.
To report these uncollected taxes, file a return even if the taxpayer
would not have to otherwise file. Include the taxes in the total tax
amount on Form 1040, line 60, and write "UT" and the total of the
uncollected taxes in the space next to line 60. A Form 1040EZ or Form
1040A cannot be filed in this case.

In most cases, interest and dividend income
is taxable; however there are exclusions you
need to be aware of. This Study Guide reviews
the taxability of interest and dividend income,
including when and how to report it on the
tax return. Income from interest and
dividends are reported on lines 8a, 8b and 9a
and 9b of the 1040.

Allocated Tips
Allocated tips are shown separately in box 8 of Form W-2.
They are not included in box 1 with wages and reported
tips.
All allocated tips must be reported on the tax return,
including both cash and non-cash tips. Any tips the
taxpayer reported to the employer are included in box 1 of
the W-2. Any unreported tips, plus allocated tips from box
8, must be added to wages on Form 1040, line 7.
No income, social security, or Medicare taxes are withheld
on allocated tips. Complete Form 4137 and include the
allocated tips on line 1 of the form.

Example
John Allen began working at the Diamond Restaurant
on June 30 and received $10,000 in wages during the
year. John kept a daily tip record showing that his tips
for June were $18 and his tips for the rest of the year
totaled $7,000. He was not required to report his
June tips to his employer, but he reported all of the
rest of his tips to his employer as required.
John's Form W-2 from Diamond Restaurant shows
$17,000 ($10,000 wages plus $7,000 reported tips)
in box 1. Add the $18 of unreported tips to that
amount and report $17,018 as wages on his tax
return

In most cases, interest and dividend income
is taxable; however there are exclusions you
need to be aware of. This Study Guide reviews
the taxability of interest and dividend income,
including when and how to report it on the
tax return. Income from interest and
dividends are reported on lines 8a, 8b and 9a
and 9b of the 1040.

In most cases, interest and dividend income
is taxable; however there are exclusions you
need to be aware of. This Study Guide reviews
the taxability of interest and dividend income,
including when and how to report it on the
tax return. Income from interest and
dividends are reported on lines 8a, 8b and 9a
and 9b of the 1040.

Interest Income
In general, the interest that is received or is credited to an
account is taxable. There are exceptions, which will be
discussed throughout this study guide.
In addition to any forms showing the amount of interest
income received, taxpayers should keep a record of all
sources of interest and amounts received during the year.
Interest income is generally not subject to regular
withholding. However, it may be subject to backup
withholding to ensure that income tax is collected on the
income. Under backup withholding, the payer of the
interest must withhold, as income tax, 28% of the amount
paid.

Form 1099-INT
Interest income is generally reported on Form 1099-INT,
or a similar statement, by banks, savings and loans, and
other payers of interest. This form shows the amount of
interest received during the year.
If backup withholding is deducted from interest, Form
1099-INT shows the amount withheld as "Federal income
tax withheld."
All taxable interest income must be reported, even if the
taxpayer didn't receive a 1099-INT.
Form 1099-OID
Reportable interest income also may be shown on Form
1099-OID, Original Issue Discount.

General Information
The following general rules apply when dealing with interest income.
Joint accounts - If two or more persons hold property (such as a savings
account or bond) as joint tenants, tenants by the entirety, or tenants in
common, each person's share of any interest from the property is
determined by local law.
Individual retirement arrangements (IRAs) - Interest on a Roth IRA
generally is not taxable. Interest on a traditional IRA is taxed deferred
and generally not included in income until withdrawals are made from
the IRA.
Beneficiary of an estate or trust - Interest received as a beneficiary of an
estate or trust is generally taxable income. The taxpayer should receive
Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions,
Credits, etc., from the fiduciary.

General Information (continued)
Exempt-interest dividends - Exempt-interest dividends received from a
mutual fund or other regulated investment company are not included in
taxable income. Basis is not reduced for distributions that are exemptinterest dividends. Exempt-interest dividends are shown in box 8 of
Form 1099-INT.
Although exempt-interest dividends are not taxable, they must be
reported if the taxpayer is required to file. This is an informationreporting requirement and does not change the exempt-interest
dividends into taxable income.
Interest on VA dividends - Interest on insurance dividends left on
deposit with the Department of Veterans Affairs (VA) is not taxable. This
includes interest paid on dividends on converted United States
Government Life Insurance and on National Service Life Insurance
policies.

Tax on investment income of certain children - Part of a child's 2011 investment
income may be taxed at the parent's tax rate. If so, Form 8615, Tax for Certain
Children Who Have Investment Income of More Than $1,900, must be completed
and attached to the child's tax return.
Some parents can choose to include the child's interest and dividends on the
parent's return. Use Form 8814, Parents' Election to Report Child's Interest and
Dividends, for this purpose.
Income from property given to a child - Property given by a parent to a child
becomes property of the child. Income from the property is taxable to the child,
except for any portion of it used to satisfy a legal obligation to support the child is
taxable to the parent or guardian having that legal obligation.
Savings account with parent as trustee - Interest income from a savings account
opened for a minor child, but placed in the name and subject to the order of the
parents as trustees, is taxable to the child if, under the law of the state in which
the child resides, the savings account legally belongs to the child and the parents
are not legally permitted to use any of the funds to support the child.

Tax on investment income of certain children - Part of a child's 2011 investment
income may be taxed at the parent's tax rate. If so, Form 8615, Tax for Certain
Children Who Have Investment Income of More Than $1,900, must be completed
and attached to the child's tax return.
Some parents can choose to include the child's interest and dividends on the
parent's return. Use Form 8814, Parents' Election to Report Child's Interest and
Dividends, for this purpose.
Income from property given to a child - Property given by a parent to a child
becomes property of the child. Income from the property is taxable to the child,
except for any portion of it used to satisfy a legal obligation to support the child is
taxable to the parent or guardian having that legal obligation.
Savings account with parent as trustee - Interest income from a savings account
opened for a minor child, but placed in the name and subject to the order of the
parents as trustees, is taxable to the child if, under the law of the state in which
the child resides, the savings account legally belongs to the child and the parents
are not legally permitted to use any of the funds to support the child.

Money Market Funds
Money market funds pay dividends and are offered by nonbank financial
institutions, such as mutual funds and stock brokerage houses.
Generally, amounts received from money market funds should be
reported as dividends, not as interest.
Gift for Opening an Account
Report as interest the value of non-cash gifts or services received for
making deposits or for opening an account in a savings institution.
For deposits of less than $5,000, gifts or services valued at more than
$10 must be reported as interest. For deposits of $5,000 or more, gifts
or services valued at more than $20 must be reported as interest. The
value is determined by the cost to the financial institution.
Example
Mary and her husband, John, each open a savings account. Mary
deposits $2,500 and receives a pen valued at $15. John deposits $5,200
and receives a pen and leather bound notebook valued at $35. Both
Mary and John must report the value of the gifts as interest





Interest is usually paid at fixed intervals of 1 year or less during the term
of the account. Include this interest in income when it's received or when
the interest is entitled to be received without receiving a substantial
penalty. The same is true for accounts that mature in 1 year or less and
pay interest in a single payment at maturity. If interest is deferred for
more than 1 year, see Original Issue Discount (OID), later.
Page 9 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Taxable Interest
If penalized for early withdrawal, report the total amount of interest paid
or credited to the account during the year, without subtracting the
penalty.
If money is borrowed to invest in a certificate of deposit, report the total
interest earned on the certificate in income. If the taxpayer itemizes,
they can deduct the interest paid as investment interest, up to the
amount of the net investment income

Amy deposited $3,000 with a bank and borrowed
$2,000 from the bank so she could purchase a
$5,000 certificate of deposit. The certificate
earned $325 at maturity in 2011, but Amy
received only $214, which represented the $325
she earned minus $111 interest charged on the
$2,000 loan. Amy received a 1099-INT from the
bank showing the $325 earned for the certificate
of deposit and another statement showing the
$111 paid in interest for the loan. Amy must
include $325 in income, and can deduct the $111
if she itemizes on her return.

Interest on insurance dividends left on deposit with an insurance
company that can be withdrawn annually is taxable in the year
it's credited to the taxpayer's account. However, if withdrawals
are only allowed on the anniversary date of the policy (or other
specified date), the interest is taxable in the year that date
occurs.
Prepaid Insurance Premiums
Any increase in the value of prepaid insurance premiums,
advance premiums, or premium deposit funds is interest if it is
applied to the payment of premiums due on insurance policies or
made available for withdrawal.
U.S. Obligations
Interest on U.S. obligations, such as U.S. Treasury bills, notes,
and bonds, issued by any agency or instrumentality of the United
States is taxable for federal income tax purposes.

Interest on Tax Refunds
Interest received on tax refunds is taxable income.
Interest on Condemnation Award
If the condemning authority pays interest to compensate
for a delay in payment of an award, the interest is taxable.
Installment Sale Payments
If a contract for the sale or exchange of property provides
for deferred payments, it also usually provides for interest
payable with the deferred payments. That interest is
taxable when it's received. If little or no interest is
provided for in a deferred payment contract, part of each
payment may be treated as interest.

Interest on Annuity Contracts
Accumulated interest on annuity contracts sold before
maturity is taxable.
Usurious Interest
Usurious interest is interest charged at an illegal rate. This
is taxable as interest unless state law automatically
changes it to a payment on the principal.
Interest Income on Frozen Deposits
Exclude from gross income interest on frozen deposits. A
deposit is frozen if, at the end of the year, no parts of the
deposit can be withdrawn because the financial institution
is bankrupt or insolvent, or the state where the institution
is located has placed limits on withdrawals because other
financial institutions in the state are bankrupt or insolvent.

Interest on Annuity Contracts
Accumulated interest on annuity contracts sold before
maturity is taxable.
Usurious Interest
Usurious interest is interest charged at an illegal rate. This
is taxable as interest unless state law automatically
changes it to a payment on the principal.
Interest Income on Frozen Deposits
Exclude from gross income interest on frozen deposits. A
deposit is frozen if, at the end of the year, no parts of the
deposit can be withdrawn because the financial institution
is bankrupt or insolvent, or the state where the institution
is located has placed limits on withdrawals because other
financial institutions in the state are bankrupt or insolvent.

Bonds Traded Flat
If the taxpayer bought a bond at a discount when interest has
been defaulted or when the interest has accrued but has not
been paid, the transaction is described as trading a bond flat.
The defaulted or unpaid interest is not income and is not taxable
as interest if paid later. When a payment of that interest is
received, it is a return of capital that reduces the remaining cost
basis of the bond. Interest that accrues after the date of
purchase, however, is taxable interest income for the year it is
received or accrued.
Below-Market Loans
In general, a below-market loan is a loan on which no interest is
charged or on which interest is charged at a rate below the
applicable federal rate.

US Savings Bonds
This section discusses how to report savings bonds interest income and how to
treat savings bonds transfers.
When is the interest reported for US Savings Bonds?
If using the accrual method of accounting, interest must be reported for U.S.
savings bonds each year as it accrues. You cannot postpone reporting interest
until it's received or until the bonds mature. If using the cash method of
accounting (as most individual taxpayers do), U.S. savings bond interest is
generally reported when it's received.
Series HH Bonds
Series HH Bonds were issued at face value. Interest is paid twice a year by direct
deposit to the taxpayer's bank account. If using the cash method, report interest
on these bonds as income on the taxpayer's return the year it was received.
These bonds were first offered in 1980 and last offered in August 2004. Before
1980, series H bonds were issued. Series H bonds are treated the same as series
HH bonds. Series H bonds have a maturity period of 30 years. Series HH bonds
mature in 20 years. The last series H bonds matured in 2009

Series EE and Series I Bonds
Interest on these bonds is payable when the bonds are redeemed. The
difference between the purchase price and the redemption value is
taxable interest.
Series EE Bonds - Series EE bonds were first offered in January 1980 and
have a maturity period of 30 years.





Page 17 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 US Savings Bonds
Series E bonds were issued before July 1980. The original 10-year
maturity period of series E bonds has been extended to 40 years for
bonds issued before December 1965 and 30 years for bonds issued
after November 1965.
Paper series EE and series E bonds are issued at a discount. The face
value is payable at maturity.
Electronic series EE bonds are issued at their face value. The face value
plus accrued interest is payable at maturity.

Series EE and Series I Bonds
Interest on these bonds is payable when the bonds are redeemed. The
difference between the purchase price and the redemption value is
taxable interest.
Series EE Bonds - Series EE bonds were first offered in January 1980 and
have a maturity period of 30 years.





Page 17 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 US Savings Bonds
Series E bonds were issued before July 1980. The original 10-year
maturity period of series E bonds has been extended to 40 years for
bonds issued before December 1965 and 30 years for bonds issued
after November 1965.
Paper series EE and series E bonds are issued at a discount. The face
value is payable at maturity.
Electronic series EE bonds are issued at their face value. The face value
plus accrued interest is payable at maturity.

Owners of paper series E and EE bonds can convert them
to electronic bonds. These converted bonds do not retain
the denomination listed on the paper certificate but are
posted at their purchase price (with accrued interest).
Series I bonds - Series I bonds were first offered in 1998.
These are inflation-indexed bonds issued at their face
amount with a maturity period of 30 years. The face value
plus all accrued interest is payable at maturity.
Reporting options for cash method taxpayers (Series EE
and Series I)
If you use the cash method of reporting income, report the
interest on series EE, series E, and series I bonds using one
of the two methods described next

Method 1 - Postpone reporting the interest until whichever is
earlier - the year the bond is cashed or disposed or, the year
they mature.
NOTE: Series EE bonds issued in 1981 matured in 2011. If
method 1 has been used, the taxpayer generally must report the
interest on these bonds on the 2011 return. The last series E
bonds were issued in 1980 and matured in 2010. If using
method one, generally the interest should have been reported on
the 2010 return.
Method 2 - Choose to report the increase in redemption value as
interest each year.
Choose the same reporting method for all series EE, series E, and
series I bonds being reported for the taxpayer. If method 2 is not
chosen, method 1 must be used




Example
Barbara owns a $500 U.S. Series EE savings bond. She paid $250
for the bond. When the bond matures, Barbara will receive $500.
At the end of the first year, the bond is worth $265.
Barbara can report interest income in one of two ways. She can:
Page 20 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 US Savings Bonds
Report $250 of interest income only once when the bond
matures
◦ This is the difference between the $500 value at maturity and the $250
she paid for the bond; or

Report $15 of interest income at the end of the first year
◦ This is the increase in value at the end of the year ($265 minus $250).
Barbara would report interest income each year until maturity.

Change from method 1 - If changing the method of
reporting the interest from method 1 to method 2, it is not
necessary to get permission from the IRS. In the year of
change, report all interest accrued to date and not
previously reported for all the bonds.
Once the method has changed to where the interest is
reported each year, all series EE, series E, and series I
bonds must be reported this way on all future returns,
unless permission is requested to change (explained next).
Change from method 2 - To change from method 2 to
method 1, permission must be granted from the IRS.
Permission is granted by either filing Form 3115,
Application for Change in Accounting Method or by
submitting a statement to the IRS.

Change from Method 2 (continued)
If submitting a statement, it must include the following criteria: "131"
typed or printed at the top, taxpayer's name and SSN is located under
the "131", it includes the year of change (both the beginning and ending
dates), and it identifies the savings bonds for which the change is being
requested.
The taxpayer must also agree to (a) report all interest on any bonds
acquired during or after the year of change when the interest is realized
upon disposition, redemption, or final maturity, whichever is earliest,
and (b) report all interest on the bonds acquired before the year of
change when the interest is realized upon disposition, redemption, or
final maturity, whichever is earliest, with the exception of the interest
reported in prior tax years.
The statement must be attached to the tax return for the year of change,
and the return must be filed by the due date. If necessary, an amended
return can be filed.

Co-Owners - Who Pays the Taxes?
If a U.S. savings bond is issued in the names of co-owners, such as the taxpayer, the child, or
the taxpayer and spouse, interest on the bond is generally taxable to the co-owner who
bought the bond.
One co-owner's funds used - If funds are used to purchase the bond, taxes must be paid on
the interest. This is true even if the taxpayer let the other co-owner redeem the bond and keep
all the proceeds. Under these circumstances, the co-owner who redeemed the bond will receive
a Form 1099-INT at the time of redemption and must provide the other co-owner with another
Form 1099-INT showing the amount of interest from the bond taxable to them.
Both co-owners' funds used - If each co-owner contributes part of the bond's purchase price,
the interest is generally taxable to each co-owner, in proportion to the amount each paid.
Community property - If the taxpayer and spouse live in a community property state and hold
bonds as community property, one-half of the interest is considered received by each of them.
If filing separate returns, each taxpayer generally must report one-half of the bond interest

Ownership Transferred
If the taxpayer bought series E, series EE, or series I bonds entirely with their own
funds and had them reissued in a co-owner's name or beneficiary's name alone,
include in gross income for the year of reissue all interest earned on these bonds
not previously reported. But, if the bonds were reissued in the taxpayer's name
alone, the interest accrued does not have to be reported at that time. This same
rule applies when bonds (other than bonds held as community property) are
transferred between spouses or incident to divorce.
Purchased jointly - If the co-owners contributed funds to buy series E, series EE,
or series I bonds jointly and later had the bonds reissued in one co-owner's name
alone, you must include in gross income for the year of reissue the share earned
on the bonds not previously reported.
The former co-owner does not have to include in gross income at the time of
reissue his or her share of the interest earned that was not reported before the
transfer. This interest, however, as well as all interest earned after the reissue, is
income to the former co-owner.

This income-reporting rule also applies when the bonds are reissued in the name
a former co-owner and a new co-owner. In this scenario, the new co-owner
reports his or her share of the interest earned after the transfer. If bonds that you
and a co-owner bought jointly are reissued to each of you separately in the same
proportion as your contribution to the purchase price, neither you nor your coowner has to report at that time the interest earned before the bonds were
reissued.
Transfer to a Trust
Taxpayers that own series E, series EE, or series I bonds and transfer them to a
trust, giving up all rights of ownership, must include in income for that year the
interest earned to the date of transfer if it's not already been reported. However, if
considered the owner of the trust and if the increase in value both before and after
the transfer continues to be taxable to the taxpayer, the reporting of interest
earned each year can be deferred. In this case, include the total interest in income
in the year the taxpayer cashes or disposes of the bonds or the year the bonds
finally mature, whichever is earlier.

Example
A taxpayer and spouse spent an equal amount to buy a $1,000
series EE savings bond as co-owners. They both postpone
reporting interest on the bond. Later, they have the bond
reissued as two $500 bonds, one in each of their names. At that
time, neither the taxpayer nor the spouse has to report the
interest earned to the date of reissue.
Example
The taxpayer bought a $1,000 series EE savings bond entirely
with her own funds. The bond was issued to the taxpayer and
spouse as co-owners. They both postpone reporting interest on
the bond. Later, the bond is reissued as two $500 bonds, one in
each of their names. Report half the interest earned to the date
of reissue.

Decedents
The manner of reporting interest income on series E, series EE, or series
I bonds, after the death of the owner, depends on the accounting and
income-reporting methods previously used by the decedent.
Savings Bonds Traded
If the taxpayer postponed reporting the interest on the series EE or
series E bonds, her or she did not recognize taxable income when
trading the bonds for series HH or series H bonds, unless the taxpayer
received cash in the trade. Any cash received is income up to the amount
of the interest earned on the bonds traded. When the series HH or series
H bonds mature, or if you dispose of them before maturity, you report
as interest the difference between their redemption value and the cost.
The cost is the sum of the amount paid for the traded series EE or series
E bonds plus any amount paid at the time of the trade

Form 1099-INT for U.S. Savings Bonds Interest
When a bond is cashed, the bank or other payer
that redeems it must provide the taxpayer Form
1099-INT if the interest part of the payment
received is $10 or more. Box 3 of Form 1099-INT
should show the interest as the difference
between the amounts received and the amount
paid for the bond. However, Form 1099-INT may
show more interest than what has to be included
on the income tax return.








Form 1099-INT for U.S. Savings Bonds Interest (continued)
Examples of when there can be more interest on the 1099-INT than what needs to be reported
include:
Page 30 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 US Savings Bonds
The taxpayer chose to report the increase in the redemption value of the bond each year. The
interest shown on Form 1099-INT will not be reduced by amounts previously included in
income.
The taxpayer received the bond from a decedent. The interest shown on Form 1099-INT will
not be reduced by any interest reported by the decedent before death, or on the decedent's
final return, or by the estate on the estate's income tax return.
Ownership of the bond was transferred. The interest shown on Form 1099-INT will not be
reduced by interest that accrued before the transfer.
The taxpayer was named as a co-owner, and the other co-owner contributed funds to buy the
bond. The interest shown on Form 1099-INT is not reduced by the amount received as
nominee for the other co-owner.
The taxpayer received the bond in a taxable distribution from a retirement or profit-sharing
plan. The interest shown on Form 1099-INT will not be reduced by the interest portion of the
amount taxable as a distribution from the plan and not taxable as interest.

Education Savings Bond Program
All or part of the interest received on the redemption
of qualified U.S. savings bonds during the year may
be able to be excluded from income if the taxpayer
paid for qualified higher educational expenses during
the same year. This exclusion is known as the
Education Savings Bond Program. Married filing
separately taxpayers do not qualify for this exclusion.
Form 8815 is used to figure the exclusion and must
be attached to Form 1040 or Form 1040A.







What Makes the Bond Qualified?
Page 32 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Education Savings Bond Program
The U.S. savings bond is a series EE bond issued after 1989 or a series I bond.
The bond must be issued either in the taxpayer's name (sole owner) or in the
taxpayer and spouse's names (co-owners).
The taxpayer must be at least 24 years old before the bond's issue date. NOTE:
The issue date of a bond may be earlier than the date the bond is purchased
because the issue date assigned to a bond is the first day of the month in which it
is purchased.
Example - A bond bought by a parent and issued in the name of his or her child
under age 24 does not qualify for the exclusion by the parent or child.
NOTE: Any individual (including a child) can be the beneficiary of the bond.

Qualified Higher Education Expenses
Qualified higher education expenses are tuition and fees required for the
taxpayer, the spouse, or their dependent (for whom they claim an
exemption) to attend an eligible educational institution. Qualified
expenses include any contribution made to a qualified tuition program
or to a Coverdell education savings account.
Not Included - Qualified expenses do not include expenses for room and
board or for courses involving sports, games, or hobbies that are not
part of a degree or certificate granting program.
Eligible Educational Institutions
These institutions include most public, private, and nonprofit
universities, colleges, and vocational schools that are accredited and
eligible to participate in student aid programs run by the U.S.
Department of Education.








Reduction for Certain Benefits
Qualified higher education expenses must be reduced by all of the following taxfree benefits:
Page 34 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Education Savings Bond Program
Tax-free part of scholarships and fellowships
Expenses used to figure the tax-free portion of distributions from a Coverdell
ESA.
Expenses used to figure the tax-free portion of distributions from a qualified
tuition program.
Any tax-free payments (other than gifts or inheritances) received for educational
expenses, such as Veterans' educational assistance benefits, qualified tuition
reductions, or employer-provided educational assistance.
Any expense used in figuring the American Opportunity and Lifetime Learning
credits.

Amount Excludable
If the total proceeds (interest and principal) from the qualified U.S. savings bonds
redeemed during the year are not more than the adjusted qualified higher
educational expenses for the year, the taxpayer may be able to exclude all of the
interest.
If the proceeds are more than the expenses, the taxpayer may be able to exclude
only part of the interest.



To determine the excludable amount, multiply the interest part of the proceeds by
a fraction. The numerator of the fraction is the qualified higher educational
expenses you paid during the year. The denominator of the fraction is the total
proceeds you received during the year.
Page 35 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Education Savings Bond Program
Interest x (Amount Paid During Year ÷ Proceeds Received During the Year)
= Amount to Exclude from Income





The following example demonstrates this calculation:
Page 36 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Education Savings Bond Program
Interest x (Amount Paid During Year ÷ Proceeds Received During the Year)
= Amount to Exclude from Income
Example
Taxpayers cash a qualified series EE U.S. savings bond and receive $8,000
representing principal of $5,000 and interest of $3,000. In 2011, they paid
$4,000 of their son's college tuition. They are not claiming an education credit for
that amount, and their son does not have any tax-free educational assistance.
They can exclude $1,500 of interest and must pay tax on the remaining $1,500
interest.
($3,000 × ($4,000 ÷ $8,000)) = $1,500
$3,000 - $1,500 (amount of interest to exclude) = $1,500






Adjusted Gross Income Limit
The interest exclusion is limited if the taxpayer(s) modified
adjusted gross income (modified AGI) is:
Page 37 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Education Savings
Bond Program
$71,100 to $86,100 for taxpayers filing single or head of
household, and
$106,650 to $136,650 for married taxpayers filing jointly or for
a qualifying widow(er) with dependent child.
Taxpayers do not qualify for the interest exclusion if their
modified AGI is equal to or more than the upper limit for their
filing status.

AGI, for purposes of this exclusion, is adjusted gross
income (Form 1040, line 37) figured before the
interest exclusion, and modified by adding back any:
Foreign earned income exclusion, Foreign housing
exclusion and deduction, Exclusion of income for
bona fide residents of American Samoa, Exclusion for
income from Puerto Rico, Exclusion for adoption
benefits received under an employer's adoption
assistance program, Deduction for tuition and fees,
Deduction for student loan interest, and Deduction
for domestic production activities

U.S. Treasury Bills, Notes, and Bonds
Treasury bills, notes, and bonds are direct debts (obligations) of the U.S. Government.
Taxation of Interest - Interest income from Treasury bills, notes, and bonds is subject to
federal income tax but is exempt from all state and local income taxes. Form 1099-INT (box 3)
shows the interest paid to the taxpayer for the year.
Treasury Bills - These bills generally have a 4-week, 13-week, 26-week, or 52-week maturity
period. They are issued at a discount in the amount of $100 and multiples of $100. The
difference between the discounted price paid for the bills and the face value received at
maturity is interest income. Generally, report this interest income when the bill is paid at
maturity.
Treasury Notes and Bonds - Treasury notes have maturity periods of more than 1 year, ranging
up to 10 years. Maturity periods for Treasury bonds are longer than 10 years. Both generally
are issued in denominations of $100 to $1 million and generally pay interest every 6 months.
Generally, report this interest the year it's paid.

Bonds Sold Between Interest Dates
If a bond is sold between interest payment dates, part of the sales price
represents interest accrued to the date of sale. Report that part of the
sales price as interest income for the year of sale.
For bonds purchased between interest payment dates, part of the
purchase price represents interest accrued before the date of purchase.
When that interest is paid to the taxpayer, treat it as a return of capital
investment, rather than interest income, by reducing basis in the bond.
Insurance
Life insurance proceeds paid to the taxpayer as the beneficiary of the
insured person are usually not taxable. But if the proceeds are received
in installments, part of each installment payment is usually reported as
interest income.

State or Local Government Obligations
Interest on a bond used to finance government operations generally is
not taxable if the bond is issued by a state, the District of Columbia, a
possession of the United States, or any of their political subdivisions.
Bonds issued after 1982 (including tribal economic development bonds
issued after February 17, 2009) by an Indian tribal government are
treated as issued by a state. Interest on these bonds is generally tax
exempt if the bonds are part of an issue of which substantially all
proceeds are to be used in the exercise of any essential government
function.
Taxpayers who must file a tax return must also show any tax-exempt
interest they received on the return. This is an information-reporting
requirement only and does not change tax-exempt interest to taxable
interest.

Original Issue Discount (OID)
Original issue discount (OID) is a form of interest. Generally, OID is
included in income as it accrues over the term of the debt instrument,
whether or not any payments are received from the issuer.
A debt instrument generally has OID when the instrument is issued for a
price that is less than its stated redemption price at maturity. OID is the
difference between the stated redemption price at maturity and the issue
price.
All debt instruments that pay no interest before maturity are presumed
to be issued at a discount. Zero coupon bonds are one example of these
instruments.
The OID accrual rules generally do not apply to short-term obligations
(those with a fixed maturity date of 1 year or less from date of issue).








Exceptions to Reporting OID
When discussing OID rules, they do not apply to the following debt instruments:
Page 44 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Original Issue Discount (OID)
Tax-exempt obligations.
U.S. savings bonds.
Short-term debt instruments (those with a fixed maturity date of not more than 1
year from the date of issue).
Obligations issued by an individual before March 2, 1984.
Loans between individuals if all the following are true:
◦
◦
◦
The lender is not in the business of lending money.
The amount of the loan, plus the amount of any outstanding prior loans between the same
individuals, is $10,000 or less.
Avoiding any federal tax is not one of the principal purposes of the loan

Form 1099-OID
If the total OID for the calendar year is $10 or more, the issuer of the debt
instrument (or the broker if held through a broker) should provide the taxpayer
with Form 1099-OID, Original Issue Discount, or a similar statement.
If someone other than the taxpayer (a nominee) is the holder of record (the
registered owner) of an OID instrument and receives a Form 1099-OID on the
taxpayer's behalf, that person must provide the taxpayer a Form 1099-OID.
Form 1099-OID will show in box 1, the amount of OID for the part of the year the
taxpayer held the bond. It also will show in box 2, the stated interest that must be
included in income.
In most cases, report the entire amount in boxes 1 and 2 of Form 1099-OID as
interest income.






Refiguring OID Shown on Form 1099-OID
Refigure the OID shown in box 1 or box 6 of Form 1099-OID if either of the following apply:
Page 46 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Original Issue Discount (OID)
Taxpayer bought the debt instrument after its original issue and paid a premium or an
acquisition premium.
The debt instrument is a stripped bond or a stripped coupon (including certain zero coupon
instruments).
Publication 1212 provides information about figuring the correct amount of OID to include in
income.
Refiguring Periodic Interest Shown On Form 1099-OID
If a debt instrument was disposed of or acquired from another holder during the year, see
Bonds Sold Between Interest Dates, earlier, for information about the treatment of periodic
interest that may be shown in box 2 of Form 1099-OID for that instrument.










Certificates of Deposit (CDs)
For CDs purchased with a maturity of more than 1 year, include in income each year a part of
the total interest due and report it in the same manner as other OID. This also applies to
similar deposit arrangements with banks, building and loan associations, etc., including:
Page 47 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Original Issue Discount (OID)
Time deposits,
Bonus plans,
Savings certificates,
Deferred income certificates,
Bonus savings certificates
Growth savings certificates.
Bearer CDs - CDs issued after 1982 generally must be in registered form. Bearer CDs are CDs
not in registered form. They are not issued in the depositor's name and are transferable from
one individual to another. Banks must provide the IRS and the person redeeming a bearer CD
with a Form 1099-INT.

When to Report Interest Income
The reporting of interest income depends on the taxpayer and
the method they use to report income. Most individuals use the
cash method of income reporting, however some use the accrual
method.
Cash Method
In general, interest income is reported in the year it is actually or
constructively received. Income is constructively received when it
is credited to the taxpayer's account or made available to them.
Accrual Method
Interest income is reported when it is earned, not when it is
received. Interest is earned over the term of the debt instrument.

Example
In August of 2009, the taxpayer loaned another individual
$3,500 at 10% interest, compounded annually. The note
stated that principal and interest would be due on August
31, 2011. In 2011, the taxpayer receives $4,222.20
($3,500 principal and $722.20 to interest). If using the
cash method, include in income on the 2011 return the
$722.20 interest the taxpayer received that year.
If the taxpayer is using the accrual method, include the
interest as it is earned. For example, in 2009, $350;
2010, $244.26; and 2011, $127.94.

Reporting Interest Income
This section will discuss what form must be used to file
the return, and when Schedule B is required, when
reporting interest income.
Generally, report all taxable interest income on Form
1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line
2.
Form 1040EZ cannot be used if your interest income is
more than $1,500. Instead, use Form 1040A or Form
1040.

Schedule B
If a Schedule B, Interest and Ordinary
Dividends, is required, list each payer's name
and the amount of interest income received
from each payer on line 1. If Form 1099-INT
or Form 1099-OID is received from a
brokerage firm, list the brokerage firm as the
pay












Form 1040A, Schedule B
When reporting interest income, complete Schedule B if filing Form 1040A and any of the
following are true:
Page 52 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Reporting Interest Income
Taxable interest income is more than $1,500.
Taxpayer is claiming the interest exclusion under the Education Savings Bond Program.
Taxpayer received interest from a seller-financed mortgage, and the buyer used the property
as a home.
Taxpayer received a Form 1099-INT for U.S. savings bond interest and includes amounts
reported before 2011.
Taxpayer received, as a nominee, interest that actually belongs to someone else.
Taxpayer received a Form 1099-INT for interest on frozen deposits.
Taxpayer is reporting OID in an amount less than the amount shown on Form 1099-OID.
Taxpayer received a Form 1099-INT for interest on a bond bought between interest payment
dates.
Taxpayer acquired taxable bonds after 1987 and chose to reduce interest income from the
bonds by any amortizable bond premium.






Form 1040
When reporting interest income, Form 1040 must be used instead of
Form 1040A or Form 1040EZ if:
Page 53 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Reporting Interest Income
The taxpayer forfeited interest income because of the early withdrawal
of a time deposit;
The taxpayer acquired taxable bonds after 1987, and chose to reduce
interest income from the bonds by any amortizable bond premium, and
are deducting the excess of bond premium amortization for the accrual
period over the qualified stated interest for the period; or
The taxpayer received tax-exempt interest from private activity bonds
issued after August 7, 198












Form 1040, Schedule B
Complete Schedule B if filing Form 1040 and any of the following apply:
Page 54 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Reporting Interest Income
Taxable interest income is more than $1,500.
Taxpayer is the interest exclusion under the Education Savings Bond Program.
Taxpayer received interest from a seller-financed mortgage, and the buyer used the property
as a home.
Taxpayer received a Form 1099-INT for U.S. savings bond interest that includes amounts
reported before 2011.
Taxpayer received, as a nominee, interest that actually belongs to someone else.
Taxpayer received a Form 1099-INT for interest on frozen deposits.
Taxpayer received a Form 1099-INT for interest on a bond bought between interest payment
dates.
Taxpayer is reporting OID in an amount less than the amount shown on Form 1099-OID.
Statement (2) in the preceding list under Form 1040 is true.

Reporting Tax-Exempt Interest
Total all tax-exempt interest and exempt-interest dividends
from a mutual fund as shown in box 8 of Form 1099-INT.
Add this amount to any other tax-exempt interest received.
Report the total on line 8b of Form 1040A or 1040. If filing form
1040EZ, enter "TEI" and the amount in the space to the left of
line 2. Do not add tax-exempt interest in the total on Form
1040EZ, line 2.
Box 9 shows the tax-exempt interest subject to the alternative
minimum tax on Form 6251, Alternative Minimum TaxIndividuals. It is already included in the amount in box 8. Do not
add the amount in box 9 to, or subtract from, the amount in box
8.




99-INT
Form 1099-INT shows the amount of interest received during the year.
Page 56 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Reporting Interest Income
Form 1099-INT Box 1 - Taxable interest income, except for interest from U.S. savings bonds and Treasury
obligations, is shown in box 1 of Form 1099-INT. Add this amount to any other taxable interest income
received. Report all taxable interest income even if a Form 1099-INT is received.
Box 2 - If interest income was forfeited because of the early withdrawal of a time deposit, the deductible amount
is shown on Form 1099-INT in box 2.
Box 3 - Box 3 of Form 1099-INT shows interest income received from U.S. savings bonds, Treasury bills,
Treasury notes, and Treasury bonds.
Add the amount shown in box 3 to any other taxable interest income received, unless part of the amount in box
3 was previously included in interest income.
If part of the amount shown in box 3 was previously included in your interest income, see U.S. savings bond
interest previously reported, later in this unit.

Form 1099-INT (continued)
Form 1099-INT shows the amount of interest received during the year.



Page 57 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Reporting Interest Income
Form 1099-INT Box 4 - Box 4 of Form 1099-INT (federal income tax withheld) contains an
amount if the taxpayer was subject to backup withholding.
Report the amount from box 4 on Form 1040EZ, line 7; on Form 1040A, line 36; or on Form
1040, line 62 (federal income tax withheld).
Box 5 - Box 5 of Form 1099-INT shows investment expenses that could be taken as an
itemized deduction.
Box 6 and 7 - If there are entries in boxes 6 and 7 of Form 1099-INT, file Form 1040.

Savings Bond Interest Previously Reported
If the Form 1099-INT is for savings bond interest, it may show interest that
doesn't need to be reported. See Form 1099-INT for U.S. savings bonds interest
earlier in this unit under U.S. Savings Bonds.
On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown
on the Form 1099-INT.
Next, follow these steps:





Page 58 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Reporting Interest Income
Several lines above line 2, enter a subtotal of all interest listed on line 1.
Below the subtotal enter "U.S. Savings Bond Interest Previously Reported" and
enter amounts previously reported or interest accrued before receiving the bond.
Subtract these amounts from the subtotal and enter the result on line 2.

Dividends and Other Distributions
Dividends are distributions of money, stock, or other property paid to a person by
a corporation or by a mutual fund. Most distributions are paid in cash (or check).
Distributions can consist of more stock, stock rights, other property, or services.
This section discusses the tax treatment of dividends and other distributions and
explains how they are reported on the tax return.
Form 1099-DIV
Most corporations and mutual funds distribute Form 1099-DIV, Dividends and
Distributions, to show the distributions received from them during the year, and
any tax withheld from the dividend income.
If another person receives distributions as a nominee for the taxpayer, that person
will provide a Form 1099-DIV to the taxpayer, which will show distributions
received on his or her behalf

Dividends and Other Distributions
Dividends are distributions of money, stock, or other property paid to a person by
a corporation or by a mutual fund. Most distributions are paid in cash (or check).
Distributions can consist of more stock, stock rights, other property, or services.
This section discusses the tax treatment of dividends and other distributions and
explains how they are reported on the tax return.
Form 1099-DIV
Most corporations and mutual funds distribute Form 1099-DIV, Dividends and
Distributions, to show the distributions received from them during the year, and
any tax withheld from the dividend income.
If another person receives distributions as a nominee for the taxpayer, that person
will provide a Form 1099-DIV to the taxpayer, which will show distributions
received on his or her behalf

Form 1099-MISC
Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on
the behalf of the taxpayer, must be reported on Form 1099-MISC, Miscellaneous Income, or a
similar statement.
General Rules for Dividend Income
Backup withholding - Your dividend income is generally not subject to regular withholding, but
may be subject to backup withholding to ensure that income tax is collected on the income.
Under backup withholding, the payer of dividends must withhold, as income tax, 28% of the
amount paid.
Tax on investment income of certain children - Part of a child's 2011 investment income may
be taxed at the parent's tax rate. If it is, Form 8615, Tax for Certain Children Who Have
Investment Income of More Than $1,900, must be completed and attached to the child's tax
return. If not, Form 8615 is not required and the child's income is taxed at his or her own tax
rate.
Beneficiaries of an estate or trust - Dividends and other distributions received as a beneficiary
of an estate or trust are generally taxable income. The taxpayer should receive a Schedule K-1
(Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc., from the fiduciary. The
Schedule K-1 and its instructions discuss how and where to report this income.

Stock certificate in two or more names - If two or more persons hold
stock as joint tenants, tenants by the entirety, or tenants in common,
each person's share of any dividends from the stock is determined by
local law.
Dividends on stock sold - If stock is sold, exchanged, or otherwise
disposed of after a dividend is declared but before it is paid, the owner
of record (usually the payee shown on the dividend check) must include
the dividend in income.
Dividends received in January - If a mutual fund (or other regulated
investment company) or real estate investment trust (REIT) declares a
dividend (including any exempt-interest dividend or capital gain
distribution) in October, November, or December payable to
shareholders of record on a date in one of those months but actually
pays the dividend during January of the next calendar year, dividend is
considered received on December 31. Report the dividend in the year it
was declared.

Ordinary Dividends
Ordinary dividends are the most common type of distribution from a corporation or a mutual
fund. They are paid out of earnings and profits and are normally taxed as ordinary income.
They are typically not capital gains. Ordinary dividends are shown in box 1a of the Form 1099DIV.
Qualified Dividends
Qualified dividends are the ordinary dividends subject to the same 0% or 15% maximum tax
rate that applies to net capital gain. They should be shown in box 1b of Form 1099-DIV.
Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or
higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are
subject to the 0% rate.
To qualify for the 0% or 15% maximum rate, all of the following requirements must be met.



The dividends must have been paid by a U.S. corporation or a qualified foreign corporation.
The dividends are not of the type listed later under Dividends that are not qualified dividends.
The holding period is met (discussed on the next screen).

Holding period - The taxpayer must have held the stock for more than 60 days
during the 121-day period that begins 60 days before the ex-dividend date. The
ex-dividend date is the first date following the declaration of a dividend on which
the buyer of a stock is not entitled to receive the next dividend payment. Instead,
the seller will get the dividend.
When counting the number of days the taxpayer held the stock, include the day
the stock was disposed, but not the day it was acquired.
Exception for preferred stock - In the case of preferred stock, taxpayer must have
held the stock more than 90 days during the 181-day period that begins 90 days
before the ex-dividend date if the dividends are due to periods totaling more than
366 days. If the preferred dividends are due to periods totaling less than 367
days, the holding period in the previous paragraph applies.
Click Example to view holding period examples from Pub 17 - Part Two, 8.
Dividends and Other Distributions.







Holding period reduced where risk of loss is diminished - When
determining whether the taxpayer met the holding periods, do not count
any day during which any of the following conditions are met:
Page 64 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Ordinary Dividends
Money Market Funds
Report amounts received from money market funds as dividend income.
The taxpayer had the option to sell, were under a contractual obligation
to sell, or had made (and not closed) a short sale of substantially
identical stock or securities.
The taxpayer was a grantor (writer) of an option to buy substantially
identical stock or securities.
The taxpayer's risk of loss is diminished by holding one or more other
positions in substantially similar or related property










Dividends That are Not Qualified Dividends
The following dividends are not qualified dividends, even if they are shown in box 1b of Form 1099-DIV:
Page 65 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Ordinary Dividends
Capital gain distributions.
Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan
associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial
institutions. (Report these amounts as interest income.)
Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's
tax year in which the dividends were paid or during the corporation's previous tax year.
Dividends paid by a corporation on employer securities held on the date of record by an employee stock
ownership plan (ESOP) maintained by that corporation.
Dividends on any share of stock to the extent the person is obligated (whether under a short sale or otherwise)
to make related payments for positions in substantially similar or related property.
Payments in lieu of dividends, but only if it's known or if there is reason to know the payments are not qualified
dividends.
Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent of knowing or having
reason to know they are not qualified dividends.

Dividends Used to Buy More Stock
Some corporations have a dividend reinvestment plan.
If dividends are used to buy more stock at a price equal to its fair market
value, the dividends still must be reported as income.
If the dividend reinvestment plan allows for the purchase of more stock
at a price less than its fair market value, report as dividend income the
fair market value of the additional stock on the dividend payment date.
In some dividend reinvestment plans, the taxpayer can invest more cash
to buy shares of stock at a price less than fair market value. In this
scenario, the difference between the cash invested and the fair market
value of the stock purchased must be reported as dividend income.
When figuring this amount, use the fair market value of the stock on the
dividend payment date.

Capital gain distributions (also called capital
gain dividends) are paid to or credited to an
account by mutual funds (or other regulated
investment companies) and real estate
investment trusts (REITs). They are shown in
box 2a of the Form 1099-DIV. Report capital
gain distributions as long-term capital gains.

Undistributed Capital Gains of Mutual Funds and REITs
Some mutual funds and REITs keep their long-term capital gains and pay
tax on them. The taxpayer is to treat the share of gains as distributions,
even though they've not actually been received.
These are reported to the taxpayer in box 1a of Form 2439, Notice to
Shareholder of Undistributed Long-Term Capital Gains. On the tax
return, report undistributed capital gains (box 1a of Form 2439) as
long-term capital gains on Schedule D (Form 1040), column (h), line 11.
The tax paid on these gains by the mutual fund or REIT is shown in box
2 of Form 2439.
Increase the basis in the mutual fund, or the interest in a REIT, by the
difference between the gain reported and the credit claimed for the tax
paid.

A non-dividend distribution is a distribution that
is not paid out of the earnings and profits of a
corporation or a mutual fund. Non-dividend
distributions are shown on box 3 of Form 1099DIV.
Taxpayers that do not receive a 1099-DIV should
report the distribution as an ordinary dividend

Basis Adjustment
A non-dividend distribution reduces the basis of stock. It is not
taxed until the basis in the stock is fully recovered. This
nontaxable portion is also called a return of capital and is a
return of the investment in the stock of the company. If the
taxpayer purchases stock in a corporation in different lots at
different times, and the shares subject to the non-dividend
distribution can't be identified, reduce the basis of the earliest
purchases first.
When the basis of the stock has been reduced to zero, report any
additional non-dividend distribution received as a capital gain.
Whether it's reported as a long-term or short-term capital gain
depends on how long the taxpayer has held the stock.

Liquidating Distributions
Liquidating distributions, sometimes called liquidating dividends, are distributions
received during a partial or complete liquidation of a corporation. These
distributions are, at least in part, one form of a return of capital. They may be paid
in one or more installments. The taxpayer will receive a Form 1099-DIV from the
corporation showing the amount of the liquidating distribution in box 8 or 9.
Distributions of Stock and Stock Rights
Distributions by a corporation of its own stock are commonly known as stock
dividends. Stock rights (also known as "stock options") are distributions by a
corporation of rights to acquire the corporation's stock. Generally, stock dividends
and stock rights are not taxable to the taxpayer and are not reported on the
return.
Basis
The basis in stock or stock rights received in a taxable distribution is the fair
market value when distributed.








Distributions of Stock and Stock Rights (continued)
Distributions of stock dividends and stock rights are taxable only if any of the following apply:
Page 72 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Non-Dividend Distributions
The taxpayer or any other shareholder has the choice to receive cash or other property instead
of stock or stock rights.
The distribution gives cash or other property to some shareholders and an increase in the
percentage interest in the corporation's assets or earnings and profits to other shareholders.
The distribution is in convertible preferred stock and has the same result as in (2).
The distribution gives preferred stock to some common stock shareholders and common stock
to other common stock shareholders.
The distribution is on preferred stock. The distribution, however, is not taxable if it is an
increase in the conversion ratio of convertible preferred stock made solely to take into account
a stock dividend, stock split, or similar event that would otherwise result in reducing the
conversion right.

Fractional Shares
The taxpayer may not own enough stock in a corporation
to receive a full share of stock. The corporation may have
a plan where fractional shares are not issued but instead
are sold, and the cash proceeds are given to the
shareholders.
Any cash received for fractional shares under such a plan
is treated as an amount realized on the sale of the
fractional shares.
Report this transaction on Form 8949, Sales and Other
Dispositions of Capital Assets.

Distributions of Stock and Stock Rights (continued)
Scrip Dividends
Scrip certificates entitle the shareholder to a fractional share of a
stock dividend. The certificate is generally nontaxable when it's
received.
If the taxpayer opted to have the corporation sell the certificate
and receive the proceeds, the gain or loss is the difference
between the proceeds and the portion of the taxpayer's basis in
the corporation's stock allocated to the certificate.
If the scrip certificate can be redeemed for cash instead of stock,
the certificate is taxable when it's received. Include its fair
market value in income on the date it's received.




Example
Joe owns one share of common stock purchased several years back for $100. In July, the
company declared a common stock dividend of 10%. At that time, the fair market value of the
stock dividend was $250. Joe was paid $20 for the fractional-share stock. To figure the gain or
loss, use the following calculation:
Page 75 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Non-Dividend Distributions
Because the share of stock was held for more than 1 year at the time the stock dividend was
declared, the gain on the stock dividend is a long-term capital gain.

Other Distributions
Taxpayers may receive any of the following distributions during the year.
Exempt-interest Dividends
Exempt-interest dividends received from a mutual fund or other regulated
investment company are not included in taxable income. Exempt-interest
dividends should be shown in box 8 of Form 1099-INT.



Other Distributions
Page 76 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Form 1099-INT While not taxable,
these dividends must be reported on the return.
NOTE: Exempt-interest dividends paid from specified private activity bonds may
be subject to the alternative minimum tax.

Dividends on Insurance Policies
Insurance policy dividends the insurer keeps and uses to pay the
taxpayer's premiums are not taxable. However, the interest that
is paid or credited on dividends left with the insurance company
must be reported as taxable interest income.
If dividends on an insurance contract (other than a modified
endowment contract) are distributed to the taxpayer, they are a
partial return of the premiums paid. Do not include them in
gross income until they are more than the total of all net
premiums paid for the contract.
Report any taxable distributions on insurance policies on Form
1040, line 21.

Dividends on Veterans' Insurance
Dividends received on veterans' insurance policies are not taxable. In
addition, interest on dividends left with the Department of Veterans
Affairs is not taxable.
Patronage Dividends
Generally, patronage dividends received in money from a cooperative
organization are included in income. Do not include in your income
patronage dividends received on property bought for personal use, or
capital assets or depreciable property bought for business use. However,
the basis (cost) of the items bought must be reduced. If the dividend is
more than the adjusted basis of the assets, report the excess as income.
Alaska Permanent Fund Dividends
Do not report these amounts as dividends. Instead, report these
amounts on Form 1040, line 21; Form 1040A, line 13; or Form 1040EZ,
line 3.

Reporting Dividend Income
Report dividend income on Form 1040 or Form 1040A.
Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. Report
qualified dividends on line 9b of Form 1040 or Form 1040A.



Reporting Dividend Income
Page 79 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Capital gain distributions are reported on Form
1040A or Form 1040 (1040EZ can't be used).
If the taxpayer received non-dividend distributions required to be reported as capital gains,
you must use Form 1040.
A 1040EZ can't be used if reporting any dividend income.

Form 1099-DIV
Taxpayers that own stock on which they received $10 or more in dividends and
other distributions, should receive a Form 1099-DIV. Regardless of whether or not
a 1099-DIV is received, the taxable dividend income must be reported.
Schedule B
Complete a Schedule B (Form 1040A or 1040), Part II, and attach it to Form 1040A
or 1040, if:





Page 80 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Reporting Dividend Income
Ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500, or
The taxpayer received, as a nominee, dividends that actually belonged to someone
else.
If ordinary dividends are more than $1,500, also complete Schedule B, Part III.

Reporting Qualified Dividends
Report qualified dividends (Form 1099-DIV,
box 1b) on line 9b of Form 1040 or Form
1040A.
The amount in box 1b is already included in
box 1a. Do not add the amount in box 1b to,
or subtract it from, the amount in box 1a.








Do not include any of the following on line 9b.
Page 82 of 92
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Reporting Dividend Income
Qualified dividends received as a nominee.
Dividends on stock for which the holding period was not met.
Dividends on any share of stock to the extent the taxpayer is obligated
(whether under a short sale or otherwise) to make related payments for
positions in substantially similar or related property.
Payments in lieu of dividends, but only if known or there is reason to
know the payments are not qualified dividends.
Payments shown in Form 1099-DIV, box 1b, from a foreign corporation
to the extent it is known or there is reason to know the payments are
not qualified dividends.

Reporting Qualified Dividends (continued)
To figure the tax for qualified dividends, complete the Qualified
Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A
instructions or the Schedule D Tax Worksheet in the Schedule D
instructions, whichever applies. Enter qualified dividends on line 2 of the
worksheet.
Investment Interest Deducted
If a deduction for investment interest is claimed, it may be necessary to
reduce the amount of qualified dividends that are eligible for the 0% or
15% tax rate. Reduce it by the qualified dividends that are choosen to be
included in investment income when figuring the limit on the investment
interest deduction. This is done on the Qualified Dividends and Capital
Gain Tax Worksheet or the Schedule D Tax Worksheet.


Types of Medical and Dental Expenses
Figuring Medical and Dental Expenses Skill
Check
This study guide covers the medical and
dental expenses that qualify as itemized
deductions and how to report them on
Schedule A (Form 1040).

Types of Medical and Dental Expenses
Examples of Deductible Medical and Dental Payments
To the extent the taxpayer was not reimbursed, he or she can deduct what was paid for:









Prescription medicines or insulin.
Acupuncturists, chiropractors, dentists, eye doctors, medical doctors, occupational therapists,
osteopathic doctors, physical therapists, podiatrists, psychiatrists, psychoanalysts (medical
care only), and psychologists.
Medical examinations, X-ray and laboratory services, insulin treatment, and whirlpool baths a
doctor ordered.
Diagnostic tests, such as a full-body scan, pregnancy test, or blood sugar test kit.
Nursing help (including the taxpayer's share of the employment taxes paid). If the taxpayer
paid someone to do both nursing and housework, they can deduct only the cost of the nursing
help.
Hospital care (including meals and lodging), clinic costs, and lab fees.
Qualified long-term care services (see Pub. 502).
The supplemental part of Medicare insurance (Medicare B).
The premiums paid for Medicare Part D insurance.








A program to stop smoking and for prescription medicines to alleviate nicotine
withdrawal.
A weight-loss program as treatment for a specific disease (including obesity)
diagnosed by a doctor.
Medical treatment at a center for drug or alcohol addiction.
Medical aids such as eyeglasses, contact lenses, hearing aids, braces, crutches,
wheelchairs, and guide dogs, including the cost of maintaining them.
Surgery to improve defective vision, such as laser eye surgery or radial
keratotomy.
Lodging expenses (but not meals) while away from home to receive medical care
in a hospital or a medical care facility related to a hospital, provided there was no
significant element of personal pleasure, recreation, or vacation in the travel. Do
not deduct more than $50 a night for each eligible person.
Ambulance service and other travel costs to get medical care. If the taxpayer used
their own car, they can claim what was spent for gas and oil to go to and from the
place where care was received; or the taxpayer can claim 19 cents a mile (23.5
cents a mile after June 30, 2011). Add parking and tolls to the amount claimed
under either method.
Cost of breast pumps and supplies that assist lactation.

Insurance Premiums
A taxpayer may also deduct insurance premiums for medical and dental
care, including premiums for qualified long-term care insurance
contracts as defined in Pub. 502. Reduce the insurance premiums by any
self-employed health insurance deduction claimed on Form 1040, line
29. The taxpayer cannot deduct insurance premiums paid with pretax
dollars because the premiums are not included in box 1 of Form(s) W-2.
If the taxpayer is a retired public safety officer, he or she cannot deduct
any premiums paid to the extent they were paid for with a tax-free
distribution from his or her retirement plan.
If, during 2011, the taxpayer was an eligible trade adjustment assistance
(TAA) recipient, alternative TAA (ATAA) recipient, reemployment TAA
(RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC)
pension recipient, he or she must reduce insurance premiums by any
amounts used to figure the health coverage tax credit. See the
instructions for line 1 of Schedule A.

Limit on Long Term Care Premiums
The amount a taxpayer can deduct for
qualified long-term care insurance contracts
(as defined in Pub. 502) depends on the age,
at the end of 2011, of the person for whom
the premiums were paid. See the chart below
for details.








Examples of Medical and Dental Payments that Cannot be Deducted
The following items cannot be deducted as medical or dental expenses:
Page 6 of 21
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Types of Medical and
Dental Expenses
The cost of diet food.
Cosmetic surgery unless it was necessary to improve a deformity related
to a congenital abnormality, an injury from an accident or trauma, or a
disfiguring disease.
Life insurance or income protection policies.
The Medicare tax on the taxpayer's wages and tips or the Medicare tax
paid as part of the self-employment tax or household employment
taxes.
NOTE: If the taxpayer was age 65 or older but not entitled to social
security benefits, they can deduct premiums they voluntarily paid for
Medicare A coverage.





Figuring Medical and Dental Expenses
Medical and Dental Expenses Amount
A taxpayer can deduct only the part of his or her medical and
dental expenses that exceeds 7.5% of the amount on Form 1040,
line 38.
DOMAIN 3 Study Guide - A. Medical and Dental Expenses
Figuring Medical and Dental Expenses
Page 8 of 21
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Publication 502
explains the types of expenses a taxpayer can and cannot
deduct. It also explains when a taxpayer can deduct capital
expenses and special care expenses for disabled persons









Example
Thomas and Wanda are filing a married filing joint return and will itemize deductions. They
have the following expenses for 2011:
Page 9 of 21
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Figuring Medical and Dental Expenses
$750 in prescriptions
$4,800 in medical insurance premiums
$550 in glasses and contacts
$500 for diet food (not related to a diagnosed health issue)
$2,400 in life insurance premiums
The couple may include all of the expenses listed above on line 1 of Schedule A, except for
$500 for diet food and $2,400 in life insurance premiums.
The remaining $6,100 for medical and dental expenses can be deducted to the extent that it
exceeds 7.5% of the amount on Form 1040, line 38.

Example
From the previous example, we know that Thomas
and Wanda have $6,100 in medical and dental
expenses. If line 38 on Form 1040 is $48,000, then
what is the amount that they can actually deduct?
$48,000 x 0.075 = $3,600
$6,100 - $3,600 = $2,500
Thomas and Wanda can deduct $2,500 in medical
and dental expenses.

Schedule A, Line 1
On line 1 of Schedule A, enter the total of medical
and dental expenses, after these expenses have been
reduced by any payments received from insurance or
other sources.
Include insurance premiums paid for medical and
dental care. But if the taxpayer claimed the selfemployed health insurance deduction on Form 1040,
line 29, reduce the premiums by the amount on line
29.






Trade Adjustment Assistance
If, during 2011, the taxpayer was an eligible trade adjustment assistance
(TAA) recipient, alternative TAA (ATAA) recipient, reemployment TAA
(RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC)
pension recipient, complete Form 8885 before completing Schedule A,
line 1. When figuring the amount of insurance premiums deductible on
Schedule A, do not include:
Page 12 of 21
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Figuring Medical and
Dental Expenses
Any amounts included on Form 8885, line 4,
Any qualified health insurance premiums paid to "U.S. Treasury-HCTC,"
or
Any health coverage tax credit advance payments shown in box 1 and
any additional credit reported in the box to the left of box 8 of Form
1099-H.








Whose Expenses Should be Included?
A taxpayer can include medical and dental bills paid for anyone who was
one of the following either when the services were provided or when the
taxpayer paid for them:
Page 13 of 21
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Figuring Medical and
Dental Expenses
Taxpayer and spouse.
All dependents claimed on the taxpayer's return.
The taxpayer's child whom they do not claim as a dependent because of
the rules for children of divorced or separated parents.
Any person the taxpayer could have claimed as a dependent, unless that
person received $3,700 or more of gross income or filed a joint return.
Any person that the taxpayer could have claimed as a dependent except
that the taxpayer, or spouse if filing jointly, can be claimed as a
dependent on someone else's 2011 return.

Example
Gary provided over half the care for his
father, Henry. Henry received wages of
$4,000 in 2011. Although Gary cannot claim
Henry as a dependent (because of the gross
income test for a qualifying relative
>$3,700), he can include any medical and
dental expenses paid in 2011 for Henry on
line 1 of Schedule A

Insurance Premiums for Certain Nondependents
The taxpayer may have a medical or dental insurance
policy that also covers an individual who is not their
dependent (for example, a nondependent child under
age 27). The taxpayer cannot deduct any premiums
attributable to this individual.
However, if the taxpayer had family coverage when
they added this individual to their policy and their
premiums did not increase, the taxpayer can enter on
line 1 the full amount of medical and dental
insurance premiums.

Reimbursements
If the taxpayer's insurance company paid the provider directly
for part of the taxpayer's expenses, and the taxpayer paid only
the amount that remained, include on line 1 only the amount
paid.
If the taxpayer received a reimbursement in 2011 for medical or
dental expenses paid in 2011, reduce 2011 expenses by this
amount.
If the taxpayer received a reimbursement in 2011 for prior year
medical or dental expenses, do not reduce 2011 expenses by
this amount. But if the taxpayer deducted the expenses in the
earlier year and the deduction reduced their tax, they must
include the reimbursement in income on Form 1040, line 21. See
Pub. 502 for details on how to figure the amount to include

Cafeteria Plans
Do not include on line 1 insurance premiums
paid by an employer-sponsored health insurance
plan (cafeteria plan) unless the premiums are
included in box 1 of Form(s) W-2. Also, do not
include any other medical and dental expenses
paid by the plan unless the amount paid is
included in box 1 of Form(s) W-2.

This study guide covers the taxes that a
taxpayer can include in itemized deductions
on Schedule A, Form 1040. State and local
taxes (line 5), real estate taxes (line 6),
personal property taxes (line 7) and other
taxes (line 8) will be discussed.

State and Local Taxes
Schedule A, Line 5
A taxpayer can elect to deduct state and local
general sales taxes instead of state and local
income taxes. They cannot deduct both.
If the taxpayer elects to deduct state and local
income taxes, check box a on line 5.
If the taxpayer elects state and local general sales
taxes, check box b on line 5.










State and Local Income Taxes
If electing state and local income taxes, include the following:
Page 3 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 State and Local Taxes
State and local income taxes withheld from the taxpayer's income during 2011.
State and local income taxes paid in 2011 for a prior year. Do not include
penalties or interest.
Prior year state refunds applied to the next tax year.
State and local estimated tax payments made during 2011 (exceptions may apply).
Mandatory contributions made to the California, New Jersey, or New York Nonoccupational Disability Benefit Fund, Rhode Island Temporary Disability Benefit
Fund, or Washington State Supplemental Workmen's Compensation Fund.
Mandatory contributions to the Alaska, California, New Jersey, or Pennsylvania
state unemployment fund.
Mandatory contributions to state family leave programs, such as the New Jersey
Family Leave Insurance (FLI) program and the California Paid Family Leave
program.










State and Local Income Taxes
If electing state and local income taxes, include the following:
Page 3 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 State and Local Taxes
State and local income taxes withheld from the taxpayer's income during 2011.
State and local income taxes paid in 2011 for a prior year. Do not include
penalties or interest.
Prior year state refunds applied to the next tax year.
State and local estimated tax payments made during 2011 (exceptions may apply).
Mandatory contributions made to the California, New Jersey, or New York Nonoccupational Disability Benefit Fund, Rhode Island Temporary Disability Benefit
Fund, or Washington State Supplemental Workmen's Compensation Fund.
Mandatory contributions to the Alaska, California, New Jersey, or Pennsylvania
state unemployment fund.
Mandatory contributions to state family leave programs, such as the New Jersey
Family Leave Insurance (FLI) program and the California Paid Family Leave
program.





State and Local Income Taxes
If electing state and local income taxes, do not
reduce the deduction by any:
Page 4 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 State
and Local Taxes
State or local income tax refund or credit the
taxpayer expects to receive for 2011, or
Refund of, or credit for, prior year state and local
income taxes the taxpayer actually received in 2011.
Instead, see the instructions for Form 1040, line 10.









Example
Olivia is electing to deduct state and local income taxes. She has the following
items to consider:
Page 5 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 State and Local Taxes
$2,300 in state and local income taxes withheld from her salary during 2011
$1,500 in state and local income taxes paid in 2011 for tax year 2010
$300 in interest and penalties for state tax owed from year 2010
$700 estimated state refund for 2011
$100 in vehicle inspection and driver's license fees
What amount can Olivia deduct on Schedule A, line 5?
She may only deduct $2,300 + $1,500 = $3,800. There is no need to reduce her
deduction by any estimate of refund for the current tax year ($700). Further, she
cannot deduct any interest or penalties or state inspection or license fees. (See
"Taxes a Taxpayer Cannot Deduct" later.)

State and Local General Sales Taxes
If the taxpayer elects to deduct state and local general sales
taxes, they can use either actual expenses or the optional sales
tax tables.
Actual Expenses: Generally, the taxpayer can deduct the actual
state and local general sales taxes paid in 2011 if the tax rate
was the same as the general sales tax rate.
Sales Tax Tables: Instead of using actual expenses, the taxpayer
can use the 2011 Optional State and Certain Local Sales Tax
Table and the 2011 Optional Local Sales Tax Tables for Certain
Local Jurisdictions.
Each option is detailed next.









Actual Expenses
The taxpayer can generally deduct the actual state and local general sales taxes
paid in 2011 if the tax rate was the same as the general sales tax rate.
Page 7 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 State and Local Taxes
Sales taxes on food, clothing, medical supplies, and motor vehicles are deductible
as a general sales tax even if the tax rate was less than the general sales tax rate.
If the taxpayer paid sales tax on a motor vehicle at a rate higher than the general
sales tax rate, the taxpayer can deduct only the amount of tax that the taxpayer
would have paid at the general sales tax rate on that vehicle.
Motor vehicles include cars, motorcycles, motor homes, recreational vehicles,
sport utility vehicles, trucks, vans, and off-road vehicles.
Include any state and local general sales taxes paid for a leased motor vehicle.
Do not include sales taxes paid on items used in the taxpayer's trade or business.
NOTE: It is important for the taxpayer to keep reciepts to show general sales taxes
paid.






Refund of General Sales Taxes
If the taxpayer received a refund of state or local general sales
taxes in 2011:
Page 8 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 State and Local
Taxes
For amounts paid in 2011, reduce their actual 2011 state and
local general sales taxes by this amount.
For prior year purchases, do not reduce their 2011 state and
local general sales taxes by this amount.
But if the taxpayer deducted actual state and local general sales
taxes in the earlier year and the deduction reduced their tax, the
taxpayer may have to include the refund in income on Form
1040, line 21.

Optional Sales Tax Tables
Instead of using actual expenses, the taxpayer can use the 2011 Optional State and Certain
Local Sales Tax Table and the 2011 Optional Local Sales Tax Tables for Certain Local
Jurisdictions to figure the state and local general sales tax deduction. The Taxpayer may also
be able to add the state and local general sales taxes paid on certain specified items.
To figure state and local general sales tax deduction using the tables, complete the State and
Local General Sales Tax Deduction Worksheet or use the Sales Tax Deduction Calculator on the
IRS website.
Detailed instructions for completing the State and Local General Sales Tax Deduction
Worksheet can be found in Form 1040 Instructions, 2011 Instructions for Schedule A.



Page 9 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 State and Local Taxes
NOTE: If the filing status is married filing separately, both the taxpayer and spouse elect to
deduct sales taxes, and the spouse elects to use the optional sales tax tables, the taxpayer also
must use the tables to figure state and local general sales tax deduction

Optional Sales Tax Tables
Instead of using actual expenses, the taxpayer can use the 2011 Optional State and Certain
Local Sales Tax Table and the 2011 Optional Local Sales Tax Tables for Certain Local
Jurisdictions to figure the state and local general sales tax deduction. The Taxpayer may also
be able to add the state and local general sales taxes paid on certain specified items.
To figure state and local general sales tax deduction using the tables, complete the State and
Local General Sales Tax Deduction Worksheet or use the Sales Tax Deduction Calculator on the
IRS website.
Detailed instructions for completing the State and Local General Sales Tax Deduction
Worksheet can be found in Form 1040 Instructions, 2011 Instructions for Schedule A.



Page 9 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 State and Local Taxes
NOTE: If the filing status is married filing separately, both the taxpayer and spouse elect to
deduct sales taxes, and the spouse elects to use the optional sales tax tables, the taxpayer also
must use the tables to figure state and local general sales tax deduction.

Real Estate Taxes
Schedule A, Line 6, Real Estate Taxes
Include taxes (state, local, or foreign) paid on real estate the
taxpayer owns that was not used for business, but only if the
taxes are based on the assessed value of the property. Also, the
assessment must be made uniformly on property throughout the
community, and the proceeds must be used for general
community or governmental purposes. Pub. 530 explains the
deductions homeowners can take.
NOTE: If the taxpayer is a homeowner who received assistance
under a State Housing Finance Agency Hardest Hit Fund program
or an Emergency Homeowners' Loan program, see Pub. 530 for
the amount deductible on line 6.






Do Not Include on Line 6
Do not include on Line 6 of Schedule A:
Page 11 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Real Estate
Taxes
Itemized charges for services to specific property or
persons
Charges for improvements that tend to increase the value
of property owned by the taxpayer
NOTE: A charge is deductible if it is used only to maintain
an existing public facility in service.






Example
For example, a taxpayer cannot include the following
on line 6 of Schedule A:
Page 12 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Real
Estate Taxes
$15 monthly charge per house for trash collection
$7 charge for every 1,000 gallons of water consumed
an assessment to build a new sidewalk

Mortgage Payments and Sale of Home
If a taxpayer's mortgage payments include real estate
taxes, the taxpayer can deduct only the amount the
mortgage company actually paid to the taxing authority in
2011.
If the taxpayer sold their home in 2011, any real estate tax
charged to the buyer should be shown on the settlement
statement and in box 5 of any Form 1099-S received. This
amount is considered a refund of real estate taxes. Any
real estate taxes paid at closing should be shown on the
settlement statement. See "refunds and rebates," next.

This study guide examines the mortgage
interest expense deduction on Schedule A of
Form 1040. A discussion of lines 10-14 of
Schedule A, including mortgage interest and
points, Form 1098, mortgage insurance
premiums, and investment interest follows.

Mortgage Interest
Home Mortgages
A home mortgage is any loan that is secured by the
taxpayer's main home or second home. It includes first
and second mortgages, home equity loans, and refinanced
mortgages.
A home can be a house, condominium, cooperative,
mobile home, boat, or similar property. It must provide
basic living accommodations including sleeping space,
toilet, and cooking facilities.

Schedule A, Line 10
Enter on line 10 on Schedule A mortgage interest and points reported to the taxpayer on Form
1098 under the taxpayer's social security number (SSN). Only mortgage interest of up to
$1,100,00 of qualified mortgage principle is deductible. If this form shows any refund of
overpaid interest, do not reduce the deduction by the refund. Instead, see the instructions for
Form 1040, line 21.
If the taxpayer and at least one other person (other than the taxpayer's spouse if filing jointly)
were liable for and paid interest on the mortgage, and the interest was reported on Form 1098
under the other person's SSN, report the taxpayer's share of the interest on line 11 (as
explained in the line 11 instructions, next).
If the taxpayer paid more interest to the recipient than is shown on Form 1098, see Publication
936 to find out if the taxpayer can deduct the additional interest. If they can, attach a
statement explaining the difference and enter "See attached" to the right of line 10.
If the taxpayer is claiming the mortgage interest credit (for holders of qualified mortgage credit
certificates issued by state or local governmental units or agencies), subtract the amount
shown on Form 8396, line 3, from the total deductible interest paid on the taxpayer's home
mortgage. Enter the result on line 10

Limit on Home Mortgage Interest
If the taxpayer took out any mortgages after October 13, 1987, their
deduction may be limited. Any additional amounts borrowed after
October 13, 1987, on a line-of-credit mortgage the taxpayer had on
that date are treated as a mortgage taken out after October 13, 1987.
If the taxpayer refinanced a mortgage they had on October 13, 1987,
treat the new mortgage as taken out on or before October 13, 1987. But
if the taxpayer refinanced for more than the balance of the old
mortgage, treat the excess as a mortgage taken out after October 13,
1987.
NOTE: If the taxpayer is a homeowner who received assistance under a
State Housing Finance Agency Hardest Hit Fund program or an
Emergency Homeowners' Loan program, see Pub. 530 for the amount
the taxpayer can deduct on line 10 or 11.

Mortgage Interest, Schedule A, Line 11
If the taxpayer did not receive a Form 1098 from the recipient, report
the deductible mortgage interest on line 11.
If the taxpayer bought their home from the recipient, be sure to show
that recipient's name, identifying number, and address on the dotted
lines next to line 11. If the recipient is an individual, the identifying
number is his or her social security number (SSN). Otherwise, it is the
employer identification number. The taxpayer must also let the recipient
know their SSN. If the taxpayer does not show the required information
about the recipient or let the recipient know their SSN, they may have to
pay a $50 penalty.
If the taxpayer and at least one other person (other than the taxpayer's
spouse if filing jointly) were liable for and paid interest on the mortgage,
and the other person received the Form 1098, attach a statement to
their return showing the name and address of that person. To the right
of line 11, enter "See attached."

Example
Molly and Maggie are sisters. They purchased a
home together and were both liable for and paid
interest on the mortgage in 2011. Molly received
the Form 1098. Maggie did not receive Form
1098.
Molly will report mortgage interest on line 10 of
Schedule A. Maggie will report her share of the
mortgage interest on line 11 of Schedule A.
Maggie must also attach a statement to her tax
return.

Points Not Reported on Form 1098, Line 12
Points are shown on the taxpayer's settlement
statement. Points paid only to borrow money
are generally deductible over the life of the
loan. See Pub. 936 to figure the amount that
can be deducted. Points paid for other
purposes, such as for a lender's services, are
not deductible.





Refinancing
Generally, the taxpayer must deduct points paid to refinance a
mortgage over the life of the loan. This is true even if the new
mortgage is secured by the taxpayer's main home.
Page 8 of 20
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Mortgage Interest
If the taxpayer used part of the proceeds to improve their main
home, they may be able to deduct the part of the points related
to the improvement in the year paid.
If the taxpayer paid off a mortgage early, deduct any remaining
points in the year they paid off the mortgage. However, if they
refinanced their mortgage with the same lender, see Mortgage
ending early in Pub. 936 for an exception.

Mortgage Insurance Premiums, Schedule A, Line 13
Enter the qualified mortgage insurance premiums paid
under a mortgage insurance contract issued after
December 31, 2006, in connection with home acquisition
debt that was secured by the taxpayer's first or second
home. Box 4 of Form 1098 may show the amount of
premiums paid in 2011.
If the taxpayer and at least one other person (other than
the taxpayer's spouse if filing jointly) were liable for and
paid the premiums in connection with the loan, and the
premiums were reported on Form 1098 under the other
person's SSN, report the taxpayer's share of the premiums
on line 13





Refunds and Rebates
If the taxpayer received a refund or rebate in 2011 of real
estate taxes:
Page 14 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Real Estate
Taxes
Paid in 2011, then reduce the deduction by the amount of
the refund or rebate.
Paid in an earlier year, do not reduce the deduction by this
amount. Instead, include the refund or rebate in income on
Form 1040, line 21, if the real estate taxes were deducted
in the earlier year and the deduction reduced the tax

Personal Property & Other Taxes
Personal Property Taxes, Line 7
Enter the state and local personal property
taxes paid, but only if the taxes were based
on value alone and were imposed on a yearly
basis.

Example
Franco paid a yearly fee for the registration of
his boat. Part of the fee was based on the
boat's value and part was based on its weight.
Franco can deduct only the part of the fee
that was based on the boat's value.

Other Taxes, Line 8
If the taxpayer had any deductible tax not listed
on line 5, 6, or 7, list the type and amount of tax.
Include on this line income tax paid to a foreign
country or U.S. possession. Enter only one total
on line 8.
NOTE: It may be advantageous for the taxpayer
to take a credit for the foreign tax instead of a
deduction. See the instructions for Form 1040,
line 47, for details.








Taxes a Taxpayer Cannot Deduct
To complete the discussion of deductible taxes, let's examine the types
of taxes that cannot be deducted on Schedule A. A taxpayer cannot
deduct:
Page 18 of 23
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Personal Property & Other
Taxes
Federal income and most excise taxes.
Social Security, Medicare, federal unemployment (FUTA), and railroad
retirement (RRTA) taxes.
Customs duties.
Federal estate and gift taxes. But see the instructions for line 28.
Certain state and local taxes, including: tax on gasoline, car inspection
fees, assessments on sidewalks or other improvements to the taxpayer's
property, tax paid for someone else, and license fees (marriage, driver's
license, etc).

Mortgage Insurance Premiums, Schedule A, Line 13
Enter the qualified mortgage insurance premiums paid
under a mortgage insurance contract issued after
December 31, 2006, in connection with home acquisition
debt that was secured by the taxpayer's first or second
home. Box 4 of Form 1098 may show the amount of
premiums paid in 2011.
If the taxpayer and at least one other person (other than
the taxpayer's spouse if filing jointly) were liable for and
paid the premiums in connection with the loan, and the
premiums were reported on Form 1098 under the other
person's SSN, report the taxpayer's share of the premiums
on line 13.

Qualified Mortgage Insurance
Qualified mortgage insurance is mortgage insurance provided by
the Department of Veterans Affairs, the Federal Housing
Administration, or the Rural Housing Service (or their successor
organizations), and private mortgage insurance (as defined in
section 2 of the Homeowners Protection Act of 1998 as in effect
on December 20, 2006).
Mortgage insurance provided by the Department of Veterans
Affairs and the Rural Housing Service is commonly known as a
funding fee and guarantee fee respectively. These fees can be
deducted fully in 2011 if the mortgage insurance contract was
issued in 2011. Contact the mortgage insurance issuer to
determine the deductible amount if it is not included in box 4 of
Form 1098.






Prepaid Mortgage Insurance Premiums
If the taxpayer paid qualified mortgage insurance premiums that are
allocable to periods after 2011, they must allocate them over the shorter
of:
Page 11 of 20
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Mortgage Interest
The stated term of the mortgage, or
84 months, beginning with the month the insurance was obtained.
The premiums are treated as paid in the year to which they are
allocated. If the mortgage is satisfied before its term, no deduction is
allowed for the unamortized balance.
The allocation rules, explained earlier, do not apply to qualified
mortgage insurance provided by the Department of Veterans Affairs or
the Rural Housing Service (or their successor organizations)

Limit on the Deductible Amount
The taxpayer cannot deduct mortgage insurance
premiums if the amount on Form 1040, line 38,
is more than $109,000 ($54,500 if married filing
separately). If the amount on Form 1040, line 38,
is more than $100,000 ($50,000 if married filing
separately), the taxpayer's deduction is limited
and the Mortgage Insurance Premiums Deduction
Worksheet must be used to figure the deduction

Example
James and Shirley have $5,000 in mortgage
insurance premiums and $104,500 on Form
1040, line 38. Since this is more than
$100,000 their deduction for mortgage
insurance premiums is limited. Using the
Mortgage Insurance Premiums Deduction
Worksheet, they figure their deduction to be
$2,500.

Investment Interest
Investment Interest, Line 14
Investment interest is interest paid on money the
taxpayer borrowed that is allocable to property held
for investment. It does not include any interest
allocable to passive activities or to securities that
generate tax-exempt income.
Complete and attach Form 4952 to figure the
deduction







Form 4952 Exception
The taxpayer does not have to file Form 4952 if all three of the following
apply:
Page 15 of 20
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Investment Interest
The taxpayer's investment interest expense is not more than their
investment income from interest and ordinary dividends minus any
qualified dividends.
The taxpayer has no other deductible investment expenses.
The taxpayer has no disallowed investment interest expense from 2010.
Alaska Permanent Fund dividends, including those reported on Form
8814, are not investment income.
For more details, see Pub. 550.

This study guide discusses charitable
contributions that can be deducted on
Schedule A of Form 1040. Examples of
charitable organizations, contributions and
gifts are provided, along with the rules for
reporting and figuring a taxpayer's deduction.

Gifts to Charity
The taxpayer can deduct contributions or
gifts given to organizations that are religious,
charitable, educational, scientific, or literary
in purpose. The taxpayer can also deduct
what was given to organizations that work to
prevent cruelty to children or animals









Examples of Qualified Charitable Organizations
Page 3 of 25
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Gifts to Charity
Churches, mosques, synagogues, temples, etc.
Boy Scouts, Boys and Girls Clubs of America, CARE, Girl Scouts, Goodwill
Industries, Red Cross, Salvation Army, United Way, etc.
Fraternal orders, if the gifts will be used for the purposes listed under Gifts to
Charity, earlier.
Veterans' and certain cultural groups.
Nonprofit schools, hospitals, and organizations whose purpose is to find a cure
for, or help people who have, arthritis, asthma, birth defects, cancer, cerebral
palsy, cystic fibrosis, diabetes, heart disease, hemophilia, mental illness or
retardation, multiple sclerosis, muscular dystrophy, tuberculosis, etc.
Federal, state, and local governments if the gifts are solely for public purposes.

Contributions the Taxpayer Can Deduct
Contributions can be in cash, property, or
out-of-pocket expenses paid to do volunteer
work for the kinds of organizations described
earlier. If the taxpayer drove to and from the
volunteer work, they can take the actual cost
of gas and oil or 14 cents a mile. Add parking
and tolls to the amount the taxpayer claims
under either method. But do not deduct any
amounts that were repaid to the taxpayer.

Example
Jake volunteers for the local humane society. He
has given $200 in cash and has mileage of 250
miles associated with driving to and from the
animal shelter. Jake can deduct his cash
contribution and either his actual costs for
gas/oil or 14 cents per mile. If Jake takes
mileage, he can deduct $200 + (250 X $0.14) = $235

Gifts from Which the Taxpayer Benefits
If the taxpayer made a gift and received a
benefit in return, such as food, entertainment, or
merchandise, the taxpayer can generally only
deduct the amount that is more than the value of
the benefit. But this rule does not apply to certain
membership benefits provided in return for an
annual payment of $75 or less or to certain items
or benefits of token value. For details, see Pub.
526.

Example
Bonnie paid $100 to a charitable organization
to attend a fund-raising event. She received a
book and a t-shirt at the event. The value of
the book and t-shirt was $40. Bonnie can
deduct only $60.






Gifts of $250 or more
The taxpayer can deduct a gift of $250 or more only if they have a statement from the
charitable organization showing the following information:
Page 8 of 25
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Gifts to Charity
The amount of any money contributed and a description (but not value) of any property
donated.
Whether the organization did or did not give any goods or services in return for the taxpayer's
contribution. If the taxpayer did receive any goods or services, a description and estimate of
the value must be included. If the taxpayer received only intangible religious benefits (such as
admission to a religious ceremony), the organization must state this, but it does not have to
describe or value the benefit.
In figuring whether a gift is $250 or more, do not combine separate donations. If donations
were made through payroll deductions, treat each deduction from each paycheck as a separate
gift. See Pub. 526 if the taxpayer made a separate gift of $250 or more through payroll
deduction.
NOTE: The taxpayer must get the statement by the date they file the return or the due date
(including extensions) for filing the return, whichever is earlier. Do not attach the statement to
the return. Instead, the taxpayer should keep it for their records.

Example
Brenda gave her church $45 each week for a
total of $2,340.
Brenda should treat each $45 payment as a
separate gift.






Limit on the Amount Deductible
See Pub. 526 to figure the amount of the deduction if any of the following applies:
NOTE: Generally, most cash contributions are subject to the 50% limit.
Page 10 of 25
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Gifts to Charity
The taxpayer's cash contributions or contributions of ordinary income property are more than
30% of the amount on Form 1040, line 38.
The taxpayer's gifts of capital gain property are more than 20% of the amount on Form 1040,
line 38.
The taxpayer gave gifts of property that increased in value or gave gifts of the use of property.

Gifts by Cash or Check
Enter on line 16 of Schedule A the total gifts made in
cash or by check (including out-of-pocket expenses).
For any contribution made in cash, regardless of the
amount, the taxpayer must maintain as a record of
the contribution a bank record (such as a canceled
check or credit card statement) or a written record
from the charity. The written record must include the
name of the charity, date, and amount of the
contribution. Do not attach the record to the tax
return. Instead, keep it with other tax records.

Gifts Other Than by Cash or Check
Enter contributions of property on line 17 of
Schedule A. If the taxpayer gave used items, such
as clothing or furniture, deduct their fair market
value at the time these items were given.
Fair market value is what a willing buyer would
pay a willing seller when neither has to buy or
sell and both are aware of the conditions of the
sale. For more details on determining the value
of donated property, see Pub. 561.

Form 8283
If the amount of the deduction is more than $500, the taxpayer must
complete and attach Form 8283.
NOTE: For this purpose, the "amount of the deduction" means the
deduction before applying any income limits that could result in a
carryover of contributions.
If the taxpayer deducts more than $500 for a contribution of a motor
vehicle, boat, or airplane, the taxpayer must also attach a statement
from the charitable organization to the return. The organization may use
Form 1098-C to provide the required information.
If the taxpayer's total deduction for one item is over $5,000, they may
also have to get appraisals of the values of the donated property. This
amount is $500 for certain contributions of clothing and household
items. See Form 8283 and its instructions for details.

Contributions of Clothing and Household Items
A deduction for these contributions will be
allowed only if the items are in good used
condition or better. However, this rule does not
apply to a contribution of any single item for
which a deduction of more than $500 is claimed
and for which the taxpayer includes a qualified
appraisal and Form 8283 with their tax return.

Example
Don and Linda donate their used sofa and chair to a
charitable organization. They paid $800 for the brand
new furniture in 2005. In 2011, they estimate it to be
worth half the original value. The amount of the
deduction must be based on the fair market value of
the property, or 0.5 X $800 = $400.
Don and Linda may deduct $400. Since this amount is
less than $500, a form 8283 is not necessary.








Recordkeeping
If the taxpayer gave property, they should keep a receipt or written statement from the
organization they gave the property to, or a reliable written record, that shows the
organization's name and address, the date and location of the gift, and a description of the
property. For each gift of property, the taxpayer should also keep reliable written records that
include:
Page 16 of 25
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Gifts to Charity
How the property's value was figured at the time given. If the value was determined by an
appraisal, keep a signed copy of the appraisal.
The cost or other basis of the property if the taxpayer must reduce it by any ordinary income
or capital gain that would have resulted if the property had been sold at its fair market value.
How the deduction was figured if the taxpayer chose to reduce the deduction for gifts of
capital gain property.
Any conditions attached to the gift.
NOTE: If the taxpayer's total deduction for gifts of property is over $500, the taxpayer gave
less than their entire interest in the property, or the taxpayer made a "qualified conservation
contribution," their records should contain additional information. See Pub. 526 for details.




Line 18, Carryover from Prior Year
Enter on line 18 of Schedule A any carryover of
contributions that the taxpayer could not deduct
in an earlier year because they exceeded the
adjusted gross income limit.
Page 17 of 25
MENU PREVIOUS NEXT 1040 1040 Inst Pub17
Gifts to Charity
Excess contributions can be carried over for 5
years.









Contributions the Taxpayer Cannot Deduct
Travel expenses (including meals and lodging) while away
from home, unless there was no significant element of
personal pleasure, recreation, or vacation in the travel.
Political contributions.
Dues, fees, or bills paid to country clubs, lodges, fraternal
orders, or similar groups.
Cost of raffle, bingo, or lottery tickets.
Cost of tuition.
Value of the taxpayer's time or services.
Value of blood given to a blood bank.
The transfer of a future interest in tangible personal
property (generally, until the entire interest has been
transferred)









Contributions the Taxpayer Cannot Deduct (continued)
Page 19 of 25
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Non-Deductible
Contributions
Gifts to individuals and groups that are run for personal profit.
Gifts to foreign organizations.
Gifts to organizations engaged in certain political activities that
are of direct financial interest to the taxpayer's trade or business.
Gifts to groups whose purpose is to lobby for changes in the
laws.
Gifts to civic leagues, social and sports clubs, labor unions, and
chambers of commerce.
Value of benefits received in connection with a contribution to a
charitable organization

Gifts to individuals and groups that are run
for personal profit. Gifts to foreign
organizations. Gifts to organizations engaged
in certain political activities that are of direct
financial interest to the taxpayer's trade or
business. Gifts to groups whose purpose is to
lobby for changes in the laws. Gifts to civic
leagues, social and sports clubs, labor
unions, and chambers of commerce. Value of
benefits received in connection with a
contribution to a charitable organization

This study guide discusses employee expenses
and miscellaneous deductions. the total of
certain expenses are deductible on Schedule A of
Form 1040 to the extent they exceed 2% of AGI.
These include unreimbursed employee expenses,
tax preparation fees, investment, safe deposit
box and other such expenses. There are also
miscellaneous expenses that are not subject to
the 2% limitation including gambling losses to
the extent of winning and casualty and theft
losses.





Unreimbursed Employee Expenses
Included in the expenses subject to 2% of AGI are unreimbursed
employee expenses.
DOMAIN 3 Study Guide - E. Employee Expenses and Misc. Deductions
2% Limitation
Page 2 of 22
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Enter the total ordinary and
necessary job expenses paid for which the taxpayer was not reimbursed.
An ordinary expense is one that is common and accepted in the
taxpayer's field of trade, business, or profession. A necessary expense is
one that is helpful and appropriate for the taxpayer's business. An
expense does not have to be required to be considered necessary.
NOTE: Amounts the employer included in box 1 of the Form W-2 are not
considered reimbursements















Expenses the Taxpayer Cannot Deduct
Page 3 of 22
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Employee Expenses
Political contributions.
Legal expenses for personal matters that do not produce taxable income.
Lost or misplaced cash or property.
Expenses for meals during regular or extra work hours.
The cost of entertaining friends.
Commuting expenses. See Pub. 529 for the definition of commuting.
Travel expenses for employment away from home if that period of employment
exceeds 1 year. See Pub. 529 for an exception for certain federal employees.
Travel as a form of education.
Expenses of attending a seminar, convention, or similar meeting unless it is
related to employment.
Club dues.
Fines and penalties.
Expenses of producing tax-exempt income.

ample
Eugene has $5,400 in ordinary and necessary job
expenses he paid for which he was not
reimbursed. His gross income on line 38 of Form
1040 is $67,800. How much may Eugene deduct?
$67,800 X 0.02 = $1,356 $5,400 - $1,356 =
$4,044
Because Eugene can deduct only the part of his
employee expenses that exceeds 2% of the
amount on Form 1040, line 38, he can deduct a
total $4,044.







Form 2106
The taxpayer must fill in and attach Form 2106 if either of the
following applies.
Form 2106
Page 5 of 22
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Employee Expenses
The taxpayer claims any travel, transportation, meal, or
entertainment expenses for their job.
The taxpayer's employer paid the taxpayer for any of the job
expenses that the taxpayer would otherwise report on line 21.
If the taxpayer used their own vehicle, are using the standard
mileage rate, and (2) above does not apply, the taxpayer may be
able to file Form 2106-EZ instead.





Line 21, Schedule A
If the taxpayer does not have to file Form 2106 or 2106EZ, list the type and amount of each expense on the
dotted line next to line 21 on Schedule A. If more space is
needed, attach a statement showing the type and amount
of each expense. Enter the total of all these expenses on
line 21.
Line 21
Page 6 of 22
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Employee
Expenses
NOTE: Do not include on line 21 any educator expenses
the taxpayer deducted on Form 1040, line 23.













Line 21 Examples
Examples of other expenses to include on line 21 are:
Page 7 of 22
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Employee Expenses
Safety equipment, small tools, and supplies needed for the job.
Uniforms required by an employer that are not suitable for ordinary wear.
Protective clothing required in the work, such as hard hats, safety shoes, and
glasses.
Physical examinations required by the employer.
Dues to professional organizations and chambers of commerce.
Subscriptions to professional journals.
Fees to employment agencies and other costs to look for a new job in the
taxpayer's present occupation, even if the taxpayer does not get a new job.
Certain business use of part of the home.
Certain educational expenses.
NOTE: The taxpayer may be able to take a credit for educational expenses instead
of a deduction. See Form 8863 for details.

Example
Marshall is required to wear protective clothing and
provide his own safety equipment for his job as a welder.
He is a member of a professional welding organization and
pays yearly dues. He does not pay for any travel,
transportation, meal, or entertainment expenses for his
job. Marshall's employer did not pay him for any of the job
expenses that he incurred.
Because Marshall paid for his job expenses, he can deduct
them on line 21 of Schedule A. It is not necessary for him
to complete Form 2106 because he did not pay for any
travel, transportation, meal, or entertainment expenses for
his job and because Marshall's employer did not pay him
for any job expenses that he incurred






Miscellaneous Deductions
Casualty and Theft Losses
Complete and attach Form 4684 to figure the amount of loss to
enter on line 20 of Schedule A.
DOMAIN 3 Study Guide - E. Employee Expenses and Misc.
Deductions
Miscellaneous Deductions
Line 20
Page 9 of 22
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 The taxpayer may
be able to deduct part or all of each loss caused by theft,
vandalism, fire, storm, or similar causes; car, boat, and other
accidents; and corrosive drywall. They may also be able to
deduct money they had in a financial institution but lost because
of the insolvency or bankruptcy of the institution.






Casualty and Theft Deductions
The taxpayer can deduct personal casualty or theft losses
only to the extent that:
Page 10 of 22
MENU PREVIOUS NEXT 1040 1040 Inst Pub17
Miscellaneous Deductions
The amount of each separate casualty or theft loss is more
than $100, and
The total amount of all losses during the year (reduced by
the $100 limit discussed in (1) above) is more than 10% of
the amount on Form 1040, line 38.
Use Schedule A, line 23, to deduct the costs of proving
that the taxpayer had a property loss. Examples of these
costs are appraisal fees and photographs used to establish
the amount of the loss

Corrosive Drywall Losses
If the taxpayer paid for repairs to their
personal residence or household appliances
because of corrosive drywall that was
installed between 2001 and 2008, they may
be able to deduct on line 20 those amounts
paid. See Pub. 547 for details.

Line 22 Tax Preparation Fees
Enter on line 22 of Schedule A the fees paid
for preparation of the taxpayer's tax return,
including fees paid for filing the return
electronically. If the taxpayer paid their tax by
credit or debit card, include the convenience
fee charged on line 23 instead of this line

Line 23 Other Expenses
Enter on line 23 of Schedule A the total amount
paid to produce or collect taxable income and
manage or protect property held for earning
income. Do not include any personal expenses.
List the type and amount of each expense on the
dotted lines next to line 23. If more space is
needed, attach a statement showing the type and
amount of each expense. Enter one total on line
23











Line 23 Examples
Examples of expenses to include on line 23 are:
Page 14 of 22
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Miscellaneous Deductions
Certain legal and accounting fees.
Clerical help and office rent.
Custodial (for example, trust account) fees.
The taxpayer's share of the investment expenses of a regulated investment
company.
Certain losses on non-federally insured deposits in an insolvent or bankrupt
financial institution.
Casualty and theft losses of property used in performing services as an employee
from Form 4684, lines 32 and 38b, or Form 4797, line 18a.
Deduction for repayment of amounts under a claim of right if $3,000 or less.
Convenience fee charged by the card processor for paying the taxpayer's income
tax (including estimated tax payments) by credit or debit card. The deduction is
claimed for the year in which the fee was charged to the card.












Other Miscellaneous Deductions
Only the expenses listed next can be deducted on line 28 of Schedule A. List the
type and amount of each expense on the dotted lines next to line 28. If more
space is necessary, attach a statement showing the type and amount of each
expense. Enter one total on line 28.
Line 28
Page 15 of 22
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Miscellaneous Deductions
Gambling losses (gambling losses include, but are not limited to, the cost of nonwinning bingo, lottery, and raffle tickets), but only to the extent of gambling
winnings reported on Form 1040, line 21.
Casualty and theft losses of income-producing property from Form 4684, lines 32
and 38b, or Form 4797, line 18a.
Loss from other activities from Schedule K-1 (Form 1065-B), box 2.
Federal estate tax on income in respect of a decedent.
Amortizable bond premium on bonds acquired before October 23, 1986.
Deduction for repayment of amounts under a claim of right if over $3,000.
Certain unrecovered investment in a pension.
Impairment-related work expenses of a disabled person.

Example
Nicole has the following expenses to deduct:
Casualty Loss $3,500 (personal or non-income producing property)
Gambling Loss $2,500
Legal and Accounting Fees
$750
Tax Preparation Fees $250
Where should Nicole report these losses?
Casualty Loss -- Compute the deductible amount on Form 4684 and
report on Line 20, Schedule A
Gambling Loss -- Line 28, Schedule A, but only to the extent of
winnings reported
Legal and Accounting Fees -- Line 23, Schedule A, if the fees are
associated with producing income
Tax Preparation Fees -- Line 22, Schedule A, if fees were paid to a tax
preparer or for e-filin

This study guide covers the tests a taxpayer
must meet to claim the credit for child and
dependent care expenses on line 48 of Form
1040. A discussion of how to figure the credit
and how to claim the credit follows, including
the use of Form 2441. Further, the Child Tax
Credit and Additional Child Tax Credit are
explained.








Child and Dependent Care Expenses
Who Qualifies for the Credit
A taxpayer may be able to take the credit for child and dependent care expenses if
the taxpayer paid someone to care for:
The taxpayer's qualifying child under age 13 whom the taxpayer claims as a
dependent,
The taxpayer's disabled spouse or any other disabled person who could not care
for themselves,
The taxpayer's child who was not claimed as a dependent due to the rules for
children of divorced or separated parents. See Domain 1 "Exemptions and
Dependents", or the instructions for Form 1040, line 6c for more information.
DOMAIN 3 Study Guide - F. Credits Based on Children
Child and Dependent Care
Page 2 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 The credit can be up to 35% of the
taxpayer's expenses. To qualify, the taxpayer must pay these expenses so they
can work or look for work








Tests to Claim the Credit
In order to claim the credit for child and
dependent care expenses, form 1040 or 1040A
must be filed and the following tests must be
met:
Page 3 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17
Child and Dependent Care Expenses
Qualifying Person Test
Earned Income Test
Work-Related Expense Test
Joint Return Test
Provider Identification Test








Qualifying Persons
Child and dependent care expenses must be for the care of one or more qualifying
persons.
A qualifying person is:
DOMAIN 3 Study Guide - F. Credits Based on Children
Qualifying Person Test
Page 4 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17
A qualifying child who a dependent of the taxpayer and who was under age 13
when the care was provided
The taxpayer's spouse who was not physically or mentally able to care for himself
or herself and lived with the taxpayer for more than half the year
A person who was not physically or mentally able to care for himself or herself,
lived with the taxpayer for more than half the year, and either:
◦
◦
Was the taxpayer's dependent, or
Would have been the taxpayer's dependent except that:



He or she received gross income of $3,700 or more,
He or she filed a joint return, or
The taxpayer or spouse if filing jointly, could be claimed as a dependent on another return.

Qualifying Child Definitions
Dependent. A dependent is a person, other than the taxpayer or
spouse, for whom the taxpayer can claim an exemption. To be a
dependent, a person must be the taxpayer's qualifying child (or
qualifying relative).
Qualifying child. To be the taxpayer's qualifying child, a child
must live with the taxpayer for more than half the year and meet
other requirements, discussed later.
Physically or mentally not able to care for oneself. Persons who
cannot dress, clean, or feed themselves because of physical or
mental problems are considered not able to care for themselves.
Also, persons who must have constant attention to prevent them
from injuring themselves or others are considered not able to
care for themselves

Person Qualifying for Part of Year
Determine a person's qualifying status each day.
For example, if the person for whom child and
dependent care expenses were paid no longer
qualifies on August 5, count only those expenses
through August 4.
In determining whether a person is a qualifying
person, a person who was born or died in 2011 is
treated as having lived with the taxpayer for all of
2011 if the taxpayer's home was the person's home
the entire time he or she was alive in 2011

Taxpayer ID Numbers
Include on the return the name and taxpayer identification
number (generally the social security number) of the qualifying
person(s). If the correct information is not shown, the credit may
be reduced or disallowed.
Individual taxpayer identification number (ITIN) for aliens. If the
qualifying person is a nonresident or resident alien who does not
have and cannot get a social security number (SSN), use that
person's ITIN. The ITIN is entered wherever an SSN is requested
on a tax return. To apply for an ITIN, see Form W-7.
Adoption taxpayer identification number (ATIN). If the qualifying
person is a child who was placed in in the taxpayer's home for
adoption and this child does not have an SSN, an ATIN must be
obtained for the child. File Form W-7A, Application for Taxpayer
Identification Number for Pending U.S. Adoptions








Child of Divorced or Separated Parents or Parents Living Apart
Even if the taxpayer cannot claim their child as a dependent, he or she is
treated as a qualifying person if:
Page 8 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Qualifying Person Test
The child was under age 13 or was not physically or mentally able to
care for himself or herself,
The child received over half of his or her support during the calendar
year from one or both parents who are divorced or legally separated
under a decree of divorce or separate maintenance, are separated under
a written separation agreement, or lived apart at all times during the last
6 months of the calendar year,
The child was in the custody of one or both parents for more than half
the year, and
The taxpayer was the child's custodial parent (the parent with whom the
child lived for the greater part of 2011).
NOTE: The noncustodial parent cannot treat the child as a qualifying
person even if that parent is entitled to claim the child as a dependent
under the special rules for a child of divorced or separated parents

Earned Income Test
To claim the credit, the taxpayer (and spouse if filing jointly)
must have earned income during the year.
Earned income. Earned income includes wages, salaries, tips,
other taxable employee compensation, and net earnings from
self-employment. A net loss from self-employment reduces
earned income. Earned income also includes strike benefits and
any disability pay reported as wages.
Generally, only taxable compensation is included. However,
nontaxable combat pay can be included in earned income, if
elected by the taxpayer. If filing a joint return and both the
taxpayer and spouse received nontaxable combat pay, each may
make their own election.













Not Earned Income
Earned income does not include:
Page 10 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Earned Income Test
Pensions and annuities,
Social security and railroad retirement benefits,
Workers' compensation,
Interest and dividends,
Unemployment compensation,
Scholarship or fellowship grants, except for those reported on a Form
W-2 and paid to the taxpayer for teaching or other services,
Nontaxable workfare payments,
Child support payments received,
Income of nonresident aliens that is not effectively connected with a U.S.
trade or business, or
Any amount received for work while an inmate in a penal institution.






Special Rule for Spouse
A spouse is treated as having earned income for any month that he or she is:
Page 11 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Earned Income Test
A full-time student, or
Physically or mentally not able to care for himself or herself. (The spouse also
must live with the taxpayer for more than half the year.)
This rule applies to only one spouse for any one month. If, in the same month,
both the taxpayer and spouse do not work and are either full-time students or
not physically or mentally able to care for themselves, only one can be treated as
having earned income in that month.
Full-time student. A full-time student is a person who is enrolled at a school for
the number of hours or classes that the school considers full time. A student must
have been a full-time student for some part of each of 5 calendar months during
the year. (The months need not be consecutive.)
School. The term "school" includes high schools, colleges, universities, and
technical, trade, and mechanical schools. A school does not include an on-the-job
training course, correspondence school, or school offering courses only through
the Internet



Work-Related Expense Test
Work-Related Expenses
Child and dependent care expenses must be
work-related to qualify for the credit.
Expenses are considered work-related only if
both of the following are true.
They allow the taxpayer (and spouse if filing
jointly) to work or look for work.
They are for a qualifying person's care.

Working or Looking for Work
To be work-related, the expenses must allow the taxpayer
to work or look for work. If married, generally both the
taxpayer and spouse must work or look for work. A spouse
is treated as working during any month he or she is a fulltime student or is not physically or mentally able to care
for himself or herself.
Work can be for an emeployer or in the taxpayer's own
business or partnership. It can be either full time or part
time. Work also includes actively looking for work.
However, if the taxpayer does not find a job and has no
earned income for the year this credit cannot be taken.
An expense is not considered work-related merely
because it was incurred while working. The purpose of the
expense must be to allow the taxpayer to work.

Example
Anna pays a babysitter while she goes out to
eat with friends. This is not normally a workrelated expense.
Anna works during the day. Her husband,
Rick, works at night and sleeps during the
day. Anna pays for the care of their 3 year old
during the hours when she is working and
Rick is sleeping. These expenses are
considered work-related.

Special Work Considerations
Volunteer work. For this purpose, it is not considered work if it is unpaid volunteer
work or volunteer work for a nominal salary.
Work for part of year. If the taxpayer works or actively looks for work during only
part of the period covered by the expenses, then figure expenses for each day.
Temporary absence from work. It is not necessary to figure expenses for each day
during a short, temporary absence from work, such as for vacation or a minor
illness, if the taxpayer has to pay for care anyway. Instead, figure the credit
including the expenses paid for the period of absence.
NOTE: An absence of 2 weeks or less is a short, temporary absence. An absence of
more than 2 weeks may be considered a short, temporary absence, depending on
the circumstances.
Part-time work. If the taxpayer works part-time, it is generally necessary to figure
expenses for each day. However, if care is paid for weekly, monthly, or in another
way that includes both days worked and days not worked, figure the credit
including the expenses paid for days the taxpayer did not work. Any day when at
least 1 hour is worked is considered a day of work.

Example
Rita pays a nanny to care for her 4-year-old
twins so she can work. Rita became ill and
missed 3 months of work but received sick
pay. While ill, Rita continued to pay the nanny
to care for the children. Her absence is not a
short, temporary absence, and therefore
Rita's expenses for child care during her
illness are not considered work-related.






Care of a Qualifying Person
To be work-related, expenses must be to provide care for a qualifying
person.
It is not necessary to choose the least expensive way of providing care.
Page 17 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Work-Related Expense Test
The cost of a paid care provider may be an expense for the care of a
qualifying person even if another care provider is available at no cost.
Expenses are for the care of a qualifying person only if their main
purpose is the person's well-being and protection.
Expenses for household services qualify if part of the services is for the
care of qualifying persons.

Expenses Not for Care
Expenses for care do not include amounts
paid for food, lodging, clothing, education,
and entertainment. However, small amounts
paid for these items can be included if they
are incident to and cannot be separated from
the cost of caring for the qualifying person.

Education
Expenses for a child in nursery school, pre-school, or
similar programs for children below the level of
kindergarten are expenses for care. Expenses to
attend kindergarten or a higher grade are not
expenses for care. Do not use these expenses to
figure the credit.
NOTE: However, expenses for before- or after-school
care of a child in kindergarten or a higher grade may
be expenses for care. Summer school and tutoring
programs are not for care

Example
Chuck takes his 3-year-old child to a nursery school that
provides lunch and educational activities as a part of its
preschool childcare service. The lunch and educational activities
are incident to the childcare, and their cost cannot be separated
from the cost of care. Chuck can count the total cost when he
figures the credit.
Judy placed her 10-year-old child in a boarding school so she
can work full time. Only the part of the boarding school expense
that is for the care of the child is a work-related expense. Judy
can count that part of the expense in figuring her credit if it can
be separated from the cost of education. She cannot count any
part of the amount paid for her child's education.

Care Outside of Home
Count the cost of care provided outside the home if the care is for a dependent
under age 13 or any other qualifying person who regularly spends at least 8 hours
each day in the home.
Dependent care center. Count care provided outside the home by a dependent
care center only if the center complies with all state and local regulations that
apply to these centers.
A dependent care center is a place that provides care for more than six persons
(other than persons who live there) and receives a fee, payment, or grant for
providing services for any of those persons, even if the center is not run for profit.
Camp. The cost of sending a child to an overnight camp is not considered a workrelated expense.
NOTE: The cost of sending a child to a day camp may be a work-related expense,
even if the camp specializes in a particular activity, such as computers or soccer.

Other Care Related Expenses
Transportation. If a care provider takes a qualifying person to or from a place
where care is provided, that transportation is for the care of the qualifying person.
This includes transportation by bus, subway, taxi, or private car.
However, transportation not provided by a care provider is not for the care of a
qualifying person. If the taxpayer pays the transportation cost for the care
provider to come to their home, that expense is not for care of a qualifying
person.
Fees and deposits. Fees paid to an agency to get the services of a care provider,
deposits paid to an agency or pre-school, application fees, and other indirect
expenses are work-related expenses if the taxpayer has to pay them to get care,
even though they are not directly for care. However, a forfeited deposit is not for
the care of a qualifying person if care is not provided.

Example
Donna paid a fee to an agency to get the services
of the nanny who cares for her 2-year-old
daughter while she worked. The fee Donna paid
is a work-related expense.
Tony placed a deposit with a pre-school to
reserve a place for his 4-year-old daughter. Tony
later sent his child to a different pre-school and
forfeited the deposit. The forfeited deposit is not
for care and so is not a work-related expense.

Household Services
Expenses paid for household services meet the work-related
expense test if they are at least partly for the well-being and
protection of a qualifying person.
Household services are ordinary and usual services done in and
around the home that are necessary to run a home. They include
the services of a housekeeper, maid, or cook. However, they do
not include the services of a chauffeur, bartender, or gardener.
See Household Services in Publication 503 for more information.
Taxes paid on wages. The taxes paid on wages for qualifying
child and dependent care services are work-related expenses.







Payments to Relatives or Dependents
Count work-related payments made to relatives who are not the
taxpayer's dependents, even if they live in the taxpayer's home.
However, do not count any amounts paid to:
Page 25 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Work-Related Expense Test
A dependent for whom the taxpayer (or spouse if filing jointly) can claim
an exemption,
The taxpayer's child who was under age 19 at the end of the year, even
if he or she is not the taxpayer's dependent,
A person who was the taxpayer's spouse any time during the year, or
The parent of the taxpayer's qualifying person if that qualifying person is
the taxpayer's child and under age 13.

Joint Return Test
Generally, married couples must file a joint return to take the credit. However, if the taxpayer
is legally separated or living apart from their spouse, they might be able to file a separate
return and still take the credit.
Legally separated. A taxpayer is not considered married if legally separated from their spouse
under a decree of divorce or separate maintenance. The taxpayer may be eligible to take the
credit on their return using Head of Household filing status.
Married and living apart. A taxpayer is not considered married and is eligible to take the credit
if all the following apply:








DOMAIN 3 Study Guide - F. Credits Based on Children
Joint Return Test
Page 26 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17
A return is filed separate from the spouse.
The taxpayer's home is the home of a qualifying person for more than half the year.
More than half the cost of keeping up the home for the year is paid by the taxpayer.
The spouse does not live in the home of the taxpayer for the last 6 months of the year.

Costs of Keeping Up a Home
The costs of keeping up a home normally include
property taxes, mortgage interest, rent, utility
charges, home repairs, insurance on the home,
and food eaten at home.
The costs of keeping up a home do not include
payments for clothing, education, medical
treatment, vacations, life insurance,
transportation, or mortgage principal. Also do
not include the purchase, permanent
improvement, or replacement of property.

Death of Spouse
If the taxpayer's spouse died during the year and
the taxpayer does not remarry before the end of
the year, generally a joint return must be filed to
take the credit.
If the taxpayer remarries before the end of the
year, the credit can be claimed on the deceased
spouse's return

Provider Identification Test
Identify all persons or organizations that provide care for the child or dependent. Use Form
2441, Part I to show the information.
To identify the care provider, give the provider's:






Page 29 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Joint Return Test
Name,
Address, and
Taxpayer identification number.
If the care provider is an individual, the taxpayer identification number is his or her social
security number or individual taxpayer identification number. If the care provider is an
organization, then it is the employer identification number (EIN).
It is not necessary to show the taxpayer identification number if the care provider is a taxexempt organization (such as a church or school). In this case, enter "Tax-Exempt" in the
space where the tax form calls for the number.

Missing Provider Identification
If the taxpayer cannot provide all of the information or if the information is
incorrect, use due diligence (discussed later) in trying to furnish the necessary
information.
Use Form W-10 to request the required information from the care provider. If
Form W-10 is not used, get the information from one of the other sources listed in
the instructions for Form W-10 including:






Page 30 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Joint Return Test
A copy of the provider's social security card,
A copy of the provider's completed Form W-4 if he or she is the taxpayer's
household employee,
A copy of the statement furnished by the taxpayer's employer if the provider is the
employer's dependent care plan, or
A letter or invoice from the provider if it shows the information.

Due Diligence
If the care provider information given is incorrect or
incomplete, the credit may not be allowed. However,
if it is shown that due diligence was used in trying to
supply the information the credit can still be claimed.
To show due diligence, obtain and keep the
provider's completed Form W-10 or one of the other
sources of information listed earlier. Care providers
can be penalized if they do not provide this
information to taxpayers or if they provide incorrect
information

Provider Refusal
If the provider refuses to give their identifying information,
report whatever information the taxpayer has (such as the
name and address) on the form used to claim the credit.
Enter "See Attached Statement" in the columns calling for
the information that is absent. Then attach a statement
explaining that the information was requested from the
care provider, but the provider did not provide the
information. Be sure to write the taxpayer's name and
social security number on this statement. The statement
will show due diligence in trying to furnish the necessary
information.

Figuring the Credit
The credit is a percentage of work-related expenses. Expenses are subject to the earned
income limit and the dollar limit. The percentage is based on adjusted gross income.
To figure the credit for 2011 work-related expenses, count only those paid by December 31,
2011.
Expenses prepaid in an earlier year. If services are paid for before they are provided, count the
prepaid expenses only in the year the care is received. Claim the expenses for the later year as
if they were actually paid in that later year.
Expenses not paid until the following year. Do not count 2010 expenses that were paid in
2011 as work-related expenses for 2011. The taxpayer may be able to claim an additional
credit for them on their 2011 return, but this must be figured separately. See Payments for
previous year's expenses under Amount of Credit in Publication 503.
NOTE: If the taxpayer had expenses in 2011 that were not paid until 2012, do not count them
when figuring the 2011 credit. These expenses may be eligible for an additional credit for the
taxpayer's 2012 return.

Expenses Reimbursed
If a state social services agency pays the
taxpayer a nontaxable amount to reimburse
for some of the child and dependent care
expenses paid, do not count the expenses
that are reimbursed as work-related
expenses.

Medical Expenses
Some expenses for the care of qualifying persons who are not able to
care for themselves may qualify as work-related expenses and also as
medical expenses. The taxpayer can use them either way, but do not use
the same expenses to claim both a credit and a medical expense
deduction.
If the taxpayer uses these expenses to figure the credit and they are
more than the earned income limit or the dollar limit, add the excess to
medical expenses. However, if using total expenses to figure the medical
expense deduction, do not use any part of them to figure the credit.
NOTE: Amounts excluded from the taxpayer's income under an
employer's dependent care benefits plan cannot be used to claim a
medical expense deduction.

Dependent Care Benefits
If the taxpayer received dependent care benefits, the dollar limit for purposes of the credit may
be reduced.
Dependent care benefits include:






Page 36 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Joint Return Test
Amounts an employer paid directly to either the taxpayer or the care provider for the care of
the taxpayer's qualifying person while the taxpayer is at work,
The fair market value of care in a daycare facility provided or sponsored by the employer, and
Pre-tax contributions the taxpayer made under a dependent care flexible spending
arrangement.
The taxpayer's salary may have been reduced to pay for these benefits. If benefits are received
as an employee, they should be shown in box 10 of Form W-2. Benefits received as a partner
should be shown in box 13 of Schedule K-1 (Form 1065) with code O. Enter the amount of
these benefits on Form 2441, Part III, line 12.

Exclusion or Deduction
If the employer provides dependent care benefits under a
qualified plan, the taxpayer may be able to exclude these
benefits from income. To claim the exclusion, complete Part III of
Form 2441.
If dependent care benefits are excluded from income, the
amount of the excluded benefits:





Page 37 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Joint Return Test
Is not included in work-related expenses, and
Reduces the dollar limit, discussed later.
NOTE: Form 1040EZ cannot be used if the exclusion is claimed.

Self-Employed Dependent Care Benefits
If the taxpayer is self-employed and receives benefits from a qualified dependent
care benefit plan, they are treated as both employer and employee. Therefore, the
taxpayer would not get an exclusion from wages.
Instead, the taxpayer would get a deduction on Form 1040, Schedule C, line 14;
Schedule E, line 19 or 28; or Schedule F, line 15. To claim the deduction, use Form
2441. The amount that can be excluded or deducted is limited to the smallest of:







Page 38 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Joint Return Test
The total amount of dependent care benefits received during the year,
The total amount of qualified expenses incurred during the year,
The taxpayer's earned income,
The spouse's earned income, or
$5,000 ($2,500 if married filing separately).

Statement for Employee
The employer must provide a Form W-2 (or
similar statement) showing in box 10 the
total amount of dependent care benefits
provided to the taxpayer during the year
under a qualified plan. The employer will also
include any dependent care benefits over
$5,000 in wages shown on Form W-2 in box
10.






Earned Income Limit
The amount of work-related expenses used to figure the
credit cannot be more than:
Page 40 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Joint Return
Test
The taxpayer's earned income for the year if single at the
end of the year, or
The smaller of the taxpayer's or spouse's earned income
for the year if married at the end of the year.
NOTE: For purposes of item two above, use the spouse's
earned income for the entire year, even if married for only
part of the year.

Spouse Circumstances
Separated spouse. If legally separated or married and living apart
from their spouse, the taxpayer is not considered married for
purposes of the earned income limit. Use only the taxpayer's
income in figuring the earned income limit.
Surviving spouse. If the taxpayer's spouse died during the year
and they file a joint return as a surviving spouse, they may, but
are not required to, take into account the earned income of the
spouse who died during the year.
Community property laws. Disregard community property laws
when figuring earned income for this credi






Student-Spouse or Spouse not able to Care for Self
A spouse who is either a full-time student or not able to care for himself or
herself is treated as having earned income. His or her earned income for each
month is considered to be at least $250 if there is one qualifying person in the
home, or at least $500 if there are two or more.
Page 42 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Joint Return Test
Spouse works. If the spouse works during a month, use the higher of $250 (or
$500) or his or her actual earned income for that month.
Spouse qualifies for part of month. If the spouse is a full-time student or not able
to care for himself or herself for only part of a month, the full $250 (or $500) still
applies for that month.
Both spouses qualify. If, in the same month, both the taxpayer and spouse are
either full-time students or not able to care for themselves, only one spouse can
be considered to have this earned income of $250 (or $500) for that month.

Dollar Limit
There is a dollar limit on the amount of work-related expenses that can
be used to figure the credit. The dollar limit is a yearly limit. The
amount of the dollar limit remains the same no matter how long, during
the year, the taxpayer has a qualifying person in their household.
Use the $3,000 limit if work-related expenses were paid for the care of
one qualifying person at any time during the year.
Use $6,000 if work-related expenses were paid for the care of more
than one qualifying person at any time during the year.
NOTE: If work-related expenses were paid for the care of two or more
qualifying persons, the $6,000 limit does not need to be divided equally
among them

Reduced Dollar Limit
If dependent care benefits were received that
were excluded or deducted from income,
subtract that amount from the dollar limit
that applies to the taxpayer. The reduced
dollar limit is figured on Form 2441, Part III.

Amount of Credit
To determine the amount of the credit, multiply
work-related expenses (after applying the earned
income and dollar limits) by a percentage. This
percentage depends on the taxpayer's adjusted
gross income shown on Form 1040, line 38, or
Form 1040A, line 22. The following table shows
the percentage to use based on adjusted gross
income.

How to Claim the Credit
To claim the credit, file Form 1040 or Form 1040A. The credit
cannot be claimed on Form 1040EZ.
Form 1040 or 1040A. Complete Form 2441 and attach it to Form
1040 or 1040A. Enter the credit on Form 1040, line 48, or Form
1040A, line 29.
Limit on credit. The amount of credit that can be claimed is
generally limited to the amount of tax. For more information, see
the Instructions for Form 2441.
NOTE: This credit is not refundable - the taxpayer cannot get a
refund for any part of the credit that is more than this limit.

Example
The following example provided by the IRS in
Pub. 17 shows how to figure the credit for
child and dependent care expenses for two
children when employer-provided dependent
care benefits are involved.

Employment Taxes for Household Employers
If someone is paid to come to the taxpayer's home and care for the taxpayer's
dependent or spouse, then the taxpayer may be a household employer. If a
household employer, an employer identification number (EIN) is needed and
employment taxes may have to be paid.
If the individuals who work in the taxpayer's home are self-employed, the
taxpayer is not liable for any of the taxes discussed in this section. Self-employed
persons who are in business for themselves are not household employees. Usually,
a taxpayer is not a household employer if the person who cares for their
dependent or spouse does so at his or her home or place of business.
If a placement agency is used that exercises control over what work is done and
how it will be done by a babysitter or companion who works in the taxpayer's
home, the worker is not the taxpayer's employee. This control could include
providing rules of conduct and appearance and requiring regular reports. In this
case, the taxpayer does not have to pay employment taxes.







Taxes for Household Employees
If the taxpayer has a household employee, they may be subject to:
Page 49 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Household Employees
Social security and Medicare taxes,
Federal unemployment tax, and
Federal income tax withholding.
Social security and Medicare taxes are generally withheld from the employee's pay
and matched by the employer. Federal unemployment (FUTA) tax is paid by the
employer only and provides for payments of unemployment compensation to
workers who have lost their jobs. Federal income tax is withheld from the
employee's total pay if the employee asks the employer to do so and the employer
agrees.
NOTE: The taxpayer may also have to pay state unemployment tax. A list of state
employment tax agencies, including addresses and phone numbers, is in
Publication 926.

Child Tax Credit
The child tax credit is a credit that may reduce tax by as
much as $1,000 for each qualifying child. The additional
child tax credit is a credit the taxpayer may be able to take
if unable to claim the full amount of the child tax credit.
Credits, such as the child tax credit or the credit for child
and dependent care expenses, are used to reduce tax. If
the tax on Form 1040, line 46, or Form 1040A, line 28, is
zero, do not figure the child tax credit because there is no
tax to reduce. However, the taxpayer may qualify for the
additional child tax credit on line 65 (Form 1040) or line
39 (Form 1040A).











Qualifying Child
A qualifying child for purposes of the child tax credit is a child who:
Page 51 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Child Tax Credit
Is the taxpayer's son, daughter, stepchild, foster child, brother, sister,
stepbrother, stepsister, or a descendant of any of them (for example, grandchild,
niece, or nephew),
Was under age 17 at the end of 2011,
Did not provide over half of his or her own support for 2011,
Lived with the taxpayer for more than half of 2011,
Is claimed as a dependent on the taxpayer's return,
Does not file a joint return for the year (or files it only as a claim for refund), and
Was a U.S. citizen, a U.S. national, or a resident of the United States
For each qualifying child, check the box on Form 1040 or Form 1040A, line 6c,
column (4)

Example
Tammy's son turned 17 on December 1,
2011. He is a citizen of the United States and
Tammy claimed him as a dependent on her
return. He is not a qualifying child for the
child tax credit because he was not under age
17 at the end of 2011.

Qualifying Child Circumstances
Adopted child. An adopted child is always treated as the taxpayers own
child. An adopted child includes a child lawfully placed with the taxpayer
for legal adoption. If the taxpayer is a U.S. citizen or U.S. national and
the adopted child lived with them all year as a member of the household
in 2011, that child meets condition (7) to be a qualifying child for the
child tax credit.
Exceptions to time lived with the taxpayer. A child is considered to have
lived with the taxpayer for all of 2011 if the child was born or died in
2011 and the taxpayer's home was this child's home for the entire time
he or she was alive. Temporary absences by the taxpayer or the child for
special circumstances, such as for school, vacation, business, medical
care, military service, or detention in a juvenile facility, count as time the
child lived with the taxpayer





Child Tax Credit Amount
The maximum amount that can be claimed for the credit is $1,000 for
each qualifying child. Certain limits on the credit apply. Reduce the child
tax credit if either of the following applies:
Page 54 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Child Tax Credit
The amount on line 46, Form 1040, or line 28, Form 1040A, is less than
the credit. If this amount is zero, do not take this credit because there is
no tax to reduce.
Modified adjusted gross income (AGI) is above the amount shown below
for the taxpayer's filing status:
◦ Married filing jointly - $110,000.
◦ Single, head of household, or qualifying widow(er) - $75,000.
◦ Married filing separately - $55,000.








Modified AGI
For purposes of the child tax credit, modified AGI is AGI plus the following
amounts that may apply to the taxpayer:
Page 55 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Child Tax Credit
Any amount excluded from income because of the exclusion of income from
Puerto Rico. On the dotted line next to Form 1040, line 38, enter the amount
excluded and identify it as "EPRI." Also attach a copy of any Form(s) 499R-2/ W2PR to the return.
Any amount on line 45 or line 50 of Form 2555, Foreign Earned Income.
Any amount on line 18 of Form 2555-EZ, Foreign Earned Income Exclusion.
Any amount on line 15 of Form 4563, Exclusion of Income for Bona Fide Residents
of American Samoa.
If the taxpayer does not have any of the above, then modified AGI is the same as
AGI.
NOTE: AGI is the amount on Form 1040, line 38, or Form 1040A, line 22.

Claiming the Credit
To claim the child tax credit, file Form 1040 or Form 1040A. The
child tax credit cannot be claimed on Form 1040EZ. Provide the
name and identification number (usually a social security
number) on the tax return for each qualifying child.
If filing Form 1040, answer the questions in the form
instructions for line 51, Form 1040, to find out which child tax
credit worksheet to use to figure the credit.
If the answer is "Yes" to question 1 or 2 in the Form 1040
instructions, complete the child tax credit worksheet in
Publication 972. Otherwise, use the Child Tax Credit Worksheet
in the Form 1040 or Form 1040A instructions.

Additional Child Tax Credit
This credit is for certain individuals who get less than the full amount of
the child tax credit. The additional child tax credit may give a refund
even if the taxpayer does not owe any tax.
To claim the additional child tax credit, follow the steps below.





Page 57 of 64
MENU PREVIOUS NEXT 1040 1040 Inst Pub17 Child Tax Credit
Make sure to figure the amount, if any, of child tax credit.
If the answer was "Yes" on line 9 or line 10 of the Child Tax Credit
Worksheet in the Form 1040 or Form 1040A instructions, or line 13 of
the Child Tax Credit Worksheet in Publication 972, use Form 8812 to see
if the additional child tax credit can be taken.
If there is an additional child tax credit on line 13 of Form 8812, carry it
to Form 1040, line 65, or Form 1040A, line 39.