Scenario #2
SCENARIO #2
TAX LAW TOPICS COVERED
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5.
Filing Status – Head of Household
Income: W-2, 1099-INT, 1099 MISC, and Unemployment Income
Exemptions: Dependency
Adjustment: Student Loan Interest
Credits- Refundable and nonrefundable
EITC, CTC, CDCC, Education Credit AOTC
6. Determining Itemization: Charitable Donations & Medical Expenses
7. Affordable Care Act
8. Form 8888- Split refund 50% in Savings & 50% in Checking
OBJECTIVES
Students will be able to:
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Identify the taxpayer’s filing status (HOH)
Determine dependency exemption: qualifying child and qualifying relative
Input income from a W-2, 1099-MISC, 1099-G and 1099-INT
Enter Student Loan Interest Adjustment from 1098-E
Input Post-Secondary Student Tuition Payments: 1098-T
Determine if a taxpayer is eligible for EITC, CTC, AOTC and CDCC
Explain the difference between standard v. itemized deductions
Learn how to do a split refund using the Form 8888
Determine applicable healthcare exemptions
Finish a basic tax return
MATERIALS
Online
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Savings training videos, volunteer cheat sheet, and savings integration manual – can be found on the
training page on the EKS website: www.earnitkeepitsaveit.org/coordinators/savings/
Print
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Volunteer packet for Scenario 2
1040 Formula Worksheet
Tax Forms
1. 13614-C Intake and Interview sheet for Cheryl Webster
2. Tax forms:
 W-2, Wage and Tax Statement
 1098-E, Student Loan Interest
 1099-MISC, Miscellaneous Income
 1099-G, Unemployment Income
 1099-INT, Interest Income
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1098-T, Tuition Statement
1098-E, Student Loan Interest
Statement
Form 1095-C for Health Insurance
Coverage
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SCENARIO OVERVIEW FOR INSTRUCTOR
Cheryl is married but has not lived with her husband since 2009. She has two children, Jeremy and Joshua, who
lived with her the entire year. She paid all household expenses and provided support to both of her children.
Jeremy is a college student and paid tuition. Cheryl also paid for a summer program for her son Joshua. Cheryl
worked for most of the year, but she lost her job in October and collected unemployment for 2 months. She also
received a 1099-MISC. for babysitting she provided. For this scenario, the volunteers will have to know about
exemption for gap in health coverage for the year. If due a refund, Cheryl will elect to split her refund 50/50
between her checking and savings accounts.
OPENING THE LESSON
Handout Scenario 2 Packet to volunteers
Review the objectives of the scenario with the volunteers and tell them what exactly they
will be learning. Go over the documents included
1. 13614-C Intake and interview form
2. Supporting documents
3. Scenario Interview Notes
Intake & Interview
BUILDING ON WHAT YOU’VE ALREADY LEARNED:
1. Review intake form; did Cheryl answer all of the questions correctly? As a
volunteer you must review form and verify if their answers correspond
with documents presented
2. Verify if form is filled out correctly and corrections are made when
clarifying questions are asked
3. Determine if the client is eligible for VITA services- see Scope of Service
chart in Publication 4012, Pages 8-10
Ask volunteers: Did Cheryl complete the following?
Met the program requirements (household income, photo identification,
and social security cards)? YES
2. Completed the intake and interview sheet and has supporting
documentation? YES
3. Have a filing requirement? YES
1.
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CONDUCTING THE LESSON
Starting tax return - Publication 4012, Tab N
Now that volunteers have determined that Cheryl is eligible for VITA, it’s time to create a
new return.
Have all students refer to instructions covered in lesson 1. Remind volunteers that their
TaxWise screen should be green during training.
TAXWISE 1. Create a new return and locate the forms tree on the left side of the screen
2. Input information from Part I of Intake Sheet into Main Information sheet. Refer
to Pub. 4012, Tab K 6-11
3. Taxpayers must choose a five digit PIN number (recommend using zip code) and
today’s date-. This is the client’s e-file approval signature.
Dependency Exemptions - Publication 4012, Tab
C
THREE THINGS YOU NEED TO KNOW ABOUT DEPENDENCY EXEMPTIONS:
1. You are allowed one exemption for each person you can claim as a dependent.
You can claim an exemption for a dependent even if your dependent files his/her
own return to receive their refund from income tax withheld from their pay.
2. A “dependent” is defined by a qualifying child or qualifying relative and meet the
dependency tests. See Pub 4012 Tab C-3
3. You cannot claim a person as a dependent unless that person is a U.S. citizen, U.S.
resident alien, U.S. national, or a resident of Canada or Mexico
WITH CLASS –
1. Review Part II, number 2 of Intake and Interview Sheet
2. Determine the number and type of dependency exemptions Cheryl can claim.
Instruct volunteers to use chart in Pub 4012, Tab C-3. 2 – Joshua and Jeremy are
qualifying children.
3. Remind volunteers that exemptions reduce the income that is subject to tax and
that an exemption for a particular person cannot be claimed on more than one tax
return.
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TAXWISE –
1. Back to Main Info on TaxWise – Pub 4012, Tab K-6
2. Input dependent information into Main Info sheet
3. Ensure that the EIC box is checked for each dependent
Filing Status - Publication 4012, Tab B
THREE THINGS YOU NEED TO KNOW ABOUT DETERMINING CHERYL’S FILING STATUS:
1. Does Cheryl have dependents? Yes, See Pub 4012, Tab C-3
2. Did Cheryl provide more than half the cost of keeping up her home for the entire
year? YES
3. If the client has more than one filing status that can apply to them, choose the
one that is most beneficial. Head of Household
WITH CLASS –
Determine Cheryl’s Filing Status. Review all 5 filings statuses and explanations for
each. Use Decision Tree in Publication 4012, B-1 to identify her filing status.
2. Ask volunteers, what is the filing status and what makes her eligible for this filing
status? Head of Household; she is considered unmarried, she has two qualifying
dependents and paid more than half the cost of keeping up the home for the
entire year.
1.
TAXWISE –
1. Back to Main Info on Taxwise
2. Input Cheryl’s filing status as Head of Household
Income - Publication 4012, Tab D
WITH CLASS –
1. Cheryl has a 1099 Misc. Teach business income and how it is reported: cash income and 1099 Misc.
2. Review Schedule C-EZ and C, Publication 4012, Tab D 13-14
3. Refer to Lesson 1 for details on how to input income documents, refer to Tab D-3 for TaxWise entry
information
TAXWISE –
1. Have volunteers enter all income documents for Cheryl:
 W-2
 1099-MISC
 1099-INT
 1099-G
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Adjustments to Income - Publication 4012, Tab E4
THREE THINGS YOU NEED TO KNOW ABOUT STUDENT LOAN INTEREST:
1. Can reduce the amount of your income subject to tax up to $2,500 in 2015
2. Taxpayer must be legally liable for the loan
3. Expenses were made to pay for education expenses like tuition and books.
TAXWISE –
1. Input student loan interest reported on Form 1098-E. Pub 4012 Tab E-5.
2. Link to 1040 worksheet 2 from line 33.
Deductions - Publication 4012, Tab F
THREE THINGS YOU NEED TO KNOW ABOUT DEDUCTIONS:
1. Taxpayers can take either the Itemized or Standard Deduction, whichever is
greater.
a. Standard Deduction is a fixed dollar amount that reduces the income
you’re taxed on. Your standard deduction varies according to your filing
status. Your standard deduction increases if you're blind or age 65 or
older.
b. Itemized deductions also reduce your taxable income, but are typically
used when you have qualifying expenses (like mortgage interest or large
unreimbursed medical/dental expenses) that add up to more than the
standard deduction.
2. Schedule A must be prepared if the client is itemizing their deductions.
3. Clients must have a written record of these expenses in case they get audited.
Medical Expenses –
(Refer to Publication 17 for full list of eligible medical/dental expenses you can use to itemize)
THINGS YOU NEED TO KNOW ABOUT MEDICAL EXPENSES:
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In order to claim these medical expenses there are some things you need to note:
1. Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or
prevention of disease, and the costs for treatments affecting any part or function
of the body. These expenses include payments for legal medical services rendered
by physicians, surgeons, dentists, and other medical practitioners.
2. Medical and dental expenses were paid this year (2015), regardless of when the
services were provided
3. Medical and dental expenses were more than 10% of the taxpayer’s AGI (7.5% if
65 or older)
4. Medical and dental bills paid for by the taxpayer or spouse for: dependents,
spouse and taxpayer.
WITH CLASS –
Example: You are unmarried and under age 65 and your AGI is $40,000, 10% of which is
$4,000. You paid medical expenses of $2,500. You cannot deduct any of your medical
expenses because they are not more than 10% of your AGI.
TAXWISE –
1. Input Cheryl’s medical expenses. Pub 4012 Tab F-5.
2. Link to Schedule A, from 1040 line 40, then link to itemized detail sheet from
Schedule A, Line 1 for breakout of medical expenses.
3. Enter information on the worksheet Pub 4012 F-7.
Charitable Contributions
(Publication 17 for full list of eligible charitable contributions you can use to itemize. )
THREE THINGS YOU NEED TO KNOW ABOUT CHARITABLE DONATIONS:
1. A charitable contribution is a donation or gift to, or for the use of, a qualified
organization. It is voluntary and is made without getting, or expecting to get,
anything of equal value.
2. To deduct a charitable contribution, you must file Form 1040 and itemize
deductions on Schedule A.
3. Generally, you can deduct contributions of money or property you make to, or for
the use of, a qualified organization. A contribution is “for the use of” a qualified
organization when it is held in a legally enforceable trust for the qualified
organization or in a similar legal arrangement. The contributions must be made
to a qualified organization and not set aside for use by a specific person.
WITH CLASS –
1. Have volunteers review Cheryl’s notes and determine whether she will take the
Standard Deduction or Itemize.
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2. Cheryl will be using the standard deduction in this scenario because her medical
expenses and charity contributions did not equal more than her standard
deduction.
TAXWISE1. Refer to Pub 4012 F-4 Step 12 in chart.
2. Go to Itemized Deductions Detailed Worksheet, enter amount given by cash or
check under “Cash Contributions” Pub 4012 F-8
3. Review amount on Schedule A, line 29, and compare amount to the standard
deduction on 1040 line 40. Does the client qualify to itemize?
Tax Credits - Publication 4012, Tab G
THINGS YOU NEED TO KNOW ABOUT TAX CREDITS
1. There are two types of credits: refundable and nonrefundable
2. Nonrefundable Tax Credit: allows taxpayers to lower their tax liability to zero, but
not below zero. The child tax credit is a nonrefundable tax credit.
3. Refundable Tax Credit: allows taxpayers to lower their tax liability to below zero.
When this occurs, the government owes the taxpayer a refund. The additional
child tax credit is a refundable tax credit.
Child & Dependent Care Credit- Publication 4012,
Tab G 3-5
THREE THINGS YOU NEED TO KNOW ABOUT THE CHILD AND DEPENDENT CARE CREDIT
1. The tax credit for child and dependent care expenses allows taxpayers to claim a
credit for expenses paid for the care of a child under the age of 13 and/or a
disabled spouse or dependent.
2. To claim the credit, there are requirements for the taxpayer, the child/dependent
and the type of expense. Pub 4012, G-4
3. There is a limit to the amount of qualifying expenses. The credit is a percentage of
the qualifying expenses.
WITH CLASS –
1. Have volunteers determine if Cheryl can claim the child and dependent care
credit. Review documents and have volunteers review chart found on Pub.
4012, Tab G-3.
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TAXWISE1. Go to 1040, Line 49 and link to Form 2441.
2. Fill out form, see Pub 4012, Tab G-5 for instructions
Education Credits - Publication 4012, Tab J
THINGS YOU NEED TO KNOW ABOUT EDUCATION CREDITS:
1. There are two education tax credits taxpayers may claim for themselves or their
dependents, for higher education. There are differences in the credits and they
have different eligibility requirements. Refer to Pub. 4012, Tab J for guidelines.
a. American Opportunity Credit
b. Lifetime Learning Credit
2. Taxpayers who are eligible to claim the American Opportunity Credit and the
Lifetime Learning Credit for the same student in the same year, can choose to
claim either credit, but not both. Taxpayers can choose the credit that will give
them the lower tax.
3. Form 8863, Education Credits, is used to determine eligibility and figure each
credit.
4. Students receive Form 1098-T, Tuition Statement, from eligible educational
institutions, which identify tuition and any related expenses paid to the
educational institution, and/or reimbursements or refunds.
WITH CLASS –
1. Determine which credit Cheryl will claim. Refer to Interview Notes for further
information. Use chart on Pub 4012, J-4. American Opportunity Credit
TAXWISE1. Go to 1040 Line 50, and link to the American Opportunity Credit Form 8863 and
fill out form. Pub 4012 J-7
Child Tax Credit- Publication 4012, Tab G-8 & 9
THINGS YOU NEED TO KNOW ABOUT THE CHILD TAX CREDIT:
1. The child tax credit allows taxpayers to claim a tax credit of up to $1,000 per
qualifying child.
2. In order to claim the child tax credit, the taxpayer must have at least one eligible
child. Don't confuse this credit with the child and dependent care tax credit!
3. Taxpayers who are not able to take the full amount of the child tax credit may be
able to take the additional child tax credit.
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4. To claim the child tax credit, there are requirements for both the qualifying child
and taxpayer; in addition there are limits on the amount the credit. The amount
of a taxpayer's child tax credit depends on the taxpayer's:
a. Tax liability
b. Modified adjusted gross income and filing status
c. A taxpayer's child tax credit can only be as much as their tax liability.
Once the tax liability is zero, the credit is zero because there is no tax
liability to reduce.
WITH CLASS –
1. Determine if Cheryl qualifies to receive the Child Tax Credit and identify which
dependent makes her eligible to claim the credit. Yes
2. Explain to students that this credit is non-refundable, meaning it reduces their tax
liability to zero. If their tax liability was less than $1,000 the taxpayer may be
eligible for the difference as the Additional Child Tax Credit.
TAXWISE1. Information should automatically populate if qualifying dependent information
was entered on the Main Information Sheet.
2. Review the return to see if the information populated. Line 51 on 1040
Additional Child Tax Credit- Publication 4021,
Tab G-8
THREE THINGS YOU NEED TO KNOW ABOUT THE ADDITIONAL CHILD TAX CREDIT
1. When a taxpayer's child tax credit is more than their tax liability, they may be
eligible to claim an additional child tax credit as well as the child tax credit.
2. The additional child credit is also a tax credit of up to $1,000 per qualifying child.
To claim the additional child tax credit, there are:
the same requirements for the qualifying child as for the child tax credit
additional requirements for the taxpayer
different limits on the amount of credit
3. The credit is whichever is lower:
a. 15% of the taxpayer's taxable earned income that is over $3,000, or
a.
b.
c.
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b. The amount of unused child tax credit (caused when tax liability is less
than allowed credit)
TAXWISE1. Information should automatically populate if qualifying dependent information
was entered on the Main Information Sheet.
2. Review the return to see if the information populated – 1040 Pg. 2, Line 67
Affordable Care Act, Publication 4012,
Tab D
Refer to Lesson 1 on how to interview for ACA procedures
WITH CLASS –
1. Review taxpayer answers on Part VI on 13614-C using the Job-Aid in Pub 4012 K
3-4
2. Identify applicable flowchart in ACA tab. Ask students which one they would use
for Cheryl? (Determining ACA- Next Steps Insurance all year. ACA-1)
3. Go through flowchart (ACA-1) with students
4. Review Minimum Essential Coverage on ACA-4 (she qualifies)
5. Finish reviewing flowchart (ACA-1) with students
6. Have students complete 13614-C gray box in part VI
TAXWISE –
1. Indicate on the tax return that taxpayer had insurance all year (Form 1040, line
61) by checking the box.
2. Link to the ACA worksheet and mark the appropriate coverage explanation. In
this case, it is the first bullet: “Had minimum essential coverage and / or is
applying for or was granted an exemption for the entire year”
3. Now look for Form 8965 and fill in exemption code determined by the gap in
coverage. Exemption code B.
CA State Return
THINGS YOU NEED TO KNOW ABOUT THE CA STATE RETURN:
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Scenario #2
1. Get the red out! Most information will automatically populate from the federal
return
2. If you have entered more than one W-2 on the 1040, you will have to manually
add the additional W-2s. The first W-2 will carry over, but the rest won’t.
3. Make sure to complete the direct deposit or balance due portion of the return
4. Complete the CA Renters Credit Worksheet when applicable. See below for
eligibility requirements:
a. Taxpayer was a California resident for the entire year.
b. Their California adjusted gross income (AGI) is:
 $38,259 or less if your filing status is single or married/RDP filing
separately.
 $76,518 or less if you are married/RDP filing jointly, head of
household, or qualified widow(er).
c. Taxpayer paid rent for at least half the year for property in California that
was your principal residence.
d. The property that was rented was not exempt from California property
tax.
e. Taxpayer did not live with another person for more than half the year
(such as a parent) who claimed them as a dependent.
TAXWISE (CA RETURN) –
1. Scroll down forms tree and locate 540 forms highlighted red
2. Go to CA 540 Pg. 5 and answer question #115 – Direct Deposit of Refund or Electronic Funds Withdrawal
of Balance Due. Since William has elected for Direct Deposit, choose the first option since he wants his
refund deposited into the same account.
3. Ensure all red fields on Form 3514, State EITC form, are filled out.
4. For CA 540 Page 1, below line 6, there is a question about the Renters Credit.
5. Check the “Yes” box, since William rents.
6. Note that the CA Rent Worksheet turns red in the forms tree.
7. Note questions 6 and 7 are red. Answer the questions. Examples of exempt properties are: HUD and
church property (section 8 property is NOT exempt). To claim the property tax exemption, you must own
property. In this scenario the answers are both “NO.”
8. Fill out information on 12 and 13
9. Shortcut: Go to CA 540 line 35. If the tax amount listed is “0” then there would be no benefit to the client
in claiming the non-refundable renter’s credit. You may answer “No” to renter’s credit question to avoid
inputting landlord information.
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Scenario #2
Splitting Refunds in TaxWise - Publication 4012,
Tab K-15
According to the Interview Notes and 13614-C, Cheryl elects to split her refund 50% in Savings and 50% in Checking
THREE THINGS YOU NEED TO KNOW ABOUT SPLITTING REFUNDS:
1. Always use 8888, Allocation of Refund Form. You can add this form to the forms
tree by clicking on the “add forms” icon.
2. Do not enter the bank account information on the Main Info Sheet, only enter
their info on the 8888 form.
3. See Publication 4012, Tab K-15 for how to input into TW
WITH CLASS –
1. Cheryl wants to split her refund and direct deposit. Tell volunteers to consult the
questions on Direct Deposit and Split Refund page on the Intake and Interview
sheet, bottom of Page 2 and notice that she provided bank account numbers.
The interview notes also state that she wants to save half of her refund.
1. Show Savings videos to class – links to video can be found on the EKS website:
www.earnitkeepitsaveit.org/coordinators/savings/
TAXWISE1. Use Pub. 4012, Tab K to assist volunteers in entering Cheryl’s bank account(s)
information onto form 8888.
Reviewing the Federal Tax Return
Review the 1040, line by line pointing out the different amounts and where they came
from. Tie it back to the documents and information input by the volunteers.
TAXWISE –
1. Review all lines of the 1040 that have amounts in them.
2. Bank account information needed for direct deposit- refer to Part VII of the Intake
Sheet and Interview Notes
3. Identity Protection PIN- if client checked the “yes” in box 12 of the Intake Sheet,
refer to Pub. 4012, Tab P-4
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Finishing the return- Publication 4012, Tab K
See scenario 1 on how to further complete the tax return then…
1. Ensure that all federal and state forms are green, then…
2. Click the Run Diagnostics button at the top of the page to check for mistakes or missing information.
Address any issues and click the button again until it is clear.
3. Click E-file button below the Diagnostics summary
FINISHING THE LESSON
After all volunteers have entered all documents into TaxWise for Scenario 2, ask them whether that
have any questions about the information that was taught. Review all topics that were covered and
be sure to use the questions in the PowerPoint to gauge student comprehension.
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