VITA: Winter 2011
Lesson 28: Other Taxes
Winter 2011
Kristina Shroyer
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Blank Forms for this Lesson
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As we go through this lesson you'll want to use some of the
blank forms in Publication 4491-W for reference (blank
forms start on Page 229)
Form 1040 (page 229 – lines 56-60)
Schedule SE (page 267)
Form 4137 (page 243)
Form 5329
♦
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Form 5405
♦
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(out of scope download from IRS website)
download from IRS website
Volunteer Resource Guide (Binder)
Publication 17
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Introduction
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This Chapter focuses on the additional taxes the taxpayer may have to pay in addition to their
Federal Income taxes
Other Taxes
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Are separate and in addition to the Federal Income Tax calculated on line 44
Are reported on lines 56-60 of Form 1040
♦
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Your book has a picture of this section of the Form 1040 on page 28-1
Other Taxes (IN VITA SCOPE) include:
♦
♦
♦
♦
♦
Self Employment Tax
Social Security and Medicare taxes on tip income
Additional taxes on IRAs and other qualified retirement plans
Advance earned income credit payments
Repayment of the First Time Homebuyer Credit (2008) – Part III or VI of Form 5405
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The other taxes are usually computed on a special form or schedule and then the calculated amount
from the Form is reported on the appropriate line of Form 1040
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Other Taxes (OUT OF VITA SCOPE):
♦
Household Employment taxes
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Refer to a professional tax preparer
IMPORTANT NOTE: Other taxes are added AFTER the non-refundable taxes are
subtracted from the taxpayer's federal income tax liability. This means non-refundable
credits can NOT reduce other taxes.
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Self Employment Tax
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This is Social Security and Medicare tax self employed taxpayers have to pay (remember we
talked about this Chapter 9)
♦
Self employed individuals who are not paid by an employer do not have Medicare or Social
Security withheld from their paychecks
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♦
♦
Payments of SE tax represent contributions to the taxpayer's coverage under the social security
system
If you get into advanced tax, you'll see partners in a partnership are also self employed and
have to pay self employment tax on what is called their "guaranteed payments"
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These individuals still need to pay this tax, they need to pay both the employee portion and the employer
portion, as long as the self employed person is under the Social Security limit this tax is 15.3% of net self
employment income
This is way beyond VITA so we'll just be talking about SE tax in terms of Sch C/C-EZ taxpayers
Who must pay Self Employment tax?
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Any taxpayer that receives net self employment income in the amount of $400 or more
(excluding church employee income) – independent contractors
♦
♦
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For VITA these taxpayers will report their income on Schedule C-EZ or Schedule C (limited) and
the net income will be transferred to Schedule SE to compute the self employment tax
Usually a taxpayer that receives a 1099-MISC or gets some other form of self employment
income as an independent contractor will have to pay this tax since the payer does not withhold
the tax from the contractor like an employer does in an employer-employee relationship
Any taxpayer that had income of $108.28 or more as a church employee
♦
Church employee income is wages you received as an employee (other than as a minister or
member of a religious order) of a church or qualified church-controlled organization that has a
certificate in effect electing an exemption from employer social security and Medicare taxes.
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Self Employment Tax
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This is Social Security and Medicare tax – both the employee portion and the employer portion
How is Self Employment Tax Calculated and Reported?
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Any self employment income an independent contractor receives will be reported along with expenses on Schedule C-EZ
as discussed in Chapter 9 (remember Schedule C is out of scope except for in the one limited situation
Once the Schedule C-EZ net income is calculated on line 3 (or on line 31 of Schedule C) will go to Schedule SE line 2
♦
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Schedule SE is used to calculate the Self Employment tax
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There are two ways to compute the SE tax on Schedule SE
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♦
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Social Security taxes (12.4% for SE) are only calculated on the first $106,800
Most VITA taxpayers will not have this issue
Once you figure out which Form to Use Short or Long it's a matter of following the instructions of the Form
♦
♦
Taxwise will do the calculation for you after you fill out Schedule C-EZ and will also make the adjustment for ½ of SE tax that we
talked about in Chapter 17
The ½ SE tax is calculated on line 6 or line 13
Once the SE Tax is calculated on Schedule SE (line 5 or line 12) it goes on line 56 of Form
1040
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Short Form (Section A)
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Most taxpayers will qualify for this
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At the top of SE is a flow chart to see who qualifies for the Short Forum
Long Form (Section B)
The SE calculation usually requires a long form when the taxpayer has W-2 income and self employment income and the
two together are above the social security limit of $106,800
♦
♦
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Then the self employment tax the taxpayer owes will be calculated on schedule SE
The deduction for ½ the SE tax will then go automatically to Form 1040 Line 27
You can let Taxwise do the calculation for the most part but let's take a look at the Short Form
Schedule SE so you have an idea of how it works
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Taxes on Unreported Tip Income
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General information regarding Tip Income
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All tip income is subject to income tax
Tips of less than $20 per month that are not reported to the employer are NOT subject to SE tax
♦
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Individuals who receive $20 or more in tips per month from any one job must report their tip income
to their employer
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this is called unreported tip income
The employer reports this tip income along with the employee's regular wage income in box 1 of Form W-2
and withholds and pays Social Security and Medicare income on the employee's behalf, so in this case the
employee has no other taxes to worry about
What about Allocated Tips?
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Allocated tips are tips that the taxpayer's employer assigned to them, in addition to the tips they
reported.
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Allocated tips are reported on Line 8 of Form W-2
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♦
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This may occur if you work in a restaurant, cocktail lounge, or similar establishment that must allocate tips
to employees, and when the tips you reported to your employer are less than your share of 8% of food and
drink sales.
This amount is subject to income tax and should be reported on Form 1040 (so they are added to line 7 of
form1040)
These allocated tips are treated like unreported tip income
Social Security and Medicare Tax are NOT withheld on Allocated Tips
♦
♦
The employee MUST Pay the Social Security and Medicare Tax (both employee and employer
portion) on allocated tips
This is calculated on Form 4137
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Take a look at Form 4137 to get an idea how it works
See Publication 1244 if the employee can show that the actual tips received are different than the
allocated amount (see page 28-3)
© Kristina Shroyer 2011
Lesson 28: Other Taxes
Taxes on Unreported Tip Income
What about tips the employee did not report to the employer?
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If an employee receives $20 or more in unreported cash and charge tips in any month from any job
(so they didn't report it to the employer and it is therefore not included in Box 1 of Form W-2) they
must report that income on Form 1040 and pay Social Security and Medicare tax on that income as
well (this is called underreported tips)
1.
♦
♦
They will calculate the tax on this using Form 4137
As we said on the previous page this is true for allocated tips as well, they must go on line 7 and the
employee must pay social security and Medicare (which will be calculated on Form 4137)
If an employee receives less than $20 in unreported cash and charge tips in a month from any job
they are not required to report this to their employer
2.
♦
♦
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The employee IS subject to income tax on these tips and they DO need to reported on Form 1040
The employee is NOT subject to Social Security and Medicare taxes on these tips
Form 4137 is not required in this case since Social Security and Medicare tax is not applicable
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Read through the example on Page 28-3
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The Taxwise software will calculate the Social Security and Medicare taxes on the
applicable tips and add the tips to line 7 of Form 1040
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you just have to make sure you put the information into Form 4137 correctly
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Do both Examples at the top of Page 28-4
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Once the taxes are calculated on Form 4137 they then go on line 57 of Form 1040
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Additional Taxes on IRAs and other Qualified Retirement Plans
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As we learned in Lesson 17 and Lesson 11 Traditional IRAs and other qualified retirement plans allow
individuals to contribute money to plans tax free and defer paying taxes on those contributions and the
earnings on those contributions until the funds are distributed
If the rules for contributions and distributions are not followed, additional penalty taxes may be due (10%
penalty may apply)
A taxpayer has to pay an additional penalty tax (10% of the taxable amount) if ANY of
the following are true:
1.
A distribution is taken from one of these plans (not including Roth, see #1a below) before the
taxpayer reaches age 59 ½
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♦
♦
AND that distribution is not a rollover
AND no exception applies
When this happens Box 7 of Form 1099-R will have a 1 in it
1a. Roth IRAs have penalties as well for not following rules when taking a distribution but this is not covered in
our book and is a bit more complicated so I'm going to assume those are out of scope
2.
3.
Minimum distributions are not withdrawn from the plan when required (RMDs – Required Minimum
Distributions – age 70 1/2 )
Excess contributions are not removed by the due date of the return including extensions
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For VITA we're going to be dealing with situation #1 (when there is no exception) and we're
also going to learn how to report the situation when there is an exception
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This information is not detailed in your book and can be found starting on page 79
of publication 17
Lesson 28: Other Taxes
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Additional Taxes on IRAs and other Qualified Retirement Plans
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Exceptions to the 10% penalty tax for early distributions on IRA's and other
qualified retirement plans
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Let's look at the list shown in your Volunteer Resource Guide (Binder), Look at the yellow tab
number 6 ("Other Taxes and Payments), page 6-3
If you need more information on these exceptions when working with a taxpayer go to Publication 17
pages 79-80
NOTE: the exception may exclude only a partial part of the distribution from the penalty tax, it isn't
always the whole thing
If the distribution code in Box 7 of the 1099-R us a 2,3, or 4 the taxpayer has met an
exception and does not have to pay the additional 10% tax – a Form 5329 is
required to show which exception was met
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♦
♦
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There also may be a case where Box 7 has a 1 in it but the taxpayer has met an
exception
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2—Early distribution, exception applies (under age 59½).
3—Disability.
4—Death.
In this case you will also have to file a Form 5329 to show an exception was met for an early
distribution
Remember if you need to know what a code in Box 7 means you should look in the
Form 1099-R instructions (download a Form 1099-R from the IRS website in this
situation)
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Additional Taxes on IRAs and other Qualified Retirement Plans
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How to Report Early IRA and other qualified plan distributions when no exception
applies
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If an early IRA distribution is taken by the taxpayer and no exception applies:
1.
2.
3.
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Form 5329 is NOT required
There is a 10% tax on the distribution and this is reported directly on Form 1040, line 58
"No" is written next to the amount on this line to indicate Form 5329 was NOT required
How to Report Early IRA and other qualified plan distributions when an exception
DOES apply
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You will fill out Part I of Form 5329
You will need the exception codes we just went over in Tab 6 (Yellow Tab) of your binder, page 6-3
Let's take a look to see how the Form will be filled out
1.
2.
3.
4.
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Line 1 is the amount of the distribution included in gross income
Line 2 is the amount that qualifies for the exception (the applicable code is also entered)
Line 3 is the amount that doesn't qualify for the exception (Line 1 – Line 2)
Line 4 is the penalty tax (10% of line 3) that will be carried to line 58 of Form 1040
You will just need to put the correct information in Taxwise regarding the early distribution
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Let's read through the Tip on page 28-5
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Let's look at the two examples at the bottom of page 28-5
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Advance Earned Income Credit Payments (AEIC)
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As you already know the EIC is reported in the Payments section of Form
1040 on line 64a – the EIC is a refundable credit and if it reduces the
taxpayer's tax liability below zero it results in a refund to the taxpayer
Taxpayers can choose to get EIC payments in advance (AEIC) during the
year instead of waiting until they file their tax return
How AEIC works
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The taxpayer must have or expect to have a qualifying child and submit
Form W-5 (Earned Income Advance Payment Certificate) to their employer
The employer will then use a table to include a portion of the Earned Income
Credit the employee will qualify for at the end of the year in the employee's
regular pay
The amount of the AEIC is reported on Form W-2, Box 9
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Note it is NOT taxed like regular wages since it is in Box 9 not Box 1
If the taxpayer receives an AEIC they are REQUIRED to file a tax return
even if their gross income is below the filing requirement
The AEIC reduces the amount of refund the taxpayer will get when they
file their return because they have in effect received some of their
refund in advance
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Advance Earned Income Credit Payments (AEIC)
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How AEIC Affects Tax and where it is reported on the tax return
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AEIC is in fact EIC that was paid to the taxpayer in advance during the year
AEIC must be reported on Form 1040 in the "Other Taxes" (it is reported on line 59
with the letters "AEIC" next to it – I think it doesn't say in the book – we will verify
with Sandra) section to reduce the EIC credit which is reported in full on line 64a in the
"Payments" Section
♦
♦
So EIC is subtracted from total tax and AEIC is added to total tax
Usually the taxpayer still receives an additional EIC above what they got in advance with
the AEIC – however sometimes if the taxpayer's situation changed during the year they
may owe tax
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Let's read the examples on page 28-6
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Remember Taxwise will calculate the EIC for you and put it in the proper
place on Form 1040 as long as you enter the W-2 correctly
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ALWAYS check the tax return to make sure it is there and correct
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Let's do the Exercises on page 28-7
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NOTE: AEIC was eliminated in 2010 (so this will be the last year it affects
taxes)
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Repayment of the First Time Homebuyer Credit
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We'll talk about the First Time Homebuyer Credit in detail in Chapter 29
Certain situations require the First Time Homebuyer Credit the taxpayer received in
one year be repaid and reported in the Other Taxes Section of Form 1040
When must the taxpayer generally repay the credit?
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For Homebuyer credits for homes purchased in 2009:
♦
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If the taxpayer receives the credit for a home purchased in 2009 and the home ceases to
be the taxpayer's main home within the 36 month period beginning on the purchase date
they have to repay the credit
For Homebuyer credits for homes purchased in 2008:
♦
If the taxpayer received the first time homebuyer credit for a home purchased in
2008 they must repay the credit over a 15 year period in 15 equal installments
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♦
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The repayment period begins in 2010 and starting in 2010 the taxpayer must include
the first installment as additional tax on the 2010 return
If the taxpayer received the first time homebuyer credit for a home purchased in 2008 and
the home ceases to be the taxpayer's main home before the 15 year period is up they
general must repay all the remaining installments in that year
Situations where the home ceases to be the taxpayer's main home
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sale of the home
conversion of the home to a business or rental property
the home is destroyed, condemned or disposed of under threat of condemnation
the lender forecloses on the mortgage
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Repayment of the First Time Homebuyer Credit
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Where to find more details on the repayment of the credit?
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We'll talk about the First Time Homebuyer Credit in detail in Chapter 29
Certain situations require the First Time Homebuyer Credit the taxpayer received in one year be
repaid and reported in the Other Taxes Section of Form 1040
See the instructions for Form 5405 – Part III and/or Part IV – First Time Homebuyer Credit and
Repayment
There are certain exceptions to repayment (not the 2008 loan repayment but the 2009 one) – Line
13 on the Form 5405 deals with this – read more into the instructions if one of these situations
comes up
How to report the repayment of the credit
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The repayment is calculated on Form 5405 line 16, the amount that must be repaid is reported on
line 59 of Form 1040 with box C checked
♦
Let's take a look
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Let's take a look at the Form 5405 to see how this will work
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It is VERY important this year that you ask taxpayers if they got the 2008 First
Time Homebuyer Credit
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They are required to start paying it back this year in 2010
This is the most likely situation you will encounter, someone selling their home before the three year
period is up I think will be less common
© Kristina Shroyer 2011
Lesson 28: Other Taxes
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Calculating the taxpayer's total tax (line 60)
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The taxpayers total tax on the return is the income tax they
owe (less non-refundable credits) plus all the additional
taxes they owe
Line 55 is the total INOME tax the taxpayer owed based on
the tax tables (line 46 – ignore Alternative Minimum tax –
way out of scope) less the non-refundable credits
calculated on lines 47-53 and summed on line 54
♦
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This means line 55 is never lower than zero, it's the taxpayer's
income tax calculated less non-refundable credits
The taxpayers additional taxes are calculated on lines 5659
To get the total tax on line 60, simply add lines 55-59
(income tax less refundable credits plus all additional
taxes)
© Kristina Shroyer 2011