Liberty Tax Service Online
Basic Income Tax Course.
Lesson 17
1
Chapter 16 Homework
HOMEWORK 1: Prepare the requested forms or
worksheets for each of the following situations.
1. In 2008, Amos and Luanne paid interest of $2,700 on
a student loan for their dependent son. This was the
first year interest was due on the loan. Their filing
status is MFJ. Line 22 of their Form 1040 is
$120,000. They have no other adjustments to
income. Complete a Student Loan Interest Deduction
Worksheet.
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Chapter 16 Homework
2. Phil G. (SSN 357-49-6901, born 2/5/1955) and Kate
A. Darian (SSN 301-23-4621, born 5/7/1959) are
married and are filing a joint return. Phil’s salary for
2008 was $49,000. Kate’s salary was $46,000. They
had no other income. They are both covered by a
retirement plan at work. Phil contributed $4,000
to his traditional IRA and Kate contributed $3,000 to
hers. Phil made nondeductible contributions of
$1,500 in 2007 and $800 in 2006. Kate has never
made a prior nondeductible contribution. They had
no other adjustments to income. Complete an IRA
Deduction Worksheet and Form 8606.
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3. In 2008, Bill (521-11-2233) and Linda
Jones paid $6,200 in tuition and fees for
their dependent son, Ken (521-78-8899),
to attend university. Bill claimed an IRA
deduction of $3,000 and Linda, who is a
teacher, claimed $250 in educator
expenses. They have no other adjustments
to income. Their Form 1040, line 22, total
income is $68,000. Complete Form 8917.
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Chapter 16 Homework
HOMEWORK 2: Use the following information to
complete a 2008 tax return.
Francisco P. Martinez (born 11/17/1959) is a computer
technician. He is single and lives alone at 17
Lockwood Lane, Henderson, NJ 08649. In August
2008, he left his job at Modern Tech and he reported
to work at his new job at Run Time, Inc. on
September 12, 2008. In December 2008, Francisco
moved because he now had to drive 58 miles to work
from his old home instead of the 7 miles he used to
drive to Modern Tech. His new home is 22 miles from
Run Time and is 80 miles from his old home. He has
worked full time since starting his job and expects to
continue working for Run Time until at least the end
of 2009.
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Chapter 16 Homework
He had the following expenses related to his move:
West’s Moving and Storage......................................... $1,200
PetSafe (for shipping his dog Fido).................................. 400
Realtor’s commission for sale of his old home .............. 4,900
Down payment on his new home................................... 7,000
Fix-up costs for his old house to help sell it .................. 1,500
Refitting his drapes for the windows in his new house..... 600
Fees for disconnecting electric and gas service.................. 85
Francisco drove his car the 80 miles from his old home to his
new home. He does not use actual expenses. He had to pay
tolls of $5 to reach his new home.
Francisco contributed $3,000 for 2008 to his traditional IRA
on April 2, 2009.
Francisco has been divorced for 3 years. Under his divorce
decree, Francisco pays his former wife, Lorraine T. Cassini
(SSN 375-74-7610), cash payments of $110 per month.
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The payments will cease upon her death.
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Chapter 17: Other Taxes
Chapter Content
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Alternative Minimum Tax
Social Security and Medicare Tax on Tip Income Not
Reported to Employer
Tax on Qualified Plans, Including IRAs, and Other
Tax-Favored Accounts
Advance Earned Income Credit Payments from Form
W-2
Household Employment Taxes
Additional Other Taxes
Key Ideas
27
Chapter 17: Other Taxes
Objectives
 Determine How to Figure Alternative Minimum Tax
and Complete Form 6251
 Be Able to Enter Social Security and Medicare Tax on
Tip Income Not Reported to Employer and How to
Use Form 4137
 Learn How to Determine Tax on IRAs, Other
Retirement Plans, and How to Use Form 5329
 Know How to Report Advance Earned Income Credit
Payments from Form W-2
 Understand How to Figure Household Employment
Taxes and How to Use Schedule H
28
Other Taxes
After calculating from taxable income and subtracting
total credits from the first section of page 2 of Form
1040:
 Add in various other taxes to arrive at your total
tax.
Other taxes that need to be considered are:
 Self-employment tax (line 58) (Chapter 14)
 Alternative minimum tax (line 45)
 Social security and Medicare tax on tip income
not reported to your employer (line 59)
 Tax on qualified plans, including IRAs and other
tax-favored accounts (line 60)
 Advance earned income credit payments from
FormW-2 (line 61)
 Household employment taxes (line 62)
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Other Taxes
Form 1040, Page 2
30
ALTERNATIVE MINIMUM TAX (AMT)
A. Alternative minimum tax ensures that taxpayers with
substantial economic income pay at least a minimum
amount of tax on economic income.
1. May need to pay AMT if taxable income combined with
certain adjustments and tax preference items is more than:
a. $69,950 for MFJ or Q/W
b. $46,200 for single or H/H
c. $34,975 for MFS.
B. AMT is figured using Form 6251.
1. Use the worksheet to see if you need to complete Form
6251.
C. AMT amount is entered on line 45 of Form 1040.
D. Use exemption worksheet in instructions to figure
exemption amount.
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ALTERNATIVE MINIMUM TAX (AMT)
32
ALTERNATIVE MINIMUM TAX (AMT)
33
ALTERNATIVE MINIMUM TAX (AMT)
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ALTERNATIVE MINIMUM TAX (AMT)
35
ALTERNATIVE MINIMUM TAX (AMT)
36
SELF- EMPLOYMENT TAX
 You pay self-employment tax (covered in chapter
14) when your net earnings from selfemployment are $400 or more. You are selfemployed if you carry on a trade or business as a
sole proprietor or as a general partner in a
partnership. Schedule SE is used to figure selfemployment tax and the tax is then reported on
line 57 of Form 1040.
 The Self-Employment Contributions Act of 1954
requires that you claim all allowable deductions
related to self-employment in computing net
earnings from self-employment.
37
SOCIAL SECURITY AND MEDICARE TAX ON TIP
INCOME NOT REPORTED TO EMPLOYER
A. If you received $20 or more in cash and charge tips
in a month from any one job and did not report all of
those tips to your employer, you must report the
social security and Medicare taxes on unreported tips
as additional tax on return.
1. Use Form 4137 to figure tax.
B. Report tax on line 58 of Form 1040 and attach Form
4137 to return.
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SOCIAL SECURITY AND MEDICARE TAX ON
TIP INCOME NOT REPORTED TO EMPLOYER
Sam S. Malone (SSN 155-22-1111) works as a
bartender. He lives at 375 Frasier Lane, Boston, MA
02203. He started working for “Cheers” on June
15. During the month of June, he received $475 in
tips that he did not report to his employer. In
October, he was given two deluxe box tickets to an
ice hockey game valued at $200 that he also did not
report to his employer. For July through December,
he reported all his cash tips to his employer. His
Form W-2, box 1 income for the year was $29,100.
His completed Form 4137 is shown on the following
slide.
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SOCIAL SECURITY AND MEDICARE TAX ON
TIP INCOME NOT REPORTED TO EMPLOYER
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SOCIAL SECURITY AND MEDICARE TAX ON
TIP INCOME NOT REPORTED TO EMPLOYER
Allocated Tips
 If your employer allocated tips to you, they are
shown separately in box of your Form W-2. They are
not included in box 1 with your wages and reported
tips.
 Allocated tips are tips that your employer assigned to
you in addition to the tips you reported to your
employer for the year.
 You must report allocated tips on your tax return
unless certain record keeping exceptions apply. If
you must report allocated tips on your return, add
the amount in box 8 of your Form W-2 to the amount
in box 1. Report the total as wages on line 7 of Form
W-2. Because social security and Medicare taxes
were not withheld from the allocated tips, you must
report those taxes as additional taxes on your return.
Complete Form 4137 and include the allocated tips
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on line 1 of the form.
TAX ON QUALIFIED PLANS, INCLUDING IRAs, AND
OTHER TAX-FAVORED ACCOUNTS
A. Violation of rules limiting withdrawal and use of IRA
assets generally results in additional taxes in year of
violation.
1. Use Form 5329 to report tax on premature
distributions, excess contributions, and excess
accumulations
2. Do not use Form 5329 if any of following
conditions exist:
a. Distribution code 1 is shown in box 7 of 1099-R;
instead enter 10% of taxable distribution on
line 59 of Form1040 and write “no” next to
line 59
b. You properly rolled over all distributions you
received during year.
3. If do not have to file Form 1040, send IRS
completed Form 5329.
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TAX ON QUALIFIED PLANS, INCLUDING IRAs,
AND OTHER TAX-FAVORED ACCOUNTS
Premature Distributions Or Early Withdrawals
B. Withdrawals before you are age 59 1/2 are called
premature distributions or early withdrawals.
1. Tax is 10% of part of distribution that you have to
include in gross income
2. Does not apply to nontaxable part of distribution
3. For exceptions to age 59 1/2 rule, refer to Publication
590. Some exceptions include:
a. You are disabled
b. You have un-reimbursed medical expenses more
than 7.5% of AGI
c. You are receiving distributions in form of annuity
d. You use IRA distributions to buy, build, or rebuild
first home (up to $10,000 and not owned home in
previous 2 years ending on the date of acquisition
of the home)
e. You are the beneficiary of a deceased IRA owner
f. The distributions are not more than your qualified
higher education expenses
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TAX ON QUALIFIED PLANS, INCLUDING IRAs,
AND OTHER TAX-FAVORED ACCOUNTS
Don Muller, who is 35 years old, makes a $3,000
withdrawal from his traditional IRA account. Don
does not meet any of the exceptions to the age
59½ rule, so the $3,000 is a premature distribution.
Don never made any nondeductible contributions to
his IRA. He must include the $3,000 in his gross
income for the year of the withdrawal and pay
income tax on it. Don must also pay an additional tax
of $300 ($3,000 x 10%).
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TAX ON QUALIFIED PLANS, INCLUDING IRAs,
AND OTHER TAX-FAVORED ACCOUNTS
Excess Contributions
C. An excess contribution is an amount contributed to
traditional IRA that is more than the smaller of either
your taxable compensation for year or $5,000
($6,000 if age 50 or older).
1. Excess contribution subject to 6% excise tax.
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TAX ON QUALIFIED PLANS, INCLUDING IRAs,
AND OTHER TAX-FAVORED ACCOUNTS
For 2008, Mark N. Peters (SSN 003-01-3214) is single
and under 50 years old, his compensation is $31,000
and he contributed $5,500 to his IRA. Mark has made
an excess contribution to his IRA of $500 ($5,500
minus the $5,000 limit). He does not withdraw the
$500 by the due date of his return, including
extensions.
Mark figures his excess contribution tax for 2008 by
multiplying the excess contribution ($500) shown on
line 16 of Form 5329 by 0.06 (6%), giving him an
additional tax liability of $30. He enters the tax on
line 17 of Form 5329 and on line 59 of Form 1040.
Mark’s completed Form 5329 is shown on the
following slide.
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TAX ON QUALIFIED PLANS, INCLUDING IRAs,
AND OTHER TAX-FAVORED ACCOUNTS
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TAX ON QUALIFIED PLANS, INCLUDING IRAs,
AND OTHER TAX-FAVORED ACCOUNTS
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TAX ON QUALIFIED PLANS, INCLUDING IRAs,
AND OTHER TAX-FAVORED ACCOUNTS
Excess Accumulations
D. Excess accumulations are insufficient distributions.
1. Must begin receiving distributions by April 1 of
year following year you reach age 70 1/2
2. If distributions are less than required minimum
distribution for year, may have to pay 50%
excise tax for that year on amount not
distributed as required
3. Can request that tax be waived by filing Form
5329 with an explanation.
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ADVANCE EARNED INCOME CREDIT
PAYMENTS FROM FORM W-2
A. If you work for someone and expect to qualify for
EIC, you can choose to get part of credit in advance.
1. Give employer Form W-5
2. Must have at least one qualifying child
3. Must file return.
B. Enter amount of advance EIC payment on line 60 of
Form 1040.
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ADVANCE EARNED INCOME CREDIT
PAYMENTS FROM FORM W-2
Roger T. (SSN 051-33-8164) and Anita L. Radcliff have
one child. Roger works as a musician and earns
$20,000 per year. Anita stays home to care for
the child. Since the EIC income limit for 2008 is
$36,995, they are eligible for the EIC. Roger’s
completed Form W-5 is on the next slide. His
employer will give him up to $1,750 in advance credit
based on tables provided by the IRS to all employers.
The actual amount he receives for the year is
reported in box 9 of his Form W-2.
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ADVANCE EARNED INCOME CREDIT
PAYMENTS FROM FORM W-2
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HOUSEHOLD EMPLOYMENT TAXES
A. A household employee is any person who does household
work where you control what will be done and how it will
be done.
B. You must complete Schedule H if any of following apply:
1. You paid any one household employee cash wages of
$1,600 or more in calendar year
2. You withheld federal income tax at request of any
household employee
3. You paid total cash wages of $1,000 or more in any one
calendar quarter to all household employees.
C. Enter household employment taxes on line 60 of Form
1040. Attach Schedule H.
D. Do not include amounts paid to employee who was under
age 18 at any time during year and was also a student.
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HOUSEHOLD EMPLOYMENT TAXES
Harriet N. Nelson hires Merry Maids to clean
her house for $75 per week. Since Merry
Maids provide their own tools and control
how the work is done, they are independent
contractors and Schedule H is not needed.
Marge H. Simpson employs Nanny Nancy to
care for her children while she does
volunteer work. She pays Nancy $300 per
month. Since Marge leaves specific
instructions on what to do and pays Nancy
$3,600 per year, she must file Schedule H.
See the example on the following slide.
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HOUSEHOLD EMPLOYMENT TAXES
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HOUSEHOLD EMPLOYMENT TAXES
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OTHER ADDITIONAL TAXES
A. Enter on line 61 of Form 1040 the added total of all
taxes
B. Also include on line 61 the following less common
additional taxes:
1. Additional tax on HSA distribution (Form 8889)
2. Additional tax on Archer MSA distributions (Form
8853)
3. Additional tax on Medicare Advantage MSA
distributions (Form 8853)
4. Recapture of investment credit (Form 4255)
5. Recapture of low-income housing credit (Form
8611)
6. Recapture of qualified electric vehicle credit (Form
8834)
7. Recapture of Indian employment credit (Form
8845)
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8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
OTHER ADDITIONAL TAXES
Recapture of new markets credit (Form 8874)
Recapture of credit for employer-provided child care
facilities (Form 8882)
Recapture of the alternative motor vehicle credit (Form
8910)
Recapture of alternative fuel vehicle refueling property
credit (Form 8911)
Recapture of federal mortgage subsidy (Form 8828)
Section 72(m)(5) excess benefits tax
Uncollected social security and Medicare or RRTA tax on
tips or group term life insurance (Form W-2, box 12,
code A, B, M, or N)
Golden parachute payments (Form W-2, box 12, code K)
Tax on accumulation distribution of trusts (Form 4970).
Excise tax on insider stock compensation plan from an
expatriated corporation
Additional tax on nonqualified deferred compensation
plan (Form W-2, box 12, code Z
Interest on the tax due on installment income from the
sale of certain residential lots and timeshares.
Interest on the deferred tax on gain from certain
installment sales with a sales price over $150,000
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OTHER TAXES
KEY IDEAS
♦ The alternative minimum tax ensures that some
taxpayers with substantial economic income will pay
at least a minimum amount of tax. The alternative
minimum tax is figured on Form 6251 and the result
is entered on line 45 of Form 1040.
♦ If you receive $20 or more in cash and charge tips in
a month from any one job and did not report all of
those tips to your employer, you must report the
social security and Medicare taxes on the unreported
tips as additional tax on your return. You use Form
4137 to figure these taxes and enter the tax on line
58 of Form 1040. You must also include the tips in
the income on line 7 of Form 1040.
♦ Allocated tips are shown separately in box 8 of form 59
W-2. They are not included in box 1 with your wages
and reported tips.
OTHER TAXES
KEY IDEAS
♦ If you are required to report allocated tips, add the
amount in box 8 of Form W-2 to the amount in box 1
and report the total as wages on Form 1040, line 7.
Then complete Form 4137 including the allocated tips
on line 1.
♦ You may have to pay additional taxes on a traditional IRA if
you have early withdrawals, excess contributions, and
excess accumulations. You use Form 5329 to report these
taxes and if you have to file Form 1040 report these taxes
on line 59.
♦ If you work for someone and expect to qualify for EIC, you
can choose to get part of the credit in advance. Enter
advance EIC payments received on line 60 of Form 1040.
♦ Use Schedule H to report household employment taxes.
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OTHER TAXES
CLASSWORK 1: True or False.
(1) An excess contribution is the amount contributed to
your traditional IRA that is more than the smaller
of either your taxable compensation for the year or
$5,000 ($6,000 if age 50 or older).
(2) You give your employer a Form W-5 if you want
part of your earned income credit taken out of your
pay.
(3) You enter the amount of alternative minimum tax
on line 45 of Form 1040.
(4) You figure social security and Medicare tax on
unreported tip income not reported to an employer
on Form 4137.
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OTHER TAXES
CLASSWORK 1: True or False.
(5) You report additional income from unreported tips
on Schedule H.
(6) You may have to report an early withdrawal from a
traditional IRA on Form 5329.
(7) If any part of your IRA contributions is an excess
contribution for 2008, it is subject to a 10% tax.
(8) The alternative minimum tax is designed to prevent
you from not paying your “fair share” of taxes due
to excessive use of certain tax breaks.
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OTHER TAXES
CLASSWORK 1: True or False.
(9) If you receive advance EIC payments, you may not
have to file a federal income tax return.
(10) A household employee is any person who does
household work where you control what is done
and how it will be done.
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OTHER TAXES
CLASSWORK 1: True or False.
(1) An excess contribution is the amount contributed to
your traditional IRA that is more than the smaller
of either your taxable compensation for the year or
$5,000 ($6,000 if age 50 or older). T
(2) You give your employer a Form W-5 if you want
part of your earned income credit taken out of your
pay. F
(3) You enter the amount of alternative minimum tax
on line 45 of Form 1040. T
(4) You figure social security and Medicare tax on
unreported tip income not reported to an employer
on Form 4137. T
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OTHER TAXES
CLASSWORK 1: True or False.
(5) You report additional income from unreported tips
on Schedule H. F
(6) You may have to report an early withdrawal from a
traditional IRA on Form 5329. T
(7) If any part of your IRA contributions is an excess
contribution for 2008, it is subject to a 10% tax. F
(8) The alternative minimum tax is designed to prevent
you from not paying your “fair share” of taxes due
to excessive use of certain tax breaks. T
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OTHER TAXES
CLASSWORK 1: True or False.
(9) If you receive advance EIC payments, you may not
have to file a federal income tax return. F
(10) A household employee is any person who does
household work where you control what is done
and how it will be done. T
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OTHER TAXES
CLASSWORK 2: What form (other than Form 1040) is
used to figure and/or report the following?
1.
2.
3.
4.
5.
6.
7.
8.
9.
self-employment tax
business profit or loss
moving expenses
non-cash charitable contributions over $500
earned income credit
household employee taxes
mortgage interest paid on personal residence
excess accumulations in traditional IRAs
education credits
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OTHER TAXES
CLASSWORK 2: What form (other than Form 1040) is
used to figure and/or report the following?
10.
11.
12.
13.
14.
15.
16.
17.
18.
alternative minimum tax
business use of home (self-employed)
ordinary dividend income of more than $1,500
depreciation and amortization
social security and Medicare taxes on unreported tip
income
dental expenses
child and dependent care expenses
early distribution from traditional IRA
additional child tax credit
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OTHER TAXES
CLASSWORK 2: What form (other than Form 1040) is
used to figure and/or report the following? Answers in
( ) optional
1.
2.
3.
4.
5.
6.
7.
8.
9.
self-employment tax SCHEDULE SE
business profit or loss SCHEDULE C
moving expenses FORM 3903
non-cash charitable contributions over $500 FORM 8283
(and SCHEDULE A)
earned income credit SCHEDULE EIC
household employee taxes SCHEDULE H
mortgage interest paid on personal residence SCHEDULE
A
excess accumulations in traditional IRAs FORM 5329
education credits FORM 8863
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OTHER TAXES
CLASSWORK 2: What form (other than Form 1040) is used to
figure and/or report the following?
10. alternative minimum tax FORM 6251
11. business use of home (self-employed) FORM 8829 (and
SCHEDULE C)
12. ordinary dividend income of more than $1,500 SCHEDULE B
13. depreciation and amortization FORM 4562 (and SCHEDULE C
or E)
14. social security and Medicare taxes on unreported tip income
FORM 4137
15. dental expenses SCHEDULE A
16. child and dependent care expenses FORM 2441
17. early distribution from traditional IRA FORM 5329
18. additional child tax credit FORM 8812
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OTHER TAXES
CLASSWORK 3: Complete the requested forms for the
following.
1. Lydia Bennett (SSN 155-22-1112), born 2/16/1959,
took an early distribution in 2008 of $5,000 from her
IRA. She used the distribution to pay part of her
unreimbursed medical bills of $6,000. Complete Part
I of Form 5329 for Lydia. Her AGI is $40,000.
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OTHER TAXES
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OTHER TAXES
2. Gomez P. Adams (SSN 155-12-1111) pays Debbie to
be a nanny for his two children. She worked from
August to December for $325 per month. He paid
no state unemployment taxes. Gomez’s EIN is 221234567. Complete Schedule H for Gomez.
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OTHER TAXES
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OTHER TAXES
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Questions & Answers
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