Advanced Tax Training
South Carolina
Agenda
Exemptions
Filing Status
Earned Income Credit
South Carolina Return
Alimony
State Tax Refund
Agenda
Business/Self-Employment Income
Retirement Income
Adjustments to Income
Itemized Deductions
Foreign Tax Credit
Residential Energy Tax Credit
Agenda
Education Credits
Affordable Care Act Tax Provisions
Capital Gain or Loss
Cancellation of Debt
Welcome!
Please sign-in and complete the paper work found
inside the folder with your name
There are a number of training materials inside the
folder for you to use throughout training. Please
bring these materials back to the B session
SaveFirst Advanced Training Overview
Advanced Tax Training (A & B Sessions)
IRS Advanced Certification
• Intake/Interview & Quality Review Exam (Refresher)
• Volunteer Standards of Conduct Exam (Refresher)
• 2015 IRS Advanced Certification Exam (after
Refresher session)
 Passing Score: 80% or better
 Must pass before serving at a tax site
The Impact You Will Have as a SaveFirst
Volunteer this Season
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Provide a quality reliable service and an
alternative to a costly, predatory industry for hardworking families
SaveFirst is launching in Spartanburg and building
on the incredible leadership of Wofford accounting
professor, Jenny Johnson
Exemptions
Personal Exemptions
Each personal exemption decreases the taxable
income
Taxpayers can claim exemptions for:
• Taxpayer UNLESS the taxpayer can be claimed as a
dependent by someone else.
• Spouse UNLESS the spouse can be claimed as a
dependent by someone else.
Personal Exemptions
Remember:
It’s not whether the taxpayer IS claimed as a
dependent, but whether the taxpayer CAN BE
claimed as a dependent that determines whether the
taxpayer can claim an exemption.
Dependency Exemptions
Each dependency exemption decreases taxable
income
A taxpayer can claim exemptions for:
• qualifying children
• qualifying relatives
These qualifying individuals usually live in the
taxpayer’s home and generally receive significant
support from the taxpayer
Determining Dependency Exemptions
Open the Publication 4012 to the Exemptions Tab to
Table 1: Dependency Exemption
ALWAYS BEGIN WITH THIS CHART TO
DETERMINE IF A PERSON QUALIFIES AS A
DEPENDENT
Qualifying Child or Qualifying Relative?
If no one else can claim the taxpayer or spouse as
a dependent, you need to determine if the other
people living in the house can be Qualifying
Children, and if not see if they can be Qualifying
Relatives
Remember: Each dependent decreases the taxable
income!
Determining Dependency Exemptions
Always begin with Table 1: Dependency Exemption to
determine if a person can be claimed as a dependent:
1.
2.
3.
4.
If answer is NO in Step 9, then the person is a Qualifying Child
If answer is YES in Step 9, use Qualifying Child of More Than One
Person Table
If answer is YES in Step 7 AND parents live apart, use Qualifying
Child of More Than One Person Table AND Table 3: Children of
Divorced or Separated Parents or Parents Who Live Apart
If answer is NO in Steps 5-7, then use Table 2: Dependency
Exemption for Qualifying Relative to see if person is a Qualifying
Relative
Qualifying Child:
The Taxpayer Eligibility Test
Step 1
If YES: Stop
Can you or your spouse (if filing
jointly) be claimed as a dependent on If NO: Go to
someone else’s tax return this year?
Step 2
Qualifying Child:
The Marital Status Test
Step 2
Was the person married as of
December 31st?
If YES:
Go to Step 3
If NO: Go to
Step 4
Qualifying Child:
The Joint Return Test
Is the person filing a joint return
If YES:
for this tax year?
Stop
(Answer
“NO”
if
the
person
is
filing
Step 3
a joint return only to claim a refund If NO: Go
of income tax withheld or estimated to Step 4
tax paid)
Qualifying Child:
The Citizenship Test
Step 4
Was the person a U.S. citizen, U.S.
resident alien, U.S. national, or a
resident of Canada, or Mexico?
If YES:
go to
Step 5
If NO:
Stop
Note: Taxpayers with ITIN Cards
Remember: Taxpayers receive ITIN numbers if they
are nonresidents but need to file a tax return and
cannot obtain a SSN
If a taxpayer lived in the United States all year
and has an ITIN card, they will be considered a
resident alien for tax purposes
A “child” passes the citizenship test in this situation
Qualifying Child:
The Relationship Test
Was the person your son, daughter, If YES:
stepchild, eligible foster child, brother, go to
Step 6
sister, half brother, half sister,
Step 5
stepbrother, stepsister, or a
If No: Go
descendant of any of them (i.e. your to Table
grandchild, niece, or nephew)?
2
Qualifying Child:
The Age Test
Was the person:
 under age 19 at the end of the year and
If YES:
younger than you (or spouse if filing
joingly)? OR
Go to Step 7
Step 6  a full-time student, under age 24 at the
end of the year and younger than you If NO: go to
(or spouse, if filing jointly)? OR
Table 2
 permanently and totally disabled* at
any time during the year?
“Permanently and Totally Disabled”
A person is considered permanently and totally
disabled if he or she cannot engage in any
substantial gainful activity because of a physical or
mental condition, AND
A doctor determines the condition has lasted or can
be expected to last continuously for at least a year
or can lead to death
Qualifying Child:
The Residency Test
Step 7
Did the person live with you as
a member of your household,
except for temporary absences,*
for more than half the year?
(Answer “YES” if the child was
born or died during the year.)
If YES:
Go to Step 8
(Use Table 3
if parents
live apart)
If NO: go to
Table 2
“Temporary Absences”
A child is considered to have lived with you during
periods of time when one of you, or both are
temporarily absent due to illness, education,
business, vacation or military service
Qualifying Child:
The Support Test
Did the person provide more than If YES: Stop
Step 8 half of his or her own support*
If NO:
for the year?
go to Step 9
Qualifying Child:
The Other Adults Test
Is the person a If YES: Go to the chart: QC of
More Than One Person
qualifying child
Step 9
of any other If NO: You can claim this child
person?
as a dependent.
Exercise
TRUE or FALSE:
Every taxpayer can claim a personal exemption for
himself.
Exercise – Answer
FALSE
A taxpayer who can be claimed as a dependent by
someone else CANNOT claim an exemption for
him/herself.
Exercise
Rebecca is unmarried with one child, Colin. Colin
is 8 years old and lives full time with his mother,
who provides all of his support. He is a U.S.
citizen, and no other adults live in their
household. Can Rebecca claim Colin as a
dependent?
Use the Publication 4012
Exercise – Answer
YES
Colin meets all the requirements to be claimed as
a qualifying child.
Exercise
Paul is a U.S. citizen who is 26 years old,
permanently disabled, unmarried, did not pay
for more than half of his support and lived with
his parents for the entire year.
Can Paul be claimed as a dependent by his
parents?
Exercise – Answer
YES.
Paul meets all the requirements to be claimed
as a qualifying child.
Determining Dependency Exemptions
Always begin with Table 1: Dependency Exemption to
determine if a person can be claimed as a dependent:
1.
2.
3.
4.
If answer is NO in Step 9, then the person is a Qualifying Child
If answer is YES in Step 9, use Qualifying Child of More Than One
Person Table
If answer is YES in Step 7 AND parents live apart, use Qualifying
Child of More Than One Person Table AND Table 3: Children of
Divorced or Separated Parents or Parents Who Live Apart
If answer is NO in Steps 5-7, then use Table 2: Dependency
Exemption for Qualifying Relative to see if person is a Qualifying
Relative
Qualifying Child of More Than One
Person
Did any other adult live in your home?
What was that other adult’s relationship to the
child?
Could the other adult be
Write these
claimed as a dependent
questions under
STEP 9 in the Pub
4012!
by someone else?
Qualifying Child of More Than One
Person
Sometimes, a child meets all of the tests to be claimed by
more than one taxpayer.
• Example: a mother and a grandmother
Parenthood and AGI are taken into consideration in
determining who is eligible to claim the child.
Use the Qualifying Child of More Than One Person Table
Qualifying Child of More Than One
Person
If only one taxpayer is the child’s parent, the child is the
qualifying person of the parent
PARENTHOOD TRUMPS ALL
Qualifying Child of More Than One
Person
If two parents claim the same child on separate returns,
the exemption goes to the custodial parent (the parent
the child lived with for the longer period)
If the parents are equal custodial parents, the exemption
goes to the parent with the highest AGI
PARENTHOOD, THEN AGI
Qualifying Child of More Than One
Person
If neither parent can claim the child as a qualifying
child, the child is treated as the qualifying child of the
person who had the highest AGI
IF NO PARENT, THEN AGI
Qualifying Child of More Than One
Person
If a parent can claim the child but agrees not to, then the child
is treated as the qualifying child of the person who had the
highest AGI, but only if the person’s AGI is higher than the
highest AGI of any of the child’s parents
The taxpayer’s AGI must be higher than AGIs of all other
taxpayers who are eligible to claim the child.
IF NO PARENT, THEN AGI
(IF HIGHER THAN PARENTS)
Exercise
Janet has a 2-year-old son Jacob and both live
with Janet’s sister, Lisa. Janet’s AGI is $25,000
and Lisa’s AGI is $16,000. Both Janet and Lisa
meet all of the tests to claim Jacob.
If Janet agrees not to claim Jacob, is Lisa allowed
to claim him on her tax return?
Exercise – Answer
No.
Lisa is not allowed to claim Jacob, even if Janet
agrees, because her AGI is less than Janet’s AGI.
Determining Dependency Exemptions
Always begin with Table 1: Dependency Exemption to
determine if a person can be claimed as a dependent:
1.
2.
3.
4.
If answer is NO in Step 9, then the person is a Qualifying Child
If answer is YES in Step 9, use Qualifying Child of More Than One
Person Table
If answer is YES in Step 7 AND parents live apart, use Qualifying
Child of More Than One Person Table AND Table 3: Children of
Divorced or Separated Parents or Parents Who Live Apart
If answer is NO in Steps 5-7, then use Table 2: Dependency
Exemption for Qualifying Relative to see if person is a Qualifying
Relative
What if the parents live apart?
The custodial parent generally claims the
dependency exemption for his/her child
The noncustodial parent can claim the exemption if
the parents have signed an agreement
• Form 8332 (REQUIRED for post-2008 divorce)
• Other legally binding document (if divorce went into
effect BEFORE 2009)
Division of Benefits: Form 8332
Custodial parent gives noncustodial parent right to
claim dependency exemption for
• Current Tax Year OR
• Group of Years
Custodial parent can revoke noncustodial parent’s
right—revocation takes effect the tax year after
signed
Division of Benefits: Form 8332
Normally, only ONE TAXPAYER can claim a
particular child for ALL of these benefits:
Dependency Exemption
Child Tax Credit
Head of Household
Child & Dependent Care Credit
Earned Income Credit
Division of Benefits: Form 8332
When parents sign a Form 8332:
• Noncustodial parent gets: Dependency Exemption
Child Tax Credit
• Custodial parent gets:
Head of Household
Child & Dependent Care Credit
Earned Income Credit
Exercise
Randy has been divorced since 2010. He has
one child, Paul (age 5). Paul lives with his
mother who provides most of his support. Can
Randy claim Paul as a dependent?
Exercise – Answer
NO.
Paul is the qualifying child of his mother;
therefore, he cannot be the qualifying relative of
Randy, HOWEVER
Randy can claim Paul if his mother has signed a
Form 8332 Division of Benefits OR if Paul’s
mother is not required to file a tax return.
Determining Dependency Exemptions
Always begin with Table 1: Dependency Exemption to
determine if a person can be claimed as a dependent:
1.
2.
3.
4.
If answer is NO in Step 9, then the person is a Qualifying Child
If answer is YES in Step 9, use Qualifying Child of More Than One
Person Table
If answer is YES in Step 7 AND parents live apart, use Qualifying
Child of More Than One Person Table AND Table 3: Children of
Divorced or Separated Parents or Parents Who Live Apart
If answer is NO in Steps 5-7, then use Table 2: Dependency
Exemption for Qualifying Relative to see if person is a Qualifying
Relative
Qualifying Relative:
The Qualifying Child Test
Step 1
Is the person your qualifying
child or the qualifying child
of anyone else?
If YES: Not a
qualifying
relative
If NO:
Go to Step 2
Qualifying Relative:
The Relationship Test
Was the person your son, daughter, stepchild, foster
child, or a descendant of any of them? OR
Was the person your brother, sister, or a son or
daughter of either of them? OR
Step 2
Was the person your father, mother, or an ancestor
or sibling of either of them? OR
Was the person your half brother, half sister,
stepbrother, stepsister, stepfather, stepmother, sonin-law, daughter-in-law, father-in-law, mother-inlaw, brother-in-law, or sister-in-law?*
If NO,
go to
Step 3.
If YES,
go to
Step 4
Relationship Test Notes
The relatives in the Step 2 are considered
“relatives who do not have to live with you”
Any of the relationships that were established by
marriage are not ended by death or divorce
Qualifying Relative:
The Residency Test
If NO: You
Was the person any other person
can’t claim
(other than your spouse) who
this person.
Step 3
lived with you ALL YEAR as a
If YES:
member of your household?
Go to Step 4
Residency Test Notes
Note that any person who is not one of the relationships
in Step 2 MUST live with the taxpayer for all 12 months
of year, except for the exceptions below
There are exceptions for:
• kidnapped children
• a child who was born or died during the year
• certain temporary absences – school, vacation, medical
care, etc.
Qualifying Relative:
The Gross Income Test
Step 4
If NO: You
cannot claim
Did the person have a gross
taxable income of less than the this person.
If YES:
exemption amount?
Go to Step 5
Qualifying Relative:
The Support Test
Step 5
Did YOU provide more than
half of the person’s
total support for the year?
If YES: You
can claim
this person
as your
dependent
If NO:
Go to Step 6
Qualifying Relative:
Multiple Support Tests
Step 6
Did another person provide more than half of the
person’s total support?
If NO:
Go to Step 7
Step 7
Did two or more people together provide more
than half the person’s total support?
If YES:
Go to Step 8
Step 8
Did you provide more than 10% of the person’s total
support for the year?
If YES:
Go to Step 9
Step 9
If YES:
Did the other person(s) providing more than 10% of the
person’s total support for the year provide you with a You can claim an
signed statement (Form 2120) agreeing not to claim the exemption for
exemption?
this person
Exercise
Roderick, age 29, lives with his uncle. Last year,
he worked part-time and earned $2,100. His
uncle provided for the rest of his support,
including rent and household costs.
Can his uncle claim Roderick as a dependent?
Can Roderick claim a personal exemption?
Exercise – Answer
YES.
His uncle can claim Roderick as a qualifying
relative.
NO.
Roderick cannot claim a personal exemption
because he can be claimed as a dependent.
Exercise
Gina Brown provides all support for her uncle.
Uncle Jim is unmarried, 72 years old, and lives in
another city. He has no gross income for the
calendar year. Can Gina claim Uncle Jim as a
dependent?
Exercise - Answer
YES.
Jim meets all of the requirements to be
a qualifying relative of Gina.
Filing Status
Five Filing Statuses
Single
Married Filing Jointly
Married Filing Separately
Head of Household
Qualifying Widow(er) with Dependent Child
Determining Filing Status
Open the Publication 4012 to the Filing Status Tab to Chart:
Determination of Filing Status – Decision Tree, Chart: Filing
Status, and Chart: Who is a Qualifying Person Qualifying You
To File as Head of Household
ALWAYS USE THESE CHARTS TO DETERMINE A
TAXPAYER’S FILING STATUS
Single
If on the last day of the tax year (Dec. 31st), the
taxpayer was
• Not married OR
• Legally separated/divorced OR
• Widowed
IMPORTANT:
Some taxpayers considered single can also file under a
more advantageous status (HoH or QW).
Be sure to check all options!
Married Filing Jointly
If on the last day of the tax year,
• They lived together as a married couple OR
• They lived apart but were not legally
separated/divorced OR
• One spouse died during the year, and the taxpayer
did not remarry.
Married Filing Separately
Married taxpayers can choose to file separately;
HOWEVER,
• If one spouse itemizes, the other spouse must itemize.
• Taxpayers filing with this status are not eligible to
claim several tax credits.
Be careful!
This status generally results in a
HIGHER overall TAX.
Why Do Some Choose MFS?
Sometimes MFS is chosen when one spouse does not want to
be responsible for the other spouse’s tax obligations or filing
separately may result in a lower total tax (this is rare)
Sometimes to avoid an offset of their refund against their
spouse’s outstanding debts (child support, student loans, etc.)
Note: Even in these circumstances, there may be other
options that allow them to file jointly and not be responsible
for these debts (Injured Spouse Form)
Note
If a spouse died during the tax year, and the taxpayer
did not remarry, they are considered married for the
entire year.
The surviving spouse is eligible to file as MFJ or MFS.
Surviving spouses that remarry must file with the new
spouse, as MFJ or MFS.
• The deceased spouse’s filing status becomes MFS.
Head of Household
This is the most complicated filing status to
determine, yet it is one of the most common at
SaveFirst tax sites
There are two scenarios when a taxpayers can file
Head of Household:
Head of Household
Scenario #1: Married Taxpayers
•
•
•
•
Must be “considered unmarried”*
File a separate return from spouse
Maintain more than half the costs of keeping up a home
The home is the main home for a dependent child, stepchild,
or foster child for more than ½ the year
 Note: A grandchild does NOT meet this test
• The taxpayer claims an exemption for the child
“Considered Unmarried”
A legally married taxpayer can be considered
unmarried if s/he has not lived with the spouse at
any time during the last six months of the tax year.
Head of Household
Scenario #2: Single Taxpayers
• Maintain more than half the costs of keeping up a
home
• A “qualifying person” lived with the taxpayer for more
than ½ the year
Head of Household: Qualifying Person
See
Who Is a Qualifying Person Qualifying You To
File as Head of Household
in the
Filing Status Tab of the Pub 4012
for a list of qualifying persons
Head of Household: Qualifying Person
In general, a qualifying child is a qualifying person
• Whether or not the taxpayer claims the exemption
In general, a qualifying relative is a qualifying person if:
• The taxpayer can claim the exemption for the person
• The person meets one of the relationships listed
• The person lives with the taxpayer for more than ½ the year
 Exception: a mother/father who is a qualifying relative does not have
to live in the home with the taxpayer
Head of Household: Separated Parents
Even if the custodial parent has given up his/her
right to claim the dependency exemption for a
child (Form 8332), s/he can file Head of Household
using that child as her/his qualifying person
Noncustodial parent can never claim Head of
Household
Division of Benefits: Form 8332
When parents sign a Form 8332:
• Noncustodial parent gets: Dependency Exemption
Child Tax Credit
• Custodial parent gets:
Head of Household
Child & Dependent Care Credit
Earned Income Credit
Qualifying Widow(er)
with Dependent Child
A taxpayer files QW if his/her
• Spouse died recently, AND
• The taxpayer did not remarry, AND
• The taxpayer has a dependent child (son, daughter,
stepson, stepdaughter), AND
• The taxpayer provides over half the costs to maintain
the main home for himself and the child.
Unmarried, Widowed Taxpayer?
If the spouse died during the current tax year:
Married Filing Jointly
If the spouse died during one of the two preceding
tax years and taxpayer has a qualifying child:
Qualifying Widow(er)
If the spouse died three or more years before the
current year: Single or Head of Household
From Lowest to Highest Tax Burden
Married Filing Jointly & Qualifying Widow(er)
Head of Household
Single
Married Filing Separately
Exercise
Lily left her husband in August of the tax year,
but they did not get divorced. She took her
children with her, supported them during all of
the tax year, and will claim them as dependents.
Lily refuses to file a joint return with her
husband.
Which filing status should she use?
Exercise – Answer
Married Filing Separately.
Because Lily lived with her husband for some part
of the last six months of the year, she cannot file
as Head of Household.
Exercise
Em left her husband in February of the tax year,
but they did not get divorced. She took her
children with her, supported them all year, and
will claim them as dependents. Em refuses to
file a joint return with her husband.
Which filing status should she use?
Exercise – Answer
Head of Household.
Exercise
Lane, a single woman, lives alone. She provides
full support for her mother, Theresa, who lives in
a nearby town. Since Theresa had no income for
the year, Lane paid all costs to maintain her
home and will claim her as a dependent.
What is Lane’s filing status?
Exercise – Answer
Head of Household.
A taxpayer can file as Head of Household on the
basis of a dependent parent who does not live
with him/her only if the taxpayer pays ½ of the
costs of keeping up the parent’s home.
Exercise
Brian and Ashley were happily married since
1965. They had no children, but Brian’s brother
lived with them for the last 10 years. Ashley
passed away three years ago. Even after her
death, Brian continued to maintain the entire cost
for the home and his brother still lived there.
What is Brian’s filing status?
Exercise – Answer
Head of Household
Earned Income Credit
Refundable Tax Credit
Reduces tax liability to zero
Taxpayer will receive the remainder of the credit
value as a refund.
• Earned Income Tax Credit
Earned Income Credit
Refundable tax credit for low-and-moderate
workers to encourage work, offset payroll and
income taxes, and help meet basic need
The EIC is the largest federal anti-poverty program
and has been one of the most successful programs
to lift families, especially families with children, out
of poverty
Earned Income Credit
After the Supplemental Nutritional Assistance
Program (SNAP), the EIC is largest cash assistance
program targeted for low-income families*
An estimated 26 million households received more
than $60 billion in reduced taxes and refunds in
the tax year 2015*
*Source: Tax Policy Center (joint project of the Urban Institute & Brookings Institution)
Earned Income Credit
In the tax year 2012, the EIC lifted an estimated
“6.5 million people out of poverty, including over 3
million children”
The EIC has been especially successful in providing
an incentive for single mothers with children to find
work
*Source: The Center for Budget and Policy Priorities
Encouraging Work and Reducing Poverty
Research has also found that children in families who
get an income boost from the EIC and CTC quickly show
improvements in health and school performance relative
to other low-income children who did not receive this
extra help
In addition, children whose families receive that boost
have higher school test scores, on average, and are
more likely to go to college and to work and earn more
as adults
*Source: The Center for Budget and Policy Priorities
EIC and Alabama Families
507,000 South Carolina households received EIC in
2012
124,000 South Carolinians were lifted out of poverty
by the EIC and CTC combined, including 67,000
children, each year, on average, during 2011 to 2013
The EIC put about $1.2 billion into South Carolina’s
economy in 2012
*Source: The Center for Budget and Policy Priorities
Earned Income Credit
Critics of the EIC have complained that it is too
complex, forcing recipients to seek help in filing
their return
Two-thirds get such assistance, most from paid tax
preparers
It is our job to provide high-quality tax
preparation to ensure these families receive the full
amount of the EIC they are eligible for!
Earned Income Credit: Maximum Credit
Amounts
Determining the Earned Income Credit
Open the Publication 4012 to the Earned Income Credit
Tab
Use this tab to help determine if a taxpayer
qualifies the Earned Income Credit
Earned Income Credit: Eligibility
Requirements
Rules for everyone:
•
•
•
•
•
•
Must have earned income (and AGI has limits)
Valid SSNs and U.S. citizens/resident aliens
Not Married Filing Separately
No foreign earned income
Investment income less than a specified amount
Taxpayer cannot be qualifying child of another person
Earned Income Credit: Eligibility
Requirements
Rules if taxpayer does NOT have a qualifying
child:
• Cannot be claimed as a dependent by another person
• Must be at least 25 but under 65 on December 31st of the
tax year
• Must have lived in the United States (and spouse, if MFJ) for
more than ½ of the year
Earned Income Credit: Eligibility
Requirements
Rules if taxpayer has a qualifying child:
• Qualifying child must have a valid SSN that allows
him/her to work
• Child must be the taxpayer’s:
 son, daughter, stepchild, eligible foster child
 brother, sister, half brother, half sister, stepbrother,
stepsister, or descendent of any of them
Earned Income Credit: Eligibility
Requirements
Rules if taxpayer has a qualifying child:
• Child must be
 Under age 19 at the end of the tax year
 Under age 24 and a full-time student at the end of the tax
year
 Any age and permanently and totally disabled
Earned Income Credit: Eligibility
Requirements
Rules if taxpayer has a qualifying child:
• Qualifying child must not have filed a joint return for the tax
year
 Unless the child only filed a joint return with spouse to claim a
refund
• Must have lived with the taxpayer for more than ½ the year
• Must not be the qualifying child of another person
Earned Income Credit: Eligibility
Requirements
Note: Just because a person qualifies as the
dependent of the taxpayer does not mean they
automatically make the taxpayer eligible for the
EIC
Child in question must meet the age, relationship,
residency, and joint return tests to qualify
Earned Income Credit: Qualifying Child of
More than One Person
Sometimes, a child meets all of the tests to be
claimed by more than one taxpayer
A child cannot be used by more than one person to
claim the EIC
The rules for determining who claims the child for
EIC are the same as those for determining who
claims the the child as a dependent
Earned Income Credit: Disallowance
EIC can be disallowed for
• Reckless or intentional disregard of the rules: 2 years
• Fraudulent Claim: 10 Years
To claim EIC again, a taxpayer must
• Wait full period of disallowance
• Submit a Form 8862 with the tax return
Example
Sharon, who has an earned income and AGI of
$15,525, takes care of her sister’s son, Eric. If
Eric is 12 years old and began living with Sharon
in August, can Sharon claim the EIC?
Example – Answer
No
Sharon’s AGI is too high to claim the EIC alone,
and since Eric lived with her for less than half a
year, he is not her qualifying child
Example
Doug and Donna are married and live together
with their 4-year-old son Sam. Their combined
earned income is $25,000, but they file
separately. Doug reports an AGI of $11,000 on
his return, and Donna reports AGI of $14,000.
Can Doug and/or Donna claim the EIC?
Example – Answer
No
Neither can claim the EIC because both have a
filing status of Married Filing Separately
Example
Doug and Donna are still married and still live
together with Sam, but now they decide to file a
joint return. Their combined earned income and
AGI are $25,000. Can they claim the EIC on this
return?
Example – Answer
Yes
Their joint income is low enough to claim the EIC
with one qualifying child (Sam)
Example
Tom is 64 years old, retired and collected $10,000
of social security during the tax year. He does
not have any qualifying children.
Can he claim the EIC on his return?
Example – Answer
No
Tom does not have any earned income
South Carolina Return
Who Must File
Residents under 65
• Anyone who is required to file an income tax return
that includes income taxable by South Carolina
 Residents of South Carolina are taxed on their entire
income, regardless of where earned, unless specifically
exempted by law
• Any who has South Carolina income tax withheld from
wages
Who Must File
Residents over 65
• Married Filing Jointly (both 65 or older)
 Gross income must be greater than federal gross income filing
requirement + $30,000
• Any other filing status
 Gross income must be greater than federal gross income filing
requirement + $15,000
• Any who have South Carolina income tax withheld from
wages
Part-Year / Nonresidents
Anyone who had South Carolina income tax
withheld from wages
Part-year or nonresidents whose South Carolina
gross income is greater than current federal
personal exemption amount
Part-Year Residents
Taxpayers who moved into or out of South
Carolina have two filing options
• Full-year resident
 Taxpayer reports entire income as if they were a resident
for the entire year
• Nonresident
 Taxpayer will only be taxed on income earned while a
resident and deductions/exemptions will be prorated
Personal & Dependency Exemptions
 Personal and dependency exemption correspond
to the federal return
Filing Status
Filing status corresponds to filing status on the
federal return
Taxable Income
All income is subject to South Carolina income tax unless
specifically exempted by state law
• This includes all income earned inside and outside of South
Carolina
 However, taxpayers may be eligible for a state tax credit if
taxes were paid in another state on the income
• The taxpayer may need to file a tax return for another
state if they have income earned outside of South Carolina!
Nontaxable Income
Specific types of income that are nontaxable in
South Carolina include:
• Disability Retirement Income
• Social Security Benefits
• Railroad Retirement Income
• Retirement Income paid by the federal government for
service in the Reserves or National Guard
Subtractions from Taxable Income
Retirement
• An individual under 65 may deduct up to $3,000 of
qualified retirement income from taxable income
• An individual over 65 may deduct up to $10,000 of
qualified retirement income from taxable income
Subtractions from Taxable Income
Dependents under 6 years old
• Additonal personal exemption amount can be
subtracted from income
Age 65 and older
• Beginning in the tax year when a taxpayer reaches
65, he/she is entitled to a $15,000 deduction of
income (reduced by an eligible retirement deduction)
Standard & Itemized Deductions
The standard deduction is the same on the South
Carolina as the federal return
Taxpayers who choose to itemize on their federal
returns can also itemize on their South Carolina
returns
Nonrefundable Credits
South Carolina Child and Dependent Care Credit
• Amount is a percentage of the federal C&DC allowed
Two-Wage Earned Credit
• Available to MFJ couples who both have earned
income taxed in South Carolina
Refundable Credits
Tuition Tax Credit
• Individuals (including dependents of taxpayers) that
received a high school diploma from a SC high school
(or home school, or preparatory school outside of SC
while a dependent of a legal SC resident) and
• Attend a qualifying institution in South Carolina
• May be eligible for refundable credit up to $850
See Impact America staff member if you believe your taxpayer may qualify for this credit
Starting the South Carolina Return
The South Carolina Return will require choosing a
county code for the taxpayer’s county of residence
• Residents choose Codes 01 – 46
• Nonresidents choose Code 99
Paying a Balance/Receiving a Refund
Much like the federal return, taxpayers can have
their refunds directly deposited or they can receive
a check
Taxpayers can also have their liabilities directly
debited or they can send a check
IRS Basic Tax Training
Overview
IRS Basic Tax Training Overview
Kevin Kent Exercise
•
•
•
•
•
•
Wages
Unemployment
Social Security
Child & Dependent Care Credit
Earned Income Credit
South Carolina Return
Login to TaxWise:
• Username: Last Name, First initial (e.g., NELSONS)
• Password: Same as user name (must change after login)
Alimony Income
Alimony
A payment to or for a spouse or former spouse
under a separation or divorce instrument
Person RECEIVING the alimony must report it as
income
• Note: person PAYING the alimony can take amount as
an adjustment – we will cover later on in this training
Alimony
May include:
• Medical bills, housing costs and other expenses
Does NOT include:
• Child support or voluntary payments outside
Alimony vs. Child Support
Child support payments from a separation or
divorce instrument will stop once the child is grown.
Alimony Information
You need the EXACT amount from a divorce or
separate instrument executed after 1984
Amount of alimony reported on one tax return as
income must match the alimony adjustment amount
on the spouse’s tax return
Alimony
Open up Kevin Kent in TaxWise
• Enter Alimony on line 11
• Take notes in your TaxWise Training Notes Packet
State Tax Refund
State Tax Refund
Taxpayers who receive a refund of state or local
income taxes may receive Form 1099-G listing
their refund in box 2.
NOT everyone must include their state tax refund
as taxable income.
Form 1099-G: Certain Government
Payments
State Tax Refund
Prior tax year (PTY) state tax refund may be
taxable and need to be reported
Conditions in which PTY state tax refund is taxable:
• Received a refund on a state return
• Itemized Deductions in PTY (Federal) AND
• Deducted state income tax instead of state sales tax
when itemizing deductions (Federal)
State Tax Refund
What if taxpayer doesn’t know if they itemized
deductions last year?
• Ask: “Did you have any mortgage interest, medical
expenses, charitable contributions, etc., that you listed
on your return last year?”
• A taxpayer may not be sure if they did, but often they
are very confident that they did not have any of these
deductions listed last year
State Tax Refund
Note: Many taxpayers may have itemized
deductions on their state tax returns but NOT their
federal tax returns
In this case, the previous tax year state tax refund
will NOT be taxable on the federal tax return
PTY State Tax Refund
Answer question in the box on the Form 1040:
• If NO: the state tax refund does not need to be
reported
• If YES: additional steps will be required to report the
state tax refund
Info Needed from PTY Return
To correctly report a state tax refund amount, the
following info from the PTY return is needed:
•
•
•
•
•
•
State tax refund amount
Sch A, line 5a, state income taxes
Sch A, line 5b, general sales tax
Total itemized deductions amount
Filing status
Taxable income amount
State Tax Refund
Open up Kevin Kent in TaxWise
• Enter State Tax Refund on Line 10
• Take notes in your TaxWise Training Notes Packet
Income: Other Income,
Business/Self-Employment
Form 1099-MISC
Form 1099-MISC: Other Income
Reported in box 3
Other income reported in this box is generally:
•
•
•
•
Prizes
Awards
Taxable damages (from a lawsuit settlement)
Other taxable income
Other income in box 3 is classified as unearned
income
Form 1099-MISC: Federal Income Tax
Withheld
Reported in box 4
Taxpayers can choose to have federal income tax
withheld on other income in box 3
Form 1099-MISC:
Nonemployee Compensation
Reported in box 7
Nonemployee compensation is paid to an
independent contractor
Independent contractors work for a company or
organization without being considered an
“employee”
• Freelancers, part-time workers, contractors, interns
Form 1099-MISC:
Nonemployee Compensation
If payment for services from a company or
organization is reported in box 7, the taxpayer is
being treated as a self-employed worker
Self-employment income, also known as business
income, is taxed differently than wages/salary
Business/Self-Employment Income
Income from a personal business (sole proprietor)
or independent contractor (nonemployee
compensation)
Business/Self-Employment Income
Why is it important to designate between wages
and business/self-employment income?
• Federal income taxes are not withheld from business
income
• FICA taxes are not withheld from business income
• However, the taxpayer must still pay federal income
taxes and FICA taxes on business income!
Business/Self-Employment Income
Business/self-employment income can be reported
to taxpayers in a variety of ways
Form 1099-MISC
Form W-2: Wage and Tax Statement
See Your Site
Coordinator
Form 1099-K
See Your Site
Coordinator
Cash Payments
Business/Self-Employment Income
Having a part-time business (even in addition to
another job) may still be self-employment income
and need to be reported
Remember: Income that was not reported on Form
W-2, 1099-MISC or 1099-K still needs to be
reported as cash payments.
Example
Andy works as an independent contractor for a
painting company. He received a 1099-MISC from
the company that shows he made $10,000. He
also received $2,000 in cash payments from a
few different people for the work he completed,
but he did not receive a 1099-MISC for the $2,000.
What is Andy’s total business/self-employment
income that needs to be reported?
Example – Answer
Andy must include the amounts from both the
1099-MISC and cash payments. His total business
income that must be reported is $12,000.
Business/Self-Employment Income
vs. Other Income
Business Income
• An activity qualifies as a business if:
 The primary purpose for engaging in the activity is for income or
profit
 The taxpayer is involved in the activity with continuity and regularity
Other Income
• A sporadic activity or a hobby does not qualify as a business
• Hobby: undertaken for pleasure during leisure time (not for
profit)
Business/Self-Employment Income Terms
Business expenses: amounts that are ordinary and
necessary to carry on the business
• Business expenses are subtracted from gross receipts to
obtain the net profit/loss
• Net profit/Loss = Gross Receipts – Expenses
Cash method of accounting: Reports all income
when received and deducts all expenses when paid
Business/Self-Employment Income Terms
Inventory: the items the taxpayer buys or makes
for resale for others
Depreciation: the cost of items that are expected
to last more than a year should be spread over a
period of years, rather than deducted in the year
of purchase
Business/Self-Employment Income
VITA Filing Conditions
 Less than $25,000 of business expenses
 Cash method of accounting
 No inventory
 Does not want to depreciate assets
 Must report a profit— no net loss!
 No employees
Business/Self-Employment Income
Schedule C & C-EZ
Business/Self-Employment Income:
Schedule C or C-EZ
Schedule C-EZ is just the simplified version of the
Schedule C
• Use the Schedule C-EZ if there are few business
expenses and only one business
Less than $5,000
• Use the Schedule C if there are a lot of business
expenses and/or more than one business
$5,000 to $25,000
Deductible Business Expenses:
Advertising
Costs associated with promoting the business through
various means:
•
•
•
•
•
•
Yellow pages
Newspapers
Magazines
Billboards
Racing sponsors
Television spots
Deductible Business Expenses:
Car & Truck Expenses
A taxpayer who uses a car/truck in a business may
be able to deduct the costs of operating and
maintaining the vehicle
Vehicle expenses are calculated using the standard
mileage rate
Actual expenses include depreciation, which is out
of our scope
Deductible Business Expenses:
Commissions and Fees
Commissions paid to both individuals and
businesses
Any kind of fee necessary to operate the business
Deductible Business Expenses:
Insurance
Insurance policies and coverage are deductible for the
business operation
• Property
• Automobile (business vehicles only)
• Malpractice
If the standard mileage rate is used, no deduction is
allowed for automobile insurance premiums
Health insurance is NOT deductible
Deductible Business Expenses:
Interest
Interest paid on operating loans
NOT mortgage interest
Deductible Business Expenses:
Legal and Professional Services
Fees paid to professionals:
• Attorneys
• Accountants
• Appraisers
• Engineers
Deductible Business Expenses:
Office Expense
Supplies:
• Pens
• Paper
• Postage
• Other necessarily office supplies
Deductible Business Expenses:
Rent or Lease
Rental fees for:
• Cars
• Trucks
• Vans
• Machinery, equipment and other personal property
Leases of more than 30 days are out of scope
Deductible Business Expenses:
Repairs and Maintenance
Repairs on:
• Equipment
• Automobiles
• Office space
• Buildings
• Etc.
Deductible Business Expenses:
Supplies
Costs for general operating supplies not associated
with the cost of goods sold
Remember: business/self-employment income
involving inventory is out of scope
Deductible Business Expenses:
Taxes and Licenses
Taxes and license fees paid in the operation of the
business:
• State and local sales taxes imposed on the taxpayer
as the seller of services
• Real estate and personal property taxes
• Certain licenses and regulatory fees
Deductible Business Expenses:
Travel/Meals and Entertainment
Ordinary and necessary expenses of traveling
away from home for business
Deductible Business Expenses:
Utilities
Normal electric, gas, water and telephone
No deduction for personal expenses
Deductible Business Expenses:
Business Mileage Rates
 If used for business purposes, taxpayer can receive
a mileage deduction at the federal rate
• Cannot deduct commuting miles
Cannot calculate depreciation (out of scope)
Business/Self-Employment Income
Open up Kevin Kent in TaxWise
• Enter Business/Self-Employment on Line 12
• Take notes in your TaxWise Training Notes Packet
Retirement Income
Employer
Funded
Defined Benefit
Retirement Plans
Pensions
Civil
Service
Defined Contribution
Retirement Plans
Employer
Sponsored
Annuities
401(k)
403(b)
Annuities
Retirement
Income
Taxpayer
Funded
Individual
Retirement Plans
IRA
Roth IRA
Defined Benefit Plans
An older, traditional type of pension plan
Workers’ retirement benefits are calculated (and
thus “defined”) by a formula that takes into account
• YEARS OF SERVICE
• SALARY HISTORY
Defined Contribution Plans
More modern type of employer plan
Employee controls amount contributed to the plan as
well as how the funds are invested
Retirement benefits depend on how the fund assets
perform and grow
Funded primarily by the employee, with the employer
often matching contributions to a certain amount
Individual Retirement Plans
Investing tool used by individual taxpayers to earmark
funds for retirement savings
Traditional IRA (in scope) and Roth IRA (see Site
Coordinator for Roth IRAs)
Established by individual taxpayers, who are allowed
to contribute 100% of compensation (or selfemployment income) up to a certain dollar amount each
year
Individual Retirement Plans
Offers numerous tax benefits
• Contributions to Traditional IRA can be taken as an
adjustment to income (dependent on certain conditions)
• In general, eventual withdrawal from an IRA is taxed
as income; including capital gains on the investment
• Because income is likely to be lower after retirement,
the tax rate may be lower
Individual Retirement Plans
Combined with potential tax savings at the time of
contributions, IRAs can be a very valuable tax
management tool for individuals
Also, depending on income, an individual may be
able to fit into a lower tax bracket during his/her
working years because of the adjustment to income
from contributions
Defined Benefit
Retirement Plans
 Funded by the employer
 Monthly set amount based on salary history, years of service
 Employee pays taxes on payments received
Defined
Contribution
Retirement Plans
 Employer-sponsored, employee contributes portion of gross
salary pre-tax
 Offers benefits by allowing employee to defer taxes
Individual
Retirement Plans
 Funded by individual taxpayers
 Like DC plans, offers benefits by allowing employee to defer
taxes
Common Types of Retirement Plans
Pension: series of payments for past work (based on
salary history and years of service)
Defined Benefit Plan
401(k) Plan: part of employee’s gross salary is placed
in a retirement plan on a pre-tax basis (not subject to
income tax until employee receives it as a distribution
from retirement account)
Defined Contribution Plan
Common Types of Retirement Plans
Individual Retirement Arrangements: A personal
savings plan that offers tax advantages to set aside
money for retirement
• Earnings generally accumulate tax free until withdrawn
• Types:
Traditional
Roth: Usually Out of Scope (in scope under certain conditions)
SIMPLE: Out of Scope!
SEP: Out of Scope!
Retirement Forms
Retirement income can be reported on:
• Form 1099-R  Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,
etc.
• Form CSA 1099-R  Statement of Annuity Paid (civil service
retirement payments)
• Form CSF 1099-R  Statement of Survivor Annuity Paid
• Form RRB 1099-R  Annuities or Pensions by the Retirement
Railroad Board (See Site Coordinator for RRB 1099-R)
Form 1099-R: Distributions From Pensions,
Annuities, Retirement…
Form 1099-R: Gross Distribution
Reported in box 1
Shows the total amount received during the tax
year
Amount could be a rollover, or taxpayer may have
received it as periodic payments, as non-periodic
payments, or as a total distribution
Form 1099-R: Taxable Amount
Reported in box 2a
Shows the total amount that is subject to federal
income tax
The box MAY be blank and require additional
computation to determine taxable amount
• See Site Coordinator if box 2a is blank
Form 1099-R: Taxable Amount Not
Determined & Total Distribution
Reported in box 2b
❒Taxable Amount Not Determined indicates that
the payer was unable to determine the taxable
amount—box 2a should also be blank
❒Total Distribution indicates that the distribution
was a total distribution that closed out the account
Form 1099-R: Federal Income Tax
Withheld
Reported in box 4
Reports the amount of federal income tax withheld
on the gross distribution
Similar to the Form
W-2, this amount is
determined by filling
out a Form W-4P
Form 1099-R: Distribution Code(s) &
IRA/SEP/SIMPLE
Reported in box 7
Distribution Code(s) identify the type of distribution
received
Only certain distribution types are in scope for
VITA
Form 1099-R: Distribution Code(s) &
IRA/SEP/SIMPLE
 1: Early distribution, no known exception (in most cases, under age 59 ½)
 2: Early distribution, exception applies (under age 59 ½)
 3: Disability
 4: Death
 7: Normal distribution
 B: Designated Roth account distribution
 G: Direct rollover and rollover distribution
See the Publication 4012, Income Tab for a full list of box 7 distribution
codes (and which are in scope)
Form 1099-R: Distribution Code(s) &
IRA/SEP/SIMPLE
❒IRA/SEP/SIMPLE indicates that the distribution
was from a traditional IRA, SEP, or SIMPLE
retirement account
ONLY traditional IRAs are in scope
Verify with the taxpayer that the amount
distributed was from a traditional IRA
Form 1099-R: Total Employee
Contributions
Reported in box 9b
For certain plans, an amount may be listed here
showing the taxpayer’s contributions to the plan
This amount is used to help determine the taxable
amount if box 2a is blank (however, you should see
Site Coordinator for help in computing this)
Form CSA 1099-R: Statement of Annuity
Paid
Form CSA 1099-R: Statement of Annuity
Paid
Provides the same information as the Form 1099-R
Issued to civil service employees
Remember, civil service employees have Defined
Benefit retirement plans
Form CSF 1099-R: Statement of Survivor
Annuity Paid
Form CSF 1099-R: Statement of Survivor
Annuity Paid
Provides the same information as the Form 1099-R
Issued to survivors of civil service employees (if the
employee elected to have a survivor annuity for
spouse and/or children)
Remember, civil service employees have Defined
Benefit retirement plans
Why is it important to determine what
category of retirement plan a taxpayer
has?
Why is it Important…?
Some retirement plans are not
taxable on the state level
It is extremely important to determine what
type of retirement plan a taxpayer has
because it will change how the form is
entered into TaxWise
Why is it Important…?
Taxable Social Security
Taxable Railroad Retirement
Taxable Disability Retirement
…are NOT taxable in South Carolina
if income is due to permanent
and total disability
Why is it Important…?
All retirement plans
…may be deductible up to a certain
amount ($3,000 under 65 / $10,000
over 65)
Why is it Important…?
If the taxpayer had taxable retirement income and
Did NOT have retirement income that resulted in a
federal premature withdrawal penalty (Code 1)
In TaxWise…
Box 1
Box 2
Box 3
Railroad Retirement
Why is it Important…?
Note: the exclusion is limited to $3,000 (or
$10,000 if over 65) TOTAL per taxpayer and
spouse
In TaxWise…
Box 1
Box 2
Box 3
Railroad Retirement
Why is it Important…?
If taxpayer filing return is a surviving spouse, s/he
is eligible for additional exclusion IF the additional
retirement income received is attributable to
deceased spouse
In TaxWise…
Box 1
Box 2
Box 3
Railroad Retirement
Why is it Important…?
If return is being filed on behalf of both deceased
taxpayer and spouse, use box 2 for taxpayer and
box 3 for spouse to signify exclusion
In TaxWise…
Box 1
Box 2
Box 3
Railroad Retirement
Example
Joe has been receiving his retirement payments for
several years since he retired at age 65 and has
received a Form 1099-R showing $25,000. How
much of Joe’s retirement is taxable on the South
Carolina return, and what box should be checked
(if any) on the Form 1099-R?
Example – Answer
$15,000. Joe can exclude $10,000 because he is
over 65, and must check Box 1 on Form 1099-R.
Box 1
Box 2
Box 3
Railroad Retirement
Example
Maria, aged 52, fell on hard times and had to take
an early distribution (Code 1) of $6,000 from her
retirement account to pay for car repairs. How
much of Maria’s retirement is taxable on the South
Carolina return, and what box should be checked
(if any) on the Form 1099-R?
Example – Answer
All of her retirement income is taxable because
her early withdrawal (Code 1) will result in an
early withdrawl penalty on the federal return.
No box should be checked
Box 1
on the Form 1099-R.
Box 2
Box 3
Railroad Retirement
Example
Charles, aged 62, received a Form 1099-R
showing a distribution from his pension for
$15,000 this year. Unfortunately, his wife, aged
63, passed away this year. He received a Form
1099-R showing $10,000 from her retirement
account this year. How much of an exclusion does
he get total, and what boxes should be checked on
each Form 1099-R?
Example – Answer
His total exclusion is $6,000 ($3,000 from his account,
$3,000 for his wife’s) Box 1 must be checked on
Charles’ Form 1099-R, box 2 on his wife’s.
Box 1
Box 2
Box 3
Railroad Retirement
Box 1
Box 2
Box 3
Railroad Retirement
Rollover
Refers to transferring the holdings in one retirement
account to another
Specifically, the retirement account is emptied and
distributed to the owner, who then deposits them into a
new account for reinvestment
This is a TAX-FREE DISTRIBUTION
• But still must be reported on the federal tax return
• Code G will be in Box 7 of the 1099-R
Rollover
Why do taxpayers do this?
• The money is really not going to be used, it is still be saved for
retirement—it’s simply being rolled over into a new qualified
retirement savings plan or back into the same retirement account
Example:
• Julia left her job at Dog Food Company, but wanted to take her
401(k)—Julie is going to take a full tax-free distribution of her
account and roll it over to a new qualified retirement savings plan
Disability Pension Income
Why would a taxpayer have disability pension
income?
• Perhaps they had an accident that rendered them
totally and permanently disabled
Disability payments may be coming from a
qualified retirement pension plan
Disability Pension Income
Why is it important to determine if a taxpayer’s
1099-R is for disability pension payments?
…because until a taxpayer reaches the
retirement age FOR THAT SPECIFIC PLAN, the
income will be treated like wages, which might
make the taxpayer eligible for the...
EARNED INCOME TAX CREDIT
Disability Pension Income
Why is it important to determine if a taxpayer’s
1099-R is for disability pension payments?
…and because disability pension income is NOT
taxable in South Carolina, and will be included
as taxable income unless inputted correctly into
TaxWise.
Disability Pension Income
Code 3 will be in box 7 on a 1099-R, HOWEVER,
you must…
• Check to see if taxpayer has reached retirement age
for that specific plan
 If taxpayer isn’t sure, may need to consult retirement
paperwork or contact plan manager
 Don’t just rely on a previous year return—previous tax
preparer might not have entered in correctly
Disability Pension Income
If taxpayer has not reached retirement age,
choose Check if disability and taxpayer is disabled
and verify that amount appears on the Form 1040
as wages
If taxpayer has reached retirement age, do NOT
check that box and verify that the amount appears
on the Form 1040 as retirement income
Additional Tax on IRAS, Other Qualified
Retirement Plans, etc.
Retirement plans such as IRAs have specific rules
governing when the taxpayer can withdraw money
from these accounts
If certain rules are not followed and an early
distribution is taken, additional penalty taxes may
be due
Additional Tax on IRAS, Other Qualified
Retirement Plans, etc.
An early distribution is an early withdrawal from
a retirement fund, for purposes other than
retirement, by a taxpayer who is under 59 ½
Early distributions CAN be subject to an additional
10% tax
Additional Tax on IRAS, Other Qualified
Retirement Plans, etc.
If the distribution on Form 1099-R is Code 1, the
taxpayer will be subject to the additional 10% tax,
UNLESS an exception applies
Certain early distributions are excluded from the
early distribution tax (Code 2, 3, and 4)
Additional Tax on IRAS, Other Qualified
Retirement Plans, etc.
Additional Tax on IRAS, Other Qualified
Retirement Plans, etc.
If a taxpayer has an early distribution CODE 1 on
Form 1099-R, you should ALWAYS ask the
taxpayer what they used the distribution for to
determine if they are exempt from the additional
10% tax!
Additional Tax on IRAS, Other Qualified
Retirement Plans, etc.
Exceptions to the 10% additional tax:
• You have unreimbursed medical expenses that are
more than 10% of your Adjusted Gross Income
• The distributions are not MORE than the cost of your
health insurance due to a period of unemployment
• You are totally and permanently disabled
Additional Tax on IRAS, Other Qualified
Retirement Plans, etc.
Exceptions to the 10% additional tax:
• You are the beneficiary of a deceased IRA owner
• The distributions are not MORE than your qualified
higher education expenses
• You use the distributions to buy, build, or rebuild a first
home
Additional Tax on IRAS, Other Qualified
Retirement Plans, etc.
If code 1 (early distribution) is correctly shown in
Box 7 of 1099-R, you do not need to complete
Form 5329
If an exception applies or if code 1 is incorrectly
displayed in Box 7 of 1099-R, Form 5329 must be
completed
Additional Tax on IRAS, Other Qualified
Retirement Plans, etc.
If a taxpayer has an incorrect code on a 1099-R,
he/she should contact the retirement company and get
the issue resolved
If the retirement company refuses, then the taxpayer
must enter the 1099-R as it is written on the 1099-R
• If an additional IRA tax is calculated (due to an early
distribution) but it does not apply (because it should
actually be a normal distribution), then Form 5329 must be
completed to remove the additional tax
Retirement Income
Open up Kevin Kent in TaxWise
• Enter Retirement on Line 15/16
• Take notes in your TaxWise Training Notes Packet
Adjustments to Income
Total Income
(Earned + Unearned)
Adjusted Gross
Income
Adjustments
Adjustments to Income
Adjustments are basic life expenses that help decrease the
amount of taxable income:
•
•
•
•
•
•
•
•
Educator expenses
Half of self-employment tax
Early withdrawal penalty
Alimony paid
IRA contributions (traditional)
Student loan interest
College tuition payments
Jury duty pay turned over to employer
Educator Expenses
Eligible Educators
• K-12 teachers, instructors, counselors, principals, or aides
• Worked at least 900 hours (part-time)
• Ordinary and necessary amounts of:
 Books
 Supplies
 Equipment
Educator Expenses
Qualified expenses up to $250 are eligible
If taxpayer and spouse are both eligible
educators, up to $500 are eligible
Note: More than $250 (or $500 total for
taxpayer/spouse) can be taken as an itemized
deduction
Half of Self-Employment Tax
Self-Employment Taxes
• Nonemployees & self-employed must pay an
additional tax that covers FICA taxes that weren’t
withheld during the year
• Note that nonemployees & self-employed workers
don’t have an employer to pay ½ of these FICA taxes,
so they end up paying the full share
Half of Self-Employment Tax
Offsets the tax burden placed on individuals who
do not have employers to pay half of their taxes
Available to all self-employed workers who were
required to pay the self-employment tax
Penalty on Early Withdrawal of Savings
When a taxpayer withdraws savings before
maturity, a penalty is incurred
• Box 3: Form 1099-INT or Form 1099-OID
Taxpayer can deduct these penalties from income
Form 1099-INT: Interest Income
Alimony Paid
A payment to or for a spouse or former spouse
under a separation or divorce instrument
• Child support and voluntary payments NOT considered
alimony
Deduct total alimony paid for the entire year, not
just one month
IRA Contributions Deduction
Eligibility Requirements
• Only contributions to a Traditional IRA are deductible
• Must be under the age of 70 ½ at the end of the tax
year
• Must have taxable compensation
• Contributions must be made by the filing date of the
return
IRA Contributions Deduction
Contribution limit is the lesser of:
• Total amount of earned income, or
• $5,500 ($6,500 if over the age of 50)
 Note: these amounts are subject to change
IRA Contributions Deduction: Joint Returns
If the taxpayers file a joint return and one spouse’s
compensation is greater than the other’s
compensation, then:
• Married taxpayers’combined contributions cannot
exceed combined compensation.
• Neither spouse can contribute more than $5,500
($6,500 if > age 50).
Student Loan Interest
Up to $2,500 of interest paid during the year on a
loan for qualified higher education expenses in the
name of a:
• Taxpayer
• Spouse
• Dependent
Note: Student must have been enrolled at least half-time in a program
leading to a degree, certificate, or other credential.
Student Loan Interest
Eligibility Requirements
• Loan was obtained for an eligible student and was paid
within a reasonable period of time before/after obtaining
the loan
• School is:
 Accredited
 Qualified to participate in a student aid program or conduct
internship/residency programs leading to a degree or
certificate
Student Loan Interest
Eligibility Requirements
• Taxpayer is NOT:
 Married Filing Separately
 Able to be claimed as a dependent
Note: If the taxpayer cannot be claimed as a dependent but his/her
parents paid the student loan interest, the student should claim the
deduction.
Student Loan Interest
Qualified expenses:
• Include tuition and fees required for enrollment, room
and board, transportation, books, and supplies
• Usually reported on Form 1098-E or another statement
from the lender
• Amount must be reduced by scholarships, employerprovided benefits, or tax-free education expenses
Form 1098-E: Student Loan Interest
Statement
Tuition and Fees Deduction
Tuition amounts paid by the taxpayer can be taken
as an adjustment to income OR used to claim an
education credit (if taxpayer qualifies)
The tuition and fees deduction can be claimed for
the taxpayer, spouse, and/or any qualified
dependents
Tuition and Fees Deduction
Tuition and fees deduction CANNOT be claimed if
the taxpayer is:
• Married Filing Separately
• Able to be claimed as a dependent
Note: Only OUT-OF-POCKET expenses can be claimed; you must
subtract amounts paid with scholarships and grants
Form 1098-T: Tuition Statement
Tuition and Fees Deduction
Qualified Expenses:
• Up to $4,000 in qualified tuition and related
expenses;
• NOT BOOKS
Jury Duty Pay Given to Employer
Jury duty pay is taxable income
BUT: if that pay is given to the employer, it can be
deducted as an adjustment
Adjustments to Income
TaxWise Walkthrough
• Take notes in your TaxWise Training Notes Packet
Open up Kevin Kent in TaxWise
• Enter Adjustments to Income
Itemized Deductions
Adjusted Gross
Income
Exemptions
Deductions
(Standard or Itemized)
Taxable
Income
Itemized Deductions
Every taxpayer can take a specific amount for a
“standard” deduction
• Reduces taxable income
There are certain designated expenses that a taxpayer
can choose to list out separately, and, if they total more
than the standard deduction, the taxpayer will
“itemize” his deductions
• Reduces taxable income by a greater amount
When to Itemize Deductions
A taxpayer can receive a larger deduction by
itemizing if he/she has:
• At the Federal Level & State Level:
 Home mortgage payment
 Large number of medical bills
Note: If a taxpayer is MFS and his/her spouse itemizes, the taxpayer must also itemize,
regardless of whether the Standard Deduction would be higher
Qualifying Expenses
Unreimbursed Medical Expenses
Charitable Contributions
Taxes
Home Mortgage Interest
Miscellaneous Deductions
Unreimbursed Medical Expenses
A taxpayer can claim expenses for
• Him/Herself
• Spouse
• Dependents
Unreimbursed Medical Expenses
Covered Medical Expenses
• Unreimbursed medical and dental expenses
• Eligible long-term care premiums
Be sure the expenses were not paid with pretax dollars or
reimbursed by an insurance company.
Unreimbursed Medical Expenses
Why can a taxpayer not itemize expenses paid
with pretax dollars?
• NO DOUBLE BENEFITS!
• Expenses that were deducted pretax from pay have
already given the taxpayer the benefit of a lower
taxable income
• Cannot use these expenses a second time to lower
taxable income again
Unreimbursed Medical Expenses
Deductible Medical Expenses
• Co-pays to doctor, dentist, eye doctor
• Prescription drugs
• Cost of glasses or hearing aids
• Cost of medical equipment
Unreimbursed Medical Expenses
Deductible Medical Expenses
• Health insurance premiums
• Long-term care insurance premiums
• Cost of surgery, operations
• Miles to and from doctor
NOTE: For a complete listing of deductible and
nondeductible expenses see Site Coordinator Handbook
Unreimbursed Medical Expenses
Nondeductible Medical Expenses
• Life insurance policy premiums
• Funeral, burial, cremation costs
• Unnecessary cosmetic surgery
• Nonprescription drugs
NOTE: For a complete listing of deductible and
nondeductible expenses see Site Coordinator Handbook
Charitable Contributions
Qualifying Organizations: Non-qualifying
Organizations:
• Religious
•
•
•
•
Charitable
Educational
Scientific
Literary
•
•
•
•
•
Business
Civic/Political
Social
Foreign
Homeowners’ Associations
Charitable Contributions
Deductible Expenses:
• Monetary donations
• Dues, fees, and assessments
• Fair market value (FMV) of clothing, furniture
• Uniforms required to be worn during service
• Unreimbursed transportation expenses
 Tolls, bus fare, parking fees, charitable miles
IMPORTANT: The taxpayer must keep receipts!
Charitable Contributions
FMV of Donated Goods
• If a taxpayer has made non-cash contributions to
charity and does not have receipts, use the following
resources to determine the FMV of donated items:
• Salvation Army Valuation Guide
Charitable Contributions
Nondeductible Expenses:
• Raffle, bingo, lottery tickets
• Tuition
• Value of time of service
• Blood
• Contributions to individuals
• The FMV of any good received in exchange for a
donation (i.e. t-shirts, cds, tote bags, etc.)
Charitable Contributions
Limits to Charitable Contributions
• Contributions that total more than 20% of their AGI may be
able to deduct only a percentage of their contributions, and
must carry over the remainder to a later tax year
• If taxpayers have >$500 of noncash contributions, they
need to be referred to a professional preparer if they want
to deduct the full amount.
• Form 8283 (OUT OF SCOPE)
Charitable Contributions
Recordkeeping – cash contributions
• Canceled check or bank statement
• Written communication from the charity
 Name of charity, date and amount
Charitable Contributions
Recordkeeping – noncash contribution
• For each contribution < $250
 Written communication, description, FMV
• For each contribution between $250 and $500
 Written communication, description, FMV and acknowledgement
of any goods received in return
• For each contribution > $500
 Refer to professional preparer if taxpayer wants to take full
amount
Taxes
Deductible
• Taxes imposed on and paid by the taxpayer in the tax
year
Nondeductible
• Taxes the taxpayer pays for someone else
• Taxes someone else pays for the taxpayer
• Taxes not paid during the tax year
Taxes
Deductible
•
•
•
•
State and local taxes
Real estate taxes
Personal property taxes
State and local taxes on a
new car purchase
• Ad valorem tax on car tags
Nondeductible
•
•
•
•
Federal taxes
Hunting licenses
Water/sewer
Taxes on alcohol, tobacco,
or gas
• Utilities
State and Local Taxes
Taxpayers can choose one of the following, but not
both:
• Income taxes
• Sales taxes
 County sales tax amounts differ
 SC state sales tax is 6%
 TaxWise will make an estimate of sales tax paid based on
income
Home Mortgage Interest
Any interest paid on a loan secured by the
taxpayer’s home, line of credit, or a home equity
loan.
Generally reported on Form 1098
Home Mortgage Interest
Only taxpayers who are legally liable for the debt
can deduct the interest
Taxpayers may have more than one mortgage or
may have refinanced and have multiple statements
Points: only points paid as a form of interest (for
the use of money) can be deducted
Form 1098: Mortgage Interest Statement
Form 1098: Mortgage Interest Statement
Boxes 4 or 5 MAY also report real estate taxes
These amounts can be included as an itemized
deduction
Nondeductible Interest
Personal interest
• personal loans
• car loans
• credit cards
• etc.
Casualty and Theft Losses
Out of Scope!
Miscellaneous Deductions
Union dues
Uniforms (that cannot be worn in any other
circumstance)
Professional books, journals
Small tools and supplies, used for business
Miscellaneous Deductions
Employment-related educational expenses
• Includes educator expenses > $250 (after the
adjustment)
Expenses for looking for a new job
Tax preparation fee from last year
Safe deposit box
Gambling losses up to amount of winnings
Nondeductible Expenses
Burial or funeral expenses
Wedding expenses
Fees and licenses
Fines, penalties, traffic tickets
Home repairs and insurance
Rent
Insurance premiums (except health and mortgage)
Losses from sale of home
Example
Are the following expenses deductible?
1. Medical insurance premiums
2. Vitamins
3. Federal income tax
4. Interest on car loan
5. Church contribution
6. Tax preparation fee from last year
Example – Answer
Are the following expenses deductible?
1. Medical insurance premiums - YES
2. Vitamins
3. Federal income tax
4. Interest on car loan
5. Church contribution
6. Tax preparation fee from last year
Example – Answer
Are the following expenses deductible?
1. Medical insurance premiums - YES
2. Vitamins - NO
3. Federal income tax
4. Interest on car loan
5. Church contribution
6. Tax preparation fee from last year
Example – Answer
Are the following expenses deductible?
1. Medical insurance premiums - YES
2. Vitamins - NO
3. Federal income tax - NO
4. Interest on car loan
5. Church contribution
6. Tax preparation fee from last year
Example – Answer
Are the following expenses deductible?
1. Medical insurance premiums - YES
2. Vitamins - NO
3. Federal income tax - NO
4. Interest on car loan - NO
5. Church contribution
6. Tax preparation fee from last year
Example – Answer
Are the following expenses deductible?
1. Medical insurance premiums - YES
2. Vitamins - NO
3. Federal income tax - NO
4. Interest on car loan - NO
5. Church contribution - YES
6. Tax preparation fee from last year
Example – Answer
Are the following expenses deductible?
1. Medical insurance premiums - YES
2. Vitamins - NO
3. Federal income tax - NO
4. Interest on car loan - NO
5. Church contribution - YES
6. Tax preparation fee from last year - YES
Itemized Deductions (South Carolina Return)
If the taxpayer is itemizing deductions on the
Federal and State returns you always enter the
itemized deductions on Sch A on the Federal return.
All of the information from the Sch A carries over
to the South Carolina return
Itemized Deductions
TaxWise Walkthrough
• Take notes in your TaxWise Training Notes Packet
Open up Kevin Kent in TaxWise
• Enter Itemized Deductions
Nonrefundable Credits
Nonrefundable Credits
Remember: Nonrefundable credits directly reduce
the tax liability, but only to zero (no refund of
additional credit is available)
Child & Dependent Care Credit
Retirement Savings Contribution Credit
Foreign tax credit
Residential energy credit
Child & Dependent Care Expenses Credit
Nonrefundable credit
Applied to offset expenses paid so taxpayer can
work or look for work
• Dependent child under 13
• Spouse who is incapable of self-care
• Dependent who is incapable of self-care
Child & Dependent Care Expenses Credit:
Eligibility
Care had to be for qualifying persons
Taxpayer (and spouse) had to have earned income
• A spouse is treated as having earned income for any
month the spouse is physically/mentally incapable of
care, or is a full-time student.
Child & Dependent Care Expenses Credit:
Eligibility
Expenses must have been for work or to look for
work
Payments can’t have been made to taxpayer’s
spouse, dependent child or child under 19
Must have care provider’s name, address, and
SSN/EIN (due diligence)
Child & Dependent Care Expenses Credit:
Qualified Work-Related Expenses
Expenses must be paid for the care of the
qualifying person to allow the taxpayer (and
spouse) to work or look for work
Care includes the costs of services for the
qualifying person’s well-being and protection
Child & Dependent Care Expenses Credit:
Qualified Work-Related Expenses
Expenses to attend Kindergarten or a higher
grade: NOT AN EXPENSE
Expenses for summer day-camp qualify, but those
for over-night camp are not!
$3,000 limit for one qualifying person or $6,000
for two or more qualifying persons.
Child & Dependent Care Expenses Credit:
Notes
If you had expenses that met the requirements for the
previous tax year, except that you did not pay them
until the current tax year, you may be able to claim
them on your tax return.
Taxpayer’s who cannot provide all of the provider’s
information or who have incorrect information may still
be able to take the credit if they can show they used
due diligence in trying to obtain the info.
Retirement Savings Contributions Credit:
General Eligibility Requirements
A contribution to an IRA or other qualified plan for
the tax year
AGI limitations (vary based on filing status)
Age 18 or older
Not claimed as a dependent on someone else’s tax
return
Not a full-time student during the tax year
Retirement Savings Contribution Credit:
Form W-2
Retirement Savings Contribution Credit:
Contributions Record
Contribution information could appear in Box 12 of
Form W-2 (typically code D or E) or as a check in
Box 13
If contribution information is found is listed
somewhere else, ask your Site Coordinator
• Box 14 of Form W-2
• Not reported on the W-2 (ask the taxpayer!)
Retirement Savings Contribution Credit:
Contributions Record
How do I know if the taxpayer has made a
qualifying contribution?
• Form W-2, Box 12 and one of the codes: D, E, F, G, H,
S, AA or BB
• Form W-2, Box 14 and codes for military personnel: Q
or E
CAUTION: Entries in box 14 that are treated a
employer contributions are NOT eligible for the credit
Retirement Savings Contributions Credit:
Eligible Contributions
Some retirement distributions reduce the eligible
contributions for the credit
In addition to retirement distributions made during
the current tax year, the taxpayer must also reduce
eligible contributions for distributions taken during
the previous two tax years
Foreign Tax Credit
Taken if a taxpayer paid income tax to a foreign
country; U.S. possession; or political subdivision,
agency, or instrumentality of a foreign country
Foreign tax paid > $300 is out of our scope!
We may see some foreign tax reported on a
1099-DIV or 1099-INT in Box 6
Form 1099-DIV: Dividends and
Distributions
Residential Energy Credit
Two Types of Residential Energy Credits
• Residential energy-efficient property credit – OUT OF
SCOPE!
• Nonbusiness energy property credit
Available to a taxpayer:
• Who made purchases for qualified energy efficient
improvements for his/her main home
• Who owns his/her home
Nonbusiness Energy Property Credit
Non-business energy property (for home
improvement):
• Heating
• Ventilating
• Air-conditioning
• Insulation
•
•
•
•
Roofs
Water heaters (non-solar)
Windows
Doors
Eligibility Requirements
Improvements must be for taxpayer’s main home
• The home where the taxpayer lives most of the time
• Temporary absences do not change main home
Credit is only available for improvements made to
existing homes
• Cannot claim based on expenses paid during the
construction of a home
Eligible Expenses
Any insulation material or system that is specifically
and primarily designed to reduce heat loss or gain of a
home when installed in or on such a home
Exterior windows and skylights
Exterior doors
Any metal roof with appropriate pigmented coatings
or asphalt roof with appropriate cooling granules that
are specifically and primarily designed to reduce the
heat gain of your home
Eligible Expenses
Certain electric heat pump water heaters
Electric heat pumps
Central air conditioners
Natural gas, propane, or oil water heaters
Stoves that use biomass fuel
Eligible Expenses
Qualified natural gas, propane, or oil furnaces
Qualified natural gas, propane, or oil hot water
boilers
Certain advanced main air circulating fans used in
natural gas, propane, or oil furnaces
Credit Dollar Limits
Total combined credit – $500
• For all tax years after 2005
Windows credit limit – $200
For all tax years after 2005
Air circulating fan – $50
Natural gas, propane, oil furnace or hot water boiler $150
Energy-efficient building property – $300
Miscellaneous Nonrefundable Credits
TaxWise Walkthrough
• Take notes in your TaxWise Training Notes Packet
Open up Kevin Kent in TaxWise
• Enter Foreign Tax Credit & Residential Energy Credits
Education Credits
Education Credits
Education credits help to offset the cost of higher
education expenses paid during the year
Two education credits available
• Nonrefundable: Lifetime learning credit
• Partially Refundable: American opportunity credit
General Eligibility
Filing status cannot be Married Filing Separately
Cannot be claimed as a dependent on someone
else’s return
Accredited institution
CAN claim on the basis of expenses paid with
student loans
Dependents
When the student can be claimed as a dependent:
• Taxpayer must claim credit if taxpayer claims the
exemption
• Student must claim credit if taxpayer does not claim
exemption
If the taxpayer claims the dependency exemption, any
amount paid by the student is considered to have been
paid by the taxpayer
American Opportunity
(Hope) Credit
Lifetime Learning Credit
Up to $2,500 per eligible student ($1,000 is
refundable)
Up to $2,000 credit per return
Available for the 1st 4 years of college
Available for all years
Student must be pursuing a degree or recognized
education credential
Student does not need to be pursuing a degree or
credential
Student must be enrolled at least half time
Available for one or more courses
No felony drug conviction on student’s record
Felony drug conviction does not apply
Expenses include tuition, fees, and course
materials
Expenses include only tuition and fees
Form 1098-T: Tuition Statement
Form 1098-T: Payments Received For
Qualified Tuition and Related Expenses
Reported in box 1
Shows the total payments RECEIVED by the
institution in the tax year from any source for
qualified tuition and related expenses
Form 1098-T: Amounts Billed for
Qualified Tuition and Related Expenses
Reported in box 2
Shows the total payments BILLED in the tax year for
qualified tuition and related expenses
Some institutions will only list an amount in box 2
(and will not list the amount RECEIVED in box 1)
If there is ONLY an amount listed in box 2, you must ask the taxpayer
how much they actually paid during the tax year before using the
amount for the credit (or adjustment)
Form 1098-T: Scholarships or Grants
Reported in box 5
Shows the total of all scholarships or grants
administered and processed by the institution
The amount of scholarships or grants must be
subtracted from the total amount of expenses paid
when figuring the credit (or adjustment)
Form 1098-T: Amounts for an Academic
Period Beginning Jan – March 20XX
Reported in box 7
This box will be checked if the amount in box 1 or
2 (amounts RECEIVED and BILLED by the institution)
includes amounts paid for an academic period
beginning in January AFTER the tax year
Form 1098-T: Amounts for an Academic
Period Beginning Jan – March 20XX
Example:
• A taxpayer is filing a 2014 tax return
• Box 7 is checked
• Box 1 or 2 amounts thus include amounts that were
received or billed by the institution for the spring
academic period beginning in January – March of
2015
Form 1098-T: Check if At Least Half-time
Student
Reported in box 8
Shows whether the student is considered to be
carrying at least one-half the full-time workload
for the student’s course of study at the institution
Number of hours considered half-time can vary
based on the institution’s policies
Qualified Expenses for Credit
American Opportunity (Hope) Credit
• Qualified tuition and related expenses up to $4,000
per eligible student
• Includes expenses for course materials – books,
supplies, and equipment needed for a course of study,
whether or not they were purchased from institution
Qualified Expenses for Credit
Lifetime Learning Credit
• Expenses include only tuition and fees
• Course-related books, supplies and fees are included
ONLY if they must be paid to the institution as a
condition of enrollment
Expenses That Do Not Qualify
Room and board
Insurance
Medical expenses (including student health fees)
Transportation costs
Personal, living or family expenses
Expenses for a course involving sports, games or
hobbies, unless it is required for the degree/certificate
No Double Benefits
The taxpayer CANNOT claim:
• Both the American opportunity and lifetime learning
credits for the same qualified tuition expenses
• Expenses paid with a tax-free scholarship, grant, or
other assistance, including Pell grants (in other words,
the taxpayer must subtract these scholarships from the
total expenses before claiming either credit)
No Double Benefits
The taxpayer CANNOT claim:
• Both an education credit AND the tuition and fees
adjustment for the same qualified tuition expenses
• Most taxpayers benefit more from the credit, but you
should try the expenses as both an adjustment AND a
credit to determine which benefits the taxpayer more
Qualified Expenses
IMPORTANT!
Verify with the taxpayer that the amount
in Box 1 or 2 of Form 1098-T is actually
the amount paid in the current tax year for
qualified expenses!
Payments for the Next Academic Year
Taxpayers can claim payments paid in the tax
year for the academic period that begins in
January – March of the next tax year
Remember: Box 7 will be checked on the Form
1098-T indicating that the amount in box 1 or 2
includes amounts paid for the next academic year
Payments for the Next Academic Year
Example:
• Michael pays $1,500 in December 2015 for the winter
semester that begins in January 2016
• He can use the $1,500 paid in December 2015 to
compute his credit for his 2015 tax return
• However, he cannot count the $1,500 again on his
2016 tax return
Form 8863: Education Credits
Determining the Amount of the Credit
Review the list of qualifying students and expenses and
decide which credit is best.
Enter each qualifying student and SSN on Form 8863
Enter the students’ qualifying expenses
•
•
•
•
Include only qualified expenses
Are reduced by untaxed benefits (scholarships, grants, etc.)
Are reduced by amounts paid in previous years
Do not exceed the limit for the credit
Nonrefundable vs. Refundable
Lifetime Learning Credit
• Entirely nonrefundable
• Limit to $2,000 PER RETURN (not per eligible student)
American Opportunity Credit
• Partially refundable – up to $1,000 PER STUDENT
• Limit to $2,500 PER STUDENT (not per return)
Refundable American Opportunity Credit
for Taxpayers under the age of 24
See Your Site Coordinator if you have a taxpayer
under the age of 24 claiming an education credit –
the taxpayer may or may not be eligible to take
the refundable American Opportunity Credit, but
the process for determining eligibility is
complicated
Example
James takes one course at a local community
college. He received a Form 1098-T showing
qualified tuition expenses of $1,000. He lives
with his parents, who can claim him as a
dependent. Who is entitled to claim the credit?
Which credit?
Example – Answer
If James’s parents claim him, they must claim the
credit
If James’s parents do not claim him, James must
claim the credit
Lifetime Learning Credit
Example
LaQuandra is a sophomore enrolled at UAB fulltime. She provides all of her own support. She
paid $10,000 in the tax year for tuition and fees
for enrollment to UAB. She received a tax-free
scholarship worth $4,000, and paid the rest from a
student loan in her name. Can LaQuandra claim
an education credit? Which one? How much of
her expenses are qualified expenses?
Example – Answer
Yes
American Opportunity Credit
Qualified expenses = $6,000 ($4,000)
Education Credits
TaxWise Walkthrough
• Take notes in your TaxWise Training Notes Packet
Open up Kevin Kent in TaxWise
• Enter Education Credits
Affordable Care Act
What is the Affordable Care Act (ACA)?
The federal government, state governments, insurers,
employers, and individuals share responsibility for improving
the quality and availability of health insurance coverage in
the United States
The ACA reforms the existing health insurance market by
prohibiting insurers from denying coverage or charging
higher premiums because of an individuals pre-existing
conditions.
The ACA also created the Health Insurance Marketplace
(also known as www.healthcare.gov)
Healthcare.gov
Where taxpayers:
• Find information about health insurance options
• Purchase health insurance
• Obtain help paying premiums and out-of-pocket costs (if
eligible)
A refundable tax credit, The Premium Tax Credit, is
available through the Marketplace and helps eligible
taxpayers pay for coverage
Shared Responsibility Provision
The Affordable Care Act requires individuals to:
• Have qualifying health coverage, called minimum
essential coverage, for each month of the year
• Qualify for a coverage exemption, OR
• Make a shared responsibility payment when filing their
federal income tax returns
 This is essentially a tax penalty for not having coverage
Use Your Resources!
Use the Publication 4012, ACA Tab
and
Affordable Care Act Survival Kit Guide
to help you complete the ACA provisions on the
tax return!
What is Minimum Essential Coverage?
Minimum essential coverage (MEC) is health
coverage that satisfies the individual shared
responsibility requirement
Most health insurance is MEC
No proof of coverage is needed. Oral statement from the
taxpayer is acceptable, unless normal due diligence leads you
to believe the taxpayer’s statement is incorrect
Who Needs MEC?
Everyone on the tax return needs MEC or a
coverage exemption
The taxpayer is responsible for the insurance,
coverage exemption, or individual shared
responsibility payment (penalty) of each person on
the return
How Many Months Do Taxpayers Need to
Have MEC?
Everyone needs MEC for every month
• A person is considered covered for the whole month if
they had coverage for at least one day
• A person who was born or died during the year is
required to have coverage for every full month alive
Types of Minimum Essential Coverage
Employer-Sponsored Coverage
• Group health insurance coverage for employees under
 A governmental plan (such as the Federal Employees Health
Benefit Program)
 A grandfathered health plan
• A self-insured health plan for employees
• COBRA coverage
• Retiree coverage
Types of Minimum Essential Coverage
Individual Health Coverage
• Health insurance purchased directly from an insurance
company
• Health insurance purchased through healthcare.gov
• Health insurance through a student health plan
Types of Minimum Essential Coverage
Government-Sponsored Programs:
• Medicare Part A coverage
• Medicare Advantage plans
• Most Medicaid coverage
• Children’s Health Insurance Program (CHIP)
 ALL Kids (Alabama)
Types of Minimum Essential Coverage
Government-Sponsored Programs:
• Most TRICARE coverage
• Veteran Affairs comprehensive health care
• Peace Corps volunteer health coverage
• Department of Defense Nonappropriated Fund Health
Benefits Program
• Refugee Medical Assistance
Types of Minimum Essential Coverage
Other Coverage
• Certain foreign coverage
• Certain coverage for business owners
Does NOT Qualify as MEC
There are some health plans that may provide limited
benefits but do not qualify as MEC
Includes:
• Coverage consisting solely of excepted benefits such as
standalone dental/vision insurance, disability income
insurance, worker’s comp insurance
• Medicaid providing only specific medical services (such as
family planning, pregnancy-related, etc.)
• AmeriCorps and AfterCorps coverage
Tax Forms That Show Evidence of
Coverage: Form W-2, Form SSA-1099
Tax Forms That Show Evidence of
Coverage: Form 1095-A
Tax Forms That Show Evidence of
Coverage: Form 1095-C
What is a Health Coverage Exemption?
A reason for not having health insurance that
avoids payment of the individual shared
responsibility payment
Who Needs a Health Coverage
Exemption?
Anyone without insurance coverage for any
month should be screened for exemption
eligibility
Exemptions: Where Do I Start?
Step
1
Does anyone on the tax return already have
an exemption in hand from the Marketplace
(healthcare.gov)?
Marketplace exemptions require an application. If a
person applied for an exemption, they should have
received an Exemption Certificate Number (ECN) from
healthcare.gov (it is a 6 or 7 alphanumeric code)
Exemptions: Where Do I Start?
Step
2
Is household or gross income under the
filing threshold?
If YES, everyone on the tax return is exempt from the
coverage requirement, and there is no need to consider
additional exemptions
Exemptions: Where Do I Start?
Step
3
If the family does not qualify for an
exemption under Step 2, does any
individual qualify for an exemption that can
be claimed directly on the return?
If YES, enter the exemption code on the tax return
Exemptions: Where Do I Start?
Step
4
For any uninsured individual that does not
qualify under Step 2 or 3, does any
individual on the tax return qualify for an
exemption from healthcare.gov?
If YES, see your Site Coordinator for additional help in
applying for the exemption and enter “pending” on the
tax return
Exemptions: Granted By Healthcare.gov
Homelessness
Eviction in the last 6 months or facing eviction or
foreclosure
Utility shut-off notice
Domestic violence
Recent death of a close family member
Exemptions: Granted By Healthcare.gov
Disaster that resulted in significant property
damage
Bankruptcy in the past 6 months
Debt from medical expense in last 24 months
High expense caring for ill, disabled or aging
relative
Exemptions: Granted By Healthcare.gov
Determined ineligible for Medicaid because state
did not expand coverage**
• Will be common at SaveFirst sites!
Other exemptions – see ACA Survival Kit, page 5
If it seems your taxpayer may qualify for a hardship
exemption granted from healthcare.gov, see your Site
Coordinator!
Exemptions: Household/Gross Income
Below Filing Threshold
Household Income
The Modified Adjusted Gross Income (MAGI) of each individual
on the tax return with a filing requirement. Include dependent
income ONLY IF the dependent has a filing requirement
Gross Income
All the income received in the form of money, goods, property,
and services that is not exempt from tax, including taxable
portions of Social Security (do not income dependent income)
See Filing Basics tab of Pub 4012 for Filing Thresholds
Exemptions: Claimed on the Tax Return
Certain noncitizens and U.S. citizens living abroad
Federally recognized Indian tribe or eligible for
services through the Indian Health Service
Member of a health care sharing ministry
Incarceration
Exemptions: Claimed on the Tax Return
Unaffordable Insurance (cost of coverage exceeds
8% of household income)
Aggregate cost of employer insurance in
unaffordable
Short coverage gap (less than 3 months)
Full list of exemptions for Individuals claimed on the tax
return can be found in Pub 4012, ACA Tab
What is a Premium Tax Credit?
A premium tax credit (PTC) lowers the cost of
health insurance coverage purchased from
healthcare.gov
PTCs can be either:
Taken in advance (payment forwarded directly to the insurer
monthly to reduce premiums), OR
Taken on the tax return (payment is claimed as a lump sum
when filing the return)
Premium Tax Credits: Where Do I Start?
Step
1
Did the taxpayer or dependent purchase
coverage from healthcare.gov?
If YES, complete Form 8962 and go to Step 2.
If NO, do not complete Form 8962 and STOP.
Premium Tax Credits: Where Do I Start?
Did the taxpayer receive Form 1095-A,
Health Insurance Marketplace Statement?
Step
2
If YES, use this to complete Form 8962. All members of
a household in a single policy will be on one Form
1095-A (if family members enroll in different policies
or made mid-year changes, there will be multiple
1095-As)
If NO, call the Marketplace call center and/or check
taxpayer’s account on healthcare.gov
Form 1095-A: Health Insurance
Marketplace Statement
Affordable Care Act
TaxWise Walkthrough
• Take notes in your TaxWise Training Notes Packet
Open up Kevin Kent in TaxWise
• Enter Affordable Care Act related information
Capital Gain or Loss
Capital Assets & Investment Income
Stocks and bonds, types of capital assets, produce
investment income in the form of:
• Interest
• Dividends
• Capital Gains
What is a Capital Asset?
Most property you
own and use for
personal purposes or
investment is a capital
asset
Stocks and bonds
Homes
Household furnishings
Cars
Gems and jewelry
What is a Capital Gain?
An increase in the owner’s basis in a capital asset
that gives it a higher worth than its purchase price.
The gain is not realized until the asset is sold
Basis, Long-term, Short-term
Generally, an asset’s basis is the original cost to
the owner. Capital gains occur if the asset is sold
for more than the basis.
Capital Gains are classified as either long-term or
short-term. This designation is important because
long-term capital gains are generally taxed at a
lower rate than short-term capital gains.
What are Stocks?
What are Bonds?
A type of security that
represents ownership
in a corporation and
represents a claim on
part of the
corporation’s assets
and earnings.
A debt investment in which an
investor loans money to an entity
(typically corporate or
governmental) which borrows the
funds for a definite period of time
at a variable or fixed interest rate.
Bonds are used by companies and
governments to raise funds to
finance a variety of projects.
Owners of bonds are debtholders.
Capital Gains on Mutual Funds
Capital gains occur
when a taxpayer
sells, exchanges, or
redeems stock, bonds,
or other capital assets
Sale:
Transfer of shares
for money
Exchange:
Transfer of shares
for other shares
Redemption:
Fund reacquires
shares in exchange
for money or
property
Sale of Stock
Capital
Gain
Amount
Realized
Adjusted
Basis
Gain: amount realized is GREATER
than adjusted basis
Loss: amount realized is LOWER than
adjusted basis
Basis & Adjusted Basis
Basis: the original cost of the asset to the owner
Adjusted Basis: the original cost of the asset to the
owner increased or decreased to account for
commissions, fees, depreciations, etc.
Basis & Adjusted Basis
Why is it important to determine the adjusted basis
of the asset?
Adjusted basis is necessary to compute the gain or loss
on a sale.
If the basis is not reported, the taxpayer must provide
this information
If the taxpayer cannot provide their basis, the IRS will
deem it be zero
Basis Other than Cost
Property Inherited (before and after 2010)
Inherited property before and after 2010 is the FMV of
the property on the date of the decedent’s death
Property Inherited during 2010
Special rules apply to property inherited in 2010, and
they can be complex – Out of Scope unless the taxpayer
can provide the basis and holding period
Basis Other than Cost
Property Received as a Gift
Determination of property received as a gift requires
multiple pieces of information and can be complex –
Out of Scope
Holding Period
Short-term
Asset is held for one year or less
Long-term
Asset is held for more than one year
Holding period begins the day after property is acquired
and continues through the day sold
NOTE: INHERITED PROPERTY IS ALWAYS LONG-TERM
Why is Determining Holding Period
Important?
Because short-term gains are taxed at regular
income tax rates, while long-term gains are taxed
at a lower-rate than the other income reported on
the return
Mutual Funds
Mutual funds are one of the ways individuals
invest in capital assets. Mutual funds are made up
of a pool of funds collected from many investors
for the purpose of investing in stocks, bonds, and
other similar assets. Each shareholder participates
proportionally in the gain or loss of the fund
Mutual Funds
Owners of mutual funds may receive both…
Form 1099-DIV
…reporting capital gain distributions from sales of stock
held by the mutual fund in Box 2a. Profits of these sales
are reported to shareholders of the fund as capital gain
distributions
Mutual Funds
Owners of mutual funds may receive both…
Form 1099-B
…reporting the sale of any shares of stock in the
mutual fund itself
Form 1099-B: Proceeds From Broker and
Barter Exchange Transactions
Form 1099-B: Description of Property
Reported in box 1a
Shows a brief description of the item being sold
Example, “100 shares of XYZ co.”
Form 1099-B: Date Acquired
Reported in box 1b
Shows the date the items sold were acquired
Note that this box may be show various dates if
the items were purchased on different days
If date acquired is not reported, the return is out
of scope unless the taxpayer can provide the dates
Form 1099-B: Date Sold or Disposed
Reported in box 1c
Shows the trade date of the sale or exchange
Used to help determine the holding period
Form 1099-B: Proceeds
Reported in box 1d
Shows the cash proceeds, reduced by any
commissions or transfer taxes related to the sale,
for transactions involving stocks and bonds
Used to help determine the capital gain or loss
Form 1099-B: Cost or Other Basis
Reported in box 1e
Shows the basis of the stocks/bonds sold
Usually this is it’s cost, but sometimes it is the FMV
of the property when inherited
Used to help determine the capital gain or loss
Form 1099-B: Code, if Any
Reported in box 1f
A variety of codes can appear in this box
The only code in scope for VITA is Code W
• Indicates a wash sale
• There will also be an amount in box 1g
Form 1099-B: Adjustments
Reported in box 1g
Usually, shows the amount of a nondeductible loss
related to a wash sale
• This amount corresponds with Code W in box 1f
• Out of scope if box 1f is not Code W
Form 1099-B: Type of Gain or Loss
Reported in box 2
Indicates if the sale is a short-term or long-term
gain/loss
Form 1099-B: If Checked, Basis Reported
to the IRS
Reported in box 3
Indicates that the basis reported on Form 1099-B
has been reported to the IRS
We can still report the capital gain/loss if the basis
hasn’t been reported to the IRS
Form 1099-B: Federal Income Tax
Withheld
Reported in box 4
Reports any federal income tax withheld
Not required, this will often be blank
Form 1099-B: If Checked, Noncovered
Security
Reported in box 5
If checked, the securities (stocks/bonds) were
noncovered securities
• Generally, stock purchased before 2011 or stock in most
mutual funds purchased before 2012
Box 1b, 1e, and 2 may be blank (date acquired, basis,
holding period) and must be provided by the
taxpayer—If they cannot be determined, the return is
out of scope
Form 1099-B: Reported to IRS: ❒Gross
Proceeds, ❒Net Proceeds
Reported in box 6
If gross proceeds is checked, ask the taxpayer for
the amount of commissions/fees paid and add to
the taxpayer’s basis
If net proceeds is checked, the broker subtracted
the commissions and fees from the proceeds (no
additional steps required)
Information Need from 1099-B to Report
in TaxWise
Basis or Adjusted Basis
Holding Period
• Long or Short Term
Proceeds from Sale
Date Acquired and Sold
If any of this information is missing from the Form 1099-B, taxpayer should
contact stockbroker; if the basis cannot be determined, the IRS deems basis to
be zero.
Tax Reporting Statement
(Form 1099-B Substitute)
Schedule D
All capital gains and losses are compiled on
Schedule D
Schedule D
Part I: Short Term Capital Gains/Losses
Part II: Long Term Capital Gains/Losses
Part III: Summary
Sch D is where the information carries over to and the
aggregate GAIN or LOSS is reported
Form 8949
Form 8949 is used to report the sale or exchange
of capital assets
Form 8949
Different Form 8949s must be used for each type
of transactions
The overall gain or loss from from different types
of transactions reported on all Forms 8949 are
figured on the Schedule D
Form 8949
Code A: The taxpayer received a Form 1099-B (or
substitute statement) for the short-term transaction and
basis of the stock was reported to the IRS
Code B: The taxpayer received a Form 1099-B (or
substitute statement) but the basis of the short-term
transaction was NOT reported to the IRS
Code C: The taxpayer had a short-term transaction in
which A or B cannot be checked because they did not
receive a Form 1099-B (or substitute statement)
Form 8949
Code D: The taxpayer received a Form 1099-B (or
substitute statement) for the long-term transaction and
basis of the stock was reported to the IRS
Code E: The taxpayer received a Form 1099-B (or
substitute statement) but the basis of the long-term
transaction was NOT reported to the IRS
Code F: The taxpayer had a long-term transaction in
which D or E cannot be checked because they did not
receive a Form 1099-B (or substitute statement)
Remember Form 8949
If the taxpayer had...
• Some sale of stock that was reported on a Form 1099B (or substitute statement) with basis reported to the
IRS and
• Some sale of stock that was reported on a Form 1099B (or substitute statement) with basis NOT reported to
the IRS then....
...Need multiple Form 8949s
Remember Form 8949
If the taxpayer had...
• Some sale of stock that was reported on a Form 1099B (or substitute statement) with basis reported to the
IRS and
• Some sale of stock that was not reported on a Form
1099-B (or substitute statement)
...Need multiple Form 8949s
Carryover Capital Losses
Capital Losses on sales of stocks/bonds can be
deducted from taxable income, reported on
Schedule D
Capital losses are limited to the lesser of $3,000
($1,500 if MFS) or the total net loss
Carryover Capital Losses
Capital Losses on sales of stocks/bonds can be
deducted from taxable income, reported on
Schedule D
Any yearly net loss over $3000 (or $1,500 if MFS) can
be carried over to the next year and treated as if it were
incurred in that tax year
Losses retain their holding period status, and if loss is
not claimed in a year, it is forfeited
Example
Jeff (who is single) had $8,000 worth of capital
losses in incurred in 2013. How much loss would
he claim on his 2013 return? 2014 return? 2015
return?
Example – Answer
Jeff would claim:
$3,000 worth of loss on his 2013 return
$3,000 worth of loss on his 2014 return
$2,000 worth of loss on his 2015 return
Example
Again, Jeff (who is single) had $8,000 worth of
capital losses in incurred in 2013. He claimed
$3,000 worth of loss on his 2013 return, but
forgot to claim any loss on his 2014 return. How
much will Jeff claim in capital losses on his 2015
return?
Example – Answer
Jeff will claim $2,000 worth of loss on his 2015
return. Even though Jeff didn’t claim any loss in
2014, he must decrease his amount of unused loss
that should have been claimed in 2014 before
claiming any additional loss on his 2015 return.
Worthless Securities
Worthless securities: stocks or bonds
No reasonable hope that investors will get
anything for their holding
Even if only worth pennies, shares are not worthless
Treated as if sold on the last day of the tax year
Out of scope for VITA!
Sale of Stock: Out of Scope
Stock received as a gift
Stock received as a part of Employee Stock Option Plan
Inherited stock with basis calculated other than using date of
decedent’s death
Determining the basis of stock acquired from decedent who
died in 2010
Bonds or other tax-exempt holdings with basis not
determined
Example
John bought 100 shares of ABC stock at $10 each
in 2004. Then, he bought 50 additional shares at
$12 each in 2005. He had to pay a commission of
$50 to acquire the 2005 stocks. What is his basis
in the ABC stock?
Example – Answer
100 shares x $10
50 shares x $12
$50 commission
$1,650
Example
On March 15th, Bill bought 1,000 shares of stock
for $15,000, including commission. On March
15th, one year later, he sold 600 shares of the
stock for $7,800, net proceeds (shown on a Form
1099-B). Is this short term or long term? Is this a
loss or a gain?
Example – Answer
$7,800 (sales price)
($15,000÷1,000 shares) x 600 shares sold
$1,200
Short-term Loss
Example
Ruth bought 200 shares of XYZ stock for $600.
She paid a $50 fee to acquire the shares. She sold
all of the shares for $900. She paid a 5% ($45)
commission to sell the shares. Her Form 1099-B
lists gross proceeds of $900. What is the adjusted
basis? What is the gain/loss?
Example – Answer
$600 (purchase price)
$50 purchase fee
$45 commission selling fee
$695 (Adjusted Basis)
$900 (Sales price)
$695
$205 (ST gain)
Sale of Home
Sale of Home
Taxpayers can exclude $250,000 ($500,000 if MFJ)
of the gain from taxable income
• If they meet Ownership AND Use tests
• Not excluded gain in two years prior to current sale of
home
If the taxpayer can exclude all of the gain, it is not
necessary to report the sale
A loss cannot be deducted, but taxpayers still need to
report the loss
Ownership and Use Tests
In the 5 years preceding date of sale, taxpayer must:
• Own the home for at least 2 years (either spouse if MFJ)
• Live in the home as his/her main home for at least 2 years
(both spouses if MFJ)
Can be different 2-year periods
Important: If either spouse does not meet requirements, it is OUTSIDE THE SCOPE OF
VITA
Determining Main Home
Taxpayers CANNOT choose their main home!
• Must live in the home most of the time
• In same location as place of employment, organizations,
church, banks
• Other family members live there
• Address for bills and homestead exemption
• Address listed on tax returns, driver’s license, car
registration, voter registration
Reporting the Gain
GAIN = AMOUNT REALIZED – ADJUSTED BASIS
Selling Price: Total amount received from sale
Amount Realized: Selling Price – Selling expenses
Basis:
• The price of purchase OR
• FMV on date of decedent’s death (inherited property)
Adjusted Basis: Additions/improvements useful life > 1
year (pool, roof, additional room, etc.)
Reporting the Gain
Gains are NOT reported unless greater than the
exclusion amount!
• Unless taxpayer receives 1099-S (reported, but not taxed)
• Report on Part II of Schedule D (Long Term Gains)
CANNOT deduct losses:
• If taxpayer receives a 1099-S, he/she must report a loss of
“0” on Sch D
1099-S: Proceeds From Real Estate
Transactions
Cancellation of Debt
Cancellation of Debt
Includes auto loans, credit card debt, medical care,
professional services, installment purchases of furniture or
other personal property, mortgages, and home equity loans
A debt includes any indebtedness for which a taxpayer is
liable or which attaches to the taxpayer’s property
Generally, if a debt for which a taxpayer is personally
liable is canceled or forgiven, other than as a gift or
bequest, the taxpayer must include the canceled amount in
income
Cancellation of Debt
Only one type of cancellation of debt issue is in
scope for VITA:
• Nonbusiness credit card debt
Cancellation of Debt
A taxpayer may have credit card debt that was
canceled by a creditor or a lender.
Generally, if a taxpayer receives a Form 1099-C
for canceled credit card debt and was solvent
immediately before the debt was canceled, all the
canceled debt will be included on Form 1040, line
21, other income
Cancellation of Debt
Lenders or creditors are required to issue Form 1099-C
if they cancel a debt of $600 or more
If the debt canceled is less than $600, some lenders or
creditors may send a letter or some other form of
notification to the taxpayer
Generally, taxpayers must include all canceled amounts
(even if less than $600) on Form 1040, line 21, other
income
Form 1099-C: Cancellation of Debt
Credit Card Debt
Cancellation of Debt Terms
Liabilities: amounts owed including mortgages, home
equity loans, vehicle loans, credit card debts, past-due
mortgage interest, real estate taxes, etc.
Assets: The FMV of homes, cars, bank accounts, IRAs,
401(k)s, furniture, clothes, jewelry, etc.
Solvency: The condition in which assets are greater
than liabilities
Insolvency: The condition in which liabilities are
greater than assets
Solvency vs. Insolvency
Only taxpayers who are solvent are in scope for
VITA
Insolvency is out of scope for VITA
Use the Insolvency Determination Worksheet as a
resource to determine whether a taxpayer is
considered insolvent (Found in the Pub 4012)
Insolvency Determination Worksheet
Example
John made a deal with his credit card company to pay
$2,000 on his $7,000 balance, and the company
agreed to take it as payment in full. In January of the
current year, John received a Form 1099-C from his
credit card company reporting $5,000 (the amount of
debt canceled). John was solvent immediately before
the debt was canceled. How does John need to report
the $5,000 from the 1099-C?
Example – Answer
John will report the entire $5,000 as income on
Form 1040, line 21 as other income
Screening Tool for Nonbusiness Credit Card
Debt Cancellation (Pub 4012)
Did the taxpayer receive Form 1099-C,
Cancellation of Debt, or other documentation (if
If Yes: Go to
less than $600) from a creditor and is the
Step 2
information shown on the form or document
correct?
These issues are outside the scope of
VITA. Refer to the IRS or a
professional tax preparer.
If No
Screening Tool for Nonbusiness Credit Card
Debt Cancellation (Pub 4012)
Was the cancellation of debt related to a
business?
These issues are outside the scope of
VITA. Refer to the IRS or a
professional tax preparer.
If No: Go to
Step 3
If Yes
Screening Tool for Nonbusiness Credit Card
Debt Cancellation (Pub 4012)
Does box 3 of Form 1099-C show any interest
or was box 6 checked to indicate bankruptcy?
*Note: If the bankruptcy box is not checked but the
taxpayer has subsequently filed bankruptcy,
answer “yes.”
These issues are outside the scope of
VITA. Refer to the IRS or a
professional tax preparer.
If No: Go to
Step 4
If Yes
Screening Tool for Nonbusiness Credit Card
Debt Cancellation (Pub 4012)
Was the taxpayer insolvent immediately before
the cancellation of debt?
If No: Go to
Use the Insolvency Determination Worksheet in Pub 4012
Step 5
and interview the taxpayer to determine if the taxpayer
was insolvent immediately before the cancellation of
debt.
These issues are outside the scope of
VITA. Refer to the IRS or a
professional tax preparer.
If Yes
Screening Tool for Nonbusiness Credit Card
Debt Cancellation (Pub 4012)
The cancellation of nonbusiness indebtedness or cancellation
of debt (the amount in box 2 of Form 1099-C or an amount
less than $600 provided in other documentation) must be
reported as ordinary income on Form 1040, line 21 (Other
Income). No additional supporting forms or schedules are
required for reporting income from canceled credit card debt.
Example
Simon incurred $15,000 in credit card debt. He was unable
to pay the monthly payments. In September 2013, the credit
card company agreed to accept $8,000 from Simon as full
payment. Simon received a Form 1099-C from the credit
card company for $7,000. He was also personally liable
for the payment of the debt. Simon was not insolvent
immediately before the cancellation of debt, nor has he
filed for bankruptcy. What is the taxable amount of Simon’s
canceled debt that will be reported on Form 1040, line 21?
Example – Answer
$7,000
(the amount of debt that was canceled and
reported on Form 1099-C)
Example
True or False:
If the fair market value of a taxpayer’s assets is
less than his/her liabilities, that is what is referred
to as being solvent.
Example – Answer
False
If liabilities are greater than assets, a taxpayer is
considered insolvent.
Congratulations!
This complete the fall Campus Fellow Training
Please complete the Jack White – Campus Fellow
Training Exercise for practice
Continue to check impactamerica.com/taxprep –
we will update with additional training videos
throughout the fall/winter
Next Steps
Attend Campus Fellow Training Refresher Session in
January
• Lizzy Harkey will email you about times/locations in
January