Liberty Tax Service Online
Basic Income Tax Course.
Lesson 10
1
Chapter 9 Homework
HOMEWORK 1:
George E. Lopez, (born 6/14/1942), retired
from Civil Service and began receiving
pension income under a joint and survivor
annuity plan. George’s annuity starting date
is January 1, 2008. George had contributed
$26,000 to a qualified plan and had received
no distribution before 2008. George is to
receive a monthly retirement benefit of
$1,000 and his wife (born 7/4/1941), is to
receive a monthly survivor benefit upon
George’s death. The following is Form CSA
1099-R for George.
Complete a Simplified Method Worksheet for
their return.
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Chapter 9 Homework
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Chapter 9 Homework
HOMEWORK 2:
Joel S. Pryce (born 6/24/1954) lives at 1322
Nineteenth Street, St. Louis, MO 63103. He is
single and has no dependents. Joel received the
following Form 1099-R after quitting his job as a
retail clerk at Quincy’s, Inc. He rolled $1,500
into a traditional IRA within 60 days. Joel did
not itemize on his 2007 tax return and is also
taking the standard deduction in 2008.
Prepare Joel’s return.
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Chapter 9 Homework
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Chapter 9 Homework
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Chapter 9 Homework
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Chapter 9 Homework
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Chapter 9 Homework
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Chapter 9 Homework
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Chapter 9 Homework
HOMEWORK 3: Charles P. (born 9/18/1960) and Ida R.
Aquilina (born11/3/1962) are married and live at
168 South Kenmore Street, Atlanta, GA 30305.
Charles worked as a teacher and Ida worked as an
office supervisor at a tax service. In 2008, Charles
contributed $4,000 to a traditional IRA and Ida
contributed $3,000 to a traditional IRA for herself.
This was the first time either had contributed to an
IRA. Charles and Ida have never received any other
pension distributions. The Aquilinas did not itemize
their deductions in 2007 and they are taking the
standard deduction in 2008.
Prepare the Aquilinas’ return.
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Chapter 9 Homework
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Chapter 9 Homework
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Chapter 9 Homework
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Chapter 9 Homework
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Chapter 9 Homework
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Chapter 9 Homework
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Chapter 10: Social Security Benefits
& Other Credits
Chapter Content
 Social Security Benefits
 Credit for the Elderly or the Disabled
 Education Credits
 Adoption Credit
 Additional Child Tax Credit
 Residential Energy Credit
 Key Ideas
Objectives
 Understand How to Figure the Taxable Portion of
Social Security Benefits
 Be Able to Figure and Report the Other Credits
22
Social Security Benefits
& Other Credits
SOCIAL SECURITY BENEFITS include not only
retirement benefits, but also monthly
survivor and disability benefits. They DO
NOT include supplemental security income
(SSI), which is not taxable. Depending on
your other income and your filing status,
these payments may be entirely tax-free or
you may have to include up to 85% of the
benefits in your gross income. Use the social
security benefits worksheet to figure the
amount of your benefits that is taxable.
23
Social Security Benefits
& Other Credits
Other credits:
 Credit for the elderly and disabled
 Education credit
 Adoption credits
These credits are nonrefundable credits.
Used to reduce the amount of your tax on line 44 of
Form 1040.
Additional child tax credit
 refundable credit
 Will receive refund of any part of credit that is more
than your total tax
24
TAXABLE SOCIAL SECURITY BENEFITS
Social security benefits include retirement,
survivor, and disability benefits.
1. Reported to you and to the IRS on Form SSA1099
2. If any amount is taxable, enter on line 20b of
Form 1040
3. Depending on your other income and your filing
status, benefits may not be taxable or up to 85%
of the benefits may be included in gross
income.
25
TAXABLE SOCIAL SECURITY BENEFITS
Social security benefits are reported to you and to the IRS on Form SSA1099, Social Security Benefit Statement.
26
TAXABLE SOCIAL SECURITY BENEFITS
Some percentage of your benefits is taxable if your
total income plus ½ the net benefits shown in box 5
of Form SSA-1099 exceeds a base amount for your
filing status.
1. $25,000 if single, H/H, or QW
2. $25,000 if MFS and lived apart from spouse for all of
the tax year
3. $32,000 if MFJ
4. $0 if MFS and lived with spouse at any time during
the tax year
27
TAXABLE SOCIAL SECURITY BENEFITS
Total income is your (and spouse’s) gross income
reported on Form 1040 (except social security
benefits) plus nontaxable interest from line 8b
minus certain adjustments.
If MFJ and both receive benefits, use 1/2 of the
combined benefits to figure the taxable amount.
As your income increases, a greater percentage of
your benefits are taxable.
28
Social Security Benefits Worksheet
Most taxpayers figure the taxable amount of
benefits by using the Social Security
Benefits Worksheet. Report taxable benefits
on line 20b of Form 1040 and net benefits
from box 5 of the SSA-1099 on line 20a
If none of your benefits are taxable, leave line
20b blank.
29
Social Security Benefits Worksheet
Example:
Box 5 of Walter’s Form SSA-1099 shows that he received social
security benefits of $22,800. His income reported on Form 1040
lines 7-21 is as
follows:
Line 8a (taxable interest)
Line 8b (tax-exempt interest)
Line 9a (ordinary dividends)
Line 13 (capital gain or loss)
Line 15b (taxable IRA distributions)
$ 1,569
997
1,500
390
24,119
Walter’s filing status is head of household. He would fill out the
Social Security Benefits worksheet and Form 1040 as follows:
30
Social Security Benefits Worksheet
31
Social Security Benefits Worksheet
Form 1040, Page 1
32
Who Is Taxed?
Taxable benefits are included in the income of the
person with the legal right to receive them.
1. The name and social security number of the
person with the legal right to receive the
benefits is shown in boxes 1 & 2 of Form SSA1099
2. A child’s benefits belong to the child and are
NOT reported on the parent’s return.
33
Who Is Taxed? – Problem 1
Trudy and her son, Will, receive social security
survivor benefits. Will received a Form SSA-1099
with his name in box 1 and his social security
number in box 2. Box 5 showed net benefits of
$2,000 for 2008. Trudy received a Form SSA-1099
with net benefits of $4,000 in her name. What
amount will Trudy use to figure if any social security
benefits are taxable?
a. $2,000
b. $4,000
c. $6,000
34
Who Is Taxed? – Problem 1
Trudy and her son, Will, receive social security survivor benefits.
Will received a Form SSA-1099 with his name in box 1 and his
social security number in box 2. Box 5 showed net benefits of
$2,000 for 2008. Trudy received a Form SSA-1099 with net
benefits of $4,000 in her name. What amount will Trudy use to
figure if any social security benefits are taxable?
b. $4,000
She will use only the amount of $4,000 to figure if any of her
benefits are taxable. One-half of the $2,000 Will received must
be added to any other taxable income he received to see if any
of the benefits are taxable. If he has no other
taxable income the $2,000 is not reported on either tax return.
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LUMP-SUM PAYMENTS
A lump sum payment is a retroactive payment of
benefits.
1. The taxable part of the payment, if any, must be
included in your income for the year you receive the
payment, even if benefits are for an earlier year.
2. Generally, use current year income to determine the
total taxable benefits received that year.
3. If it lowers the amount of your taxable benefits, you
may be able to make a lump sum election which
allows you to figure the taxable part of prior year
benefits separately using your income for the prior
year.
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LUMP-SUM PAYMENTS
4. Whichever method you use, report the taxable
portion of your benefits on line 20b of Form 1040 for
the current tax year.
5. Do NOT file an amended return for the prior year.
6. If you receive a lump-sum payment, you must use
the worksheets in Publication 915 to figure the
taxable part of your benefits.
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LUMP-SUM PAYMENTS
Example:
In 2008, Veronica received social security benefits of $19,420 and
she also received a lump-sum payment of $8,455 for 2007. For
2008, box 5 of her Form SSA-1099 is $27,875. Using the
worksheet, the taxable part of the $19,420 is $4,369. If she uses
her 2008 total income, the taxable part of the lump-sum
payment ($8,455) is $1,101.
If she uses her 2007 total income plus half of the $8,455 to figure
the taxable benefits, only $893 is taxable. Veronica enters the
total social security benefits she received of $27,875 ($19,420 +
$8,455) on line 20a of her 2008 Form 1040 and $5,262 ($4,369 +
$893) on line 20b and prints LSE to the left of line 20a.
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RAILROAD RETIREMENT BENEFITS
Part of tier 1 railroad retirement benefits are
treated as social security benefits for tax
purposes.
1. Commonly called social security equivalent
benefits
2. Reported to you on Form RRB-1099
3. Use the same worksheets and rules to
determine if any part of these benefits are
taxable
4. If any part is taxable, report on lines 20a and
20b of Form 1040
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RAILROAD RETIREMENT BENEFITS
40
RAILROAD RETIREMENT BENEFITS
5. Tier 1 benefits that are not social security
equivalent benefits, tier 2 benefits and certain
other railroad employee benefits are reported on
Form RRB-1099-R and are treated as pension
distributions for tax purposes.
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RAILROAD RETIREMENT BENEFITS
42
CREDIT FOR THE ELDERLY
OR THE DISABLED
If you are at least 65 years old at the end of the
year, or are retired on permanent and total
disability, you may be a qualified individual for
this credit.
1. A nonrefundable credit
2. Enter on line 49 on Form 1040.
Form 1040 Page 2
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CREDIT FOR THE ELDERLY
OR THE DISABLED
Qualified Individual
To qualify for the credit you:
1. Must be U.S. citizen or resident for the entire
tax year
2. Generally, must file a joint return if married.
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CREDIT FOR THE ELDERLY
OR THE DISABLED
If you are under age 65, you can claim the credit
only if:
1. You are retired on permanent and total
disability
2. You were disabled when you retired
3. You have taxable disability income, and
4. You did not reach your employer’s mandatory
retirement age before the tax year began.
45
CREDIT FOR THE ELDERLY
OR THE DISABLED
You are permanently and totally disabled if you
cannot engage in any substantial gainful activity
because of your physical or mental condition.
1. A physician must certify that you were totally
and permanently disabled on the day you retired
from work.
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CREDIT FOR THE ELDERLY
OR THE DISABLED – Problem 1
Bonnie, a sales representative, retired on
disability. She is 58 years old and works 40
hours a week at a minimum wage job. Because
she is doing fulltime work for at least the
minimum wage, she is engaged in substantial
gainful activity and can take the credit.
True or False?
47
CREDIT FOR THE ELDERLY
OR THE DISABLED – Problem 1
Bonnie, a sales representative, retired on
disability. She is 58 years old and works 40
hours a week at a minimum wage job. Because
she is doing fulltime work for at least the
minimum wage, she is engaged in substantial
gainful activity and can take the credit.
False
She cannot take the credit.
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CREDIT FOR THE ELDERLY
OR THE DISABLED
Taxable disability income must meet the following
two requirements:
1. The income must be paid under your employer’s
accident, health or pension plan.
2. The income must be wages for the time you are
absent from work because of permanent and
total disability.
49
CREDIT FOR THE ELDERLY
OR THE DISABLED
For purposes of this credit, disability income does
not include amounts you receive after you reach
mandatory retirement age.
1. Mandatory retirement age is the age set by your
employer at which you would have had to retire,
if you had not become disabled.
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CREDIT FOR THE ELDERLY
OR THE DISABLED
Income Limits
Whether you are elderly or disabled, there are two
income limits which determine if you can claim
the credit.
1. The amount of your AGI
2. Nontaxable social security and other nontaxable
pensions you received
3. You cannot claim the credit, even if you qualify,
if either income exceeds the limits for your filing
status
4. Refer to Table 10-1 for the limits for each filing
status.
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CREDIT FOR THE ELDERLY
OR THE DISABLED
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CREDIT FOR THE ELDERLY
OR THE DISABLED
Figuring the Credit
To figure the credit actually entered on line 48, you
must:
1. Use an initial amount based on your (and spouse’s)
age, filing status and disability status (See Table 102)
2. Reduce the initial amount by nontaxable social
security and certain other nontaxable pension
benefits, and excess AGI 3. Multiply this reduced
initial amount by 15%.
Claim the credit by completing Schedule R and
attaching Schedule R to Form 1040.
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CREDIT FOR THE ELDERLY
OR THE DISABLED
54
CREDIT FOR THE ELDERLY
OR THE DISABLED
Example:
Ramone D. and Rita S. Fox are married and lived
together all year. They will file a joint return. Ramone
is 66 and Rita is 65. They received nontaxable social
security benefits of $2,000 in 2008. Their adjusted
gross income (line 37 of Form 1040) is $20,200 and
the total tax on line 46 is $21. They will complete
Parts I and III of Schedule R. Because they are both
age 65 or older they checked box 3 on page one of
Schedule R and do not need to complete
Part II. Their Schedule R follows:
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CREDIT FOR THE ELDERLY
OR THE DISABLED
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CREDIT FOR THE ELDERLY
OR THE DISABLED
57
CREDIT FOR THE ELDERLY
OR THE DISABLED
Initial
Amount
58
CREDIT FOR THE ELDERLY
OR THE DISABLED
Excess
AGI
59
EDUCATION CREDITS
If you paid higher education expenses during the
tax year for yourself, your spouse or a
dependent you claim on your tax return, you
may be able to claim a credit for part of your
eligible expenses.
1. Hope credit and lifetime learning credit
2. Nonrefundable credits
3. Line 50 of Form 1040.
Form 1040, Page 2
60
EDUCATION CREDITS
Rules For Both Credits
You must have paid qualified expenses for an eligible
student to an eligible educational institution
A. Qualified expenses are tuition and fees you are
required to pay to the institution as a condition of
enrollment or attendance.
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EDUCATION CREDITS
Nonqualified expenses:
 Fees and costs of personal, living, or family
expenses
 Payments for room and board
 Athletics (unless part of a degree program)
 Student activity fees not required as a
condition of attendance
 Medical expenses
 Insurance
 Transportation
62
EDUCATION CREDITS – Problem 1
To enroll at Higher Ed University, Carl was required to
pay tuition. In order to attend classes he had to buy
certain books from the school for his courses. He
also bought review books and other materials he
thought would help him with his studies. What costs
can Carl use in figuring the education credit?
a. Tuition only
b. Tuition and required books only
c. Tuition and all books and materials
63
EDUCATION CREDITS – Problem 1
To enroll at Higher Ed University, Carl was required to
pay tuition. In order to attend classes he had to buy
certain books from the school for his courses. He
also bought review books and other materials he
thought would help him with his studies. What costs
can Carl use in figuring the education credit?
b. Tuition and required books only
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EDUCATION CREDITS
Rules For Both Credits( continued)
You must have paid qualified expenses for an eligible
student to an eligible educational institution
B. An eligible educational institution is any college,
university or vocational school eligible to
participate in a student aid program
administered by the U.S. Department of
Education.
C. An eligible student must be enrolled at an
eligible educational institution for at least one
academic period (semester, quarter, summer
session) during the tax year.
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EDUCATION CREDITS
The expenses must be for an academic period
that begins in the same year you paid the
expenses or for prepaid expenses (expenses
for an academic period that begins in the
first three months of the year following the
year of payment).
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EDUCATION CREDITS – Problem 2
In November 2008, Carl paid qualified tuition of
$3,500 for the winter semester beginning in
January 2009. Can Carl use the $3,500 in
figuring the credit on his 2008 tax return?
Yes or No?
67
EDUCATION CREDITS – Problem 2
In November 2008, Carl paid qualified tuition of
$3,500 for the winter semester beginning in
January 2009. Can Carl use the $3,500 in
figuring the credit on his 2008 tax return?
Yes
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EDUCATION CREDITS
 The expenses can be paid with gifts, inheritances, or
proceeds of a loan.
 You cannot claim the credit if your filing status is
MFS.
 The amount of the credit is reduced or eliminated
depending on modified AGI and filing status.
 You cannot take the credit if you can be claimed and
are claimed as a dependent on another’s tax return.
 You can claim the credit for any qualified expenses
paid by a dependent that you claim on your tax
return.
 If the student’s exemption is not claimed by the
taxpayer eligible to claim it, the student may claim
only the credit. The student is NOT eligible to claim
the exemption because the student can be claimed as
a dependent on another taxpayer’s return, even
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though he or she was not.
EDUCATION CREDITS – Problem 3
Lucy claims an exemption on her tax return for her
daughter Miranda. Miranda pays qualified
education expenses out of her own earnings
from her job as an assistant manager. Lucy
cannot treat these expenses as if she had paid
them and use the expenses to take an education
credit on her tax return.
True or False?
70
EDUCATION CREDITS – Problem 3
Lucy claims an exemption on her tax return for her
daughter Miranda. Miranda pays qualified
education expenses out of her own earnings
from her job as an assistant manager. Lucy
cannot treat these expenses as if she had paid
them and use the expenses to take an education
credit on her tax return.
False
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EDUCATION CREDITS
Hope Credit
The Hope credit is for the first two years of
postsecondary education. The student:
 Did not have any expenses that were used to figure a
Hope credit in any 2 earlier years
 Did not complete the first 2 years of postsecondary
education, generally the freshman and sophomore
years
 Must be enrolled, for at least one academic period, at
least half-time in a program that leads to a degree or
other recognized educational credential
 Must be free of any felony conviction for possessing
or distributing a controlled substance
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EDUCATION CREDITS
The maximum Hope credit is $1,800 of
qualified expenses for each eligible student
($1,800 x the number of eligible students).
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EDUCATION CREDITS
Example:
Frank and Ada have three dependent children, Bob, Jerry and Martha, all
in their first two years of college. Their modified AGI is $65,000. All of
the children are eligible students for whom Frank and Ada paid
qualified expenses to an eligible educational institution.
Bob’s qualified expenses were $800. Because these expenses are $1,200
or less, the Hope credit for Bob is $800.
Jerry’s expenses are $2,700. Because his expenses are $2,400 or more,
the Hope credit for Jerry is $1,800.
Martha’s qualified expenses are $1,900. Because her expenses are
between $1,200 and $2,400, Martha’s Hope credit is $1,550 ($1,200 +
one-half of $700).
The total credit Frank and Ada can claim on line 50 of Form 1040 is $4,150
($800+$1,800+$1,550).
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EDUCATION CREDITS
Lifetime Learning Credit
The lifetime learning credit can be claimed throughout an eligible
student’s lifetime.
1.
Expenses must be for courses taken as part of a
postsecondary degree program or to improve or acquire job
skills.
2. The amount of the credit is 20% of the first $10,000 of qualified
expenses paid for all eligible students (a maximum of $2,000
per family).
75
EDUCATION CREDITS
Darlene and Tom are married and have one dependent
son who is in his last year of college. Both Darlene
and Tom take courses at the local community
college to improve their job skills. In 2008, Tom’s
qualified expenses were $1,800 and Darlene’s
qualified expenses were $1,450. In 2008, they also
paid qualified expenses of $7,476 for their son. What
is the maximum lifetime learning credit they can
claim on line 50 of their 2008 return?
`
a. $2,300
b. $2,145
c. $2,000
76
EDUCATION CREDITS
Darlene and Tom are married and have one dependent son who is
in his last year of college. Both Darlene and Tom take courses
at the local community college to improve their job skills. In
2008, Tom’s qualified expenses were $1,800 and Darlene’s
qualified expenses were $1,450. In 2008, they also paid
qualified expenses of $7,476 for their son. What is the
maximum lifetime learning credit they can claim on line 49 of
their 2007 return?
c. $ 2,000
Their total qualified expenses are $10,726. They figure the lifetime
learning credit by multiplying $10,000 of the total qualified
expenses by 20%. They do not multiply each of their expenses
(up to $10,000) by 20%.
77
EDUCATION CREDITS
Which Credit To Choose
In any tax year, you can receive only one tax benefit for
each student.
1. If you choose the Hope credit for a student, you
cannot include that student’s expenses in figuring
the lifetime learning credit for that tax year
2. You cannot take the tuition and fees deduction on
Form 1040, line 34 for the same expenses (see
Chapter 16).
3. You can claim the Hope credit for the first two years
of postsecondary education and the lifetime learning
credit for the same student in later years
4. Refer to Table 10-3 for a summary of the differences
between the credits.
78
EDUCATION CREDITS
For 2008, Elaine Burns files as head of household. Her AGI on line
38 of Form 1040 is $39,000 and her tax liability on line 46 is
$2,506. Elaine took several courses at the local college to
improve her job skills. She also paid qualified education
expenses for her son David, a college freshman, and her
daughter Joanna, a college senior.
Elaine paid $1,200 for her courses. David’s qualified tuition and
fees total $7,400. Joanna’s total tuition and fees are $3,200.
What is the total credit Elaine is eligible to claim for 2008?
a. $2,680
b. $2,506
c. $2,360
79
EDUCATION CREDITS
For 2008, Elaine Burns files as head of household. Her AGI on line
38 of Form 1040 is $39,000 and her tax liability on line 46 is
$2,506. Elaine took several courses at the local college to
improve her job skills. She also paid qualified education
expenses for her son David, a college freshman, and her
daughter Joanna, a college senior.
Elaine paid $1,200 for her courses. David’s qualified tuition and
fees total $7,400. Joanna’s total tuition and fees are $3,200.
What is the total credit Elaine is eligible to claim for 2008?
b. $2,506
Because David’s expenses are more than $2,200, the Hope
credit is $1,800. For Elaine and Joanna’s expenses the credit is
$880 ($3,200 +$1,200 = $4,400 x 20%). Because the total credit
Elaine is eligible to claim $2,680 ($880 lifetime learning credit
for Elaine and Joanna + $1,800 Hope credit for David)) is more
80
than her tax liability, the credit is limited.
EDUCATION CREDITS
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EDUCATION CREDITS
82
EDUCATION CREDITS
83
EDUCATION CREDITS
Claiming The Credit
1. Hope credit is figured in Part I
2. Lifetime learning credit is figured in Part II
3. Complete Part III to determine the amount
other credit you enter on line 50 of Form 1040
4. Form 8863 is included with Form 1040.
84
ADOPTION CREDIT
You may be able to take a tax credit of up to
$11,650 for qualifying expenses you paid to
adopt an eligible child.
1. A nonrefundable credit
2. Line 53 of Form 1040.
Form 1040, Page 2
85
ADOPTION CREDIT
Qualifying Expenses
Expenses that are reasonable and necessary for the
adoption may be claimed. These include:
 Attorney’s fees
 Court costs
 Traveling expenses, and
 Other expenses directly related to the adoption.
86
ADOPTION CREDIT
An eligible child is any child:
1. Under age 18 (17 or younger) at the time of the
adoption, or
2. Any individual who is physically or mentally
incapable of self-care.
A child with special needs is an eligible child who is a
U.S. citizen or resident and who a state determines:
1. Cannot or should not be returned to his or her
parent’s home, and
2. Probably will not be adopted unless assistance is
provided to the adoptive parents.
87
ADOPTION CREDIT
Filing Status
You generally cannot file MFS and claim this credit.
Dollar Limit
The dollar amount of the adoption credit is limited to
$11,650 for each effort to adopt an eligible child. The
effort ends when a child is adopted.
88
ADOPTION CREDIT
Income Limit
The credit is reduced if your modified AGI is over
$174,730 and eliminated if your modified AGI
is $214,730 or more. (See Table 10-4)
Table 10-4. Income Limit
89
ADOPTION CREDIT
When To Take The Credit
The year you claim the expenses on your tax return
depends on when you paid the expenses and
whether the child is a U.S. citizen or resident at the
time adoption attempt begins.
1. If the child is a U.S. citizen or resident, you can take
the credit whether or not the adoption becomes final
2. Refer to Tables 10-5 and 10-6 to determine when you
can take the credit.
90
ADOPTION CREDIT
Table 10-5. Child Who is a U.S.
Citizen or Resident
Table 10-6. Foreign Child
91
ADOPTION CREDIT
Example:
In 2008, Salvatore and Rose adopted an eligible child
who is a US citizen. In 2007, they paid qualifying
expenses totaling $2,500. Because the adoption was
not final in 2007, they could not take a credit for the
$2,500 on their 2007 tax return. In 2008, they paid
$4,000 in eligible expenses. Because the adoption
became final in 2008, they can claim an adoption
credit for all their qualifying expenses of $6,500 on
their 2008 tax return.
92
ADOPTION CREDIT
Claiming The Credit
Claim the credit by completing Form 8839 and
attaching it to Form 1040.
1. Give the child’s name, date of birth and
identifying number (SSN, ITIN, or ATIN)
2. If the amount of your credit exceeds your tax,
you can claim the unused amount of the credit
over the next 5 years or until it is used up,
whichever comes first.
93
ADOPTION CREDIT
Lawrence T. and Rhonda W. Rubenstein adopted
Andrew (born 8/12/99) in 2008 and paid $7,450 in
attorney fees, court costs and travel expenses
related to the adoption. Their modified AGI is $62,450
and their tax on line 46 of Form 1040 is $5,359.
Their Form 8839 is shown next .
94
ADOPTION CREDIT
95
ADOPTION CREDIT
96
ADOPTION CREDIT
Income Exclusion
If your employer pays your adoption expenses under
an adoption assistance program, you may be able to
exclude part or all of the assistance from your gross
income.
1. Employer provided benefits are shown in box 12 of
Form W-2 with code T
2. Exclusion limits are the same as the adoption credit
limits
3. You cannot claim a credit and exclusion for the same
expenses
4. You may be able to claim a credit for expenses you
could not exclude up to the credit limits.
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ADDITIONAL CHILD TAX CREDIT
If you cannot use the entire amount of the child
tax credit on line 52 of Form 1040, you may be
able to claim the unused amount as an
additional child tax credit.
1. A refundable credit
2. Line 66 of Form 1040.
Form 1040, Page 2
98
ADDITIONAL CHILD TAX CREDIT
If you have taxable earned income (usually
line 7 of Form 1040) in excess of $8,500,
the credit is generally the lower of:
1. The unused amount of the child tax credit,
or
2. 15% of your taxable earned income in
excess of $8,500.
If you have three or more qualifying children,
you can claim the amount by which your
social security and Medicare taxes exceed
your earned income credit if this amount is
greater than the credit that is based on your
earned income in excess of $8,500. This
amount cannot exceed the unused amount
of your credit.
Claim the credit by completing Form 8812 and99
attaching it to Form 1040.
ADDITIONAL CHILD TAX CREDIT
Example:
Eric D. and Gretchen G. Grant have three
dependent children all under age 17 and
were eligible for a child tax credit of up to
$3,000. In 2008, they entered $18,000 on
line 7 of Form 1040. Their tax on Form
1040, line 46 was $0, so they could not use
the $3,000 credit on line 52. Because they
answered “yes” on line 4 of the Child Tax
Credit Worksheet, they will use Form 8812
to see if they can claim the additional child
tax credit on line 66. The amount in box 4 of
Eric’s W-2 is $1,116 and the amount in box
6 is $261. Their EIC for 2008 was $4,824.
Eric and Gretchen completed Form 8812 as
follows:
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ADDITIONAL CHILD TAX CREDIT
101
ADDITIONAL CHILD TAX CREDIT
102
RESIDENTIAL ENERGY CREDITS
Residential energy efficient property credit:
You may be able to take a credit of 30% of your costs
of qualified photovoltaic property, solar water
heating property, and fuel cell property. The credit
limits are:
 $2,000 for qualified solar electric property costs,
 $2,000 for qualified solar water heating property
costs,
 $500 for each one-half kilowatt of capacity of
qualified fuel cell property for which qualified fuel
cell property costs are paid,
 $4,000 for qualified small wind energy property
costs, and
 $2,000 for qualified geothermal heat pump
property costs.
103
Social Security Benefits
& Other Credits
KEY IDEAS
♦ Depending on the amount of social security benefits you
receive and your other income, up to 85% of your benefits
may be taxable.
♦ Taxable social security benefits are included in the income
of the person with the legal right to receive them.
♦ To qualify for the credit for the elderly or the disabled, you
must be at least 65 years old or be retired on permanent
and total disability and have a limited income.
♦ The Hope credit can only be claimed for expenses for the
first two years of postsecondary education. The maximum
Hope credit is $1,800 for each eligible student.
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Social Security Benefits
& Other Credits
Key Ideas
♦ There is no limit to the number of years you can claim
the lifetime learning credit for qualified educational
expenses. The maximum lifetime learning credit is
$2,000 per tax year, no matter how many eligible
students you can claim.
♦ You may be able to claim a credit of up to $11,650 for
expenses paid to adopt an eligible child. If you
cannot use the entire amount of the adoption credit
because it exceeds your tax, you can claim the
unused portion of the credit over the next five years,
or until it is used, whichever comes first.
105
Social Security Benefits
& Other Credits
Key Ideas
♦ If you cannot use the entire amount of your child tax
credit on line 52 of Form 1040, you may be able to
claim the unused amount as an additional child tax
credit on line 66. If you have taxable earned income
in excess of $8,500, the credit is the lower of the
unused amount of the line 52 credit or 15% of
taxable earned income in excess of $8,500. If you
have three or more qualifying children, you may be
able to claim the amount by which your social
security and Medicare taxes exceed your earned
income credit if this amount is greater than the credit
that is based on your earned income in excess of
$8,500.
106
Social Security Benefits
& Other Credits
CLASSWORK 1: True or False.
(1) For 2008, Penny files as H/H. Her modified AGI is $37,400. In
2008, she paid qualified education expenses of $8,000 for her
three children. One child was a freshman and the other two were
sophomores in college. The maximum education credit Penny can
claim is $3,800.
(2) Lamar and Anita tried to adopt a child who was a U.S citizen and
was an eligible child for the adoption credit. Unfortunately, the
adoption never became final so they cannot claim the credit.
(3) Sabrina received Form SSA-1099 showing she received net social
security disability benefits of $6,000 in 2008. Her daughter
Amanda (age 3) received her own Form SSA-1099 showing net
benefits to Amanda of $2,400. Sabrina uses the amount of $8,400
to determine if any of her benefits are taxable.
(4) There is no limit to the number of years you can take the lifetime
learning credit.
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Social Security Benefits
& Other Credits
CLASSWORK 1: True or False.
(5) Rudy (born 3/5/1948) retired on permanent and total disability
in 2003. He receives taxable disability income. The mandatory
retirement age at his company is 62. Rudy is a qualified
individual for the credit for the elderly and disabled in 2008.
(6) Depending on the amount of your social security benefits and
your other income, all of your social security benefits may be
taxable.
(7) If your filing status is MFJ and your modified AGI is $116,000 or
more, you cannot claim any higher education credits.
(8) If you have three or more qualifying children for the child tax
credit, you will always get the amount you were not able to
claim on line 52 of Form 1040 as a refund by claiming the
additional child tax credit on line 66.
(9) Sal and Bonita claim their son Jeff as a dependent. In 2008, Jeff
was a freshman in college and he paid all expenses with money
he earned. If these expenses are qualified expenses, Sal and
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Bonita can claim the Hope credit on their 2008 tax return.
Social Security Benefits
& Other Credits
CLASSWORK 1: True or False.
(10) Social security equivalent benefits for railroad workers are
reported on Form RRB-1099-R.
(11) Use the social security benefits worksheet to figure the tax on
your social security benefits.
(12) Because Shane is paying his college tuition with a student loan,
his expenses are not qualified for either education credit.
(13) In 2008, George and Gracie were able to claim the maximum
adoption credit of $11,650. Their qualified adoption expenses
were $12,200. George and Gracie can take the additional $550
on their 2009 tax return.
(14) The maximum lifetime learning credit is $1,000 for each eligible
student.
109
Social Security Benefits
& Other Credits
CLASSWORK 1: True or False.
(1) For 2008, Penny files as H/H. Her modified AGI is $37,400. In
2008, she paid qualified education expenses of $8,000 for her
three children. One child was a freshman and the other two were
sophomores in college. The maximum education credit Penny can
claim is $3,800. F
(2) Lamar and Anita tried to adopt a child who was a U.S citizen and
was an eligible child for the adoption credit. Unfortunately, the
adoption never became final so they cannot claim the credit. F
(3) Sabrina received Form SSA-1099 showing she received net social
security disability benefits of $6,000 in 2008. Her daughter
Amanda (age 3) received her own Form SSA-1099 showing net
benefits to Amanda of $2,400. Sabrina uses the amount of $8,400
to determine if any of her benefits are taxable. F
(4) There is no limit to the number of years you can take the lifetime
learning credit. T
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Social Security Benefits
& Other Credits
CLASSWORK 1: True or False.
(5) Rudy (born 3/5/1948) retired on permanent and total disability
in 2003. He receives taxable disability income. The mandatory
retirement age at his company is 62. Rudy is a qualified
individual for the credit for the elderly and disabled in 2008. T
(6) Depending on the amount of your social security benefits and
your other income, all of your social security benefits may be
taxable. F
(7) If your filing status is MFJ and your modified AGI is $116,000 or
more, you cannot claim any higher education credits. T
(8) If you have three or more qualifying children for the child tax
credit, you will always get the amount you were not able to
claim on line 52 of Form 1040 as a refund by claiming the
additional child tax credit on line 66. F
(9) Sal and Bonita claim their son Jeff as a dependent. In 2008, Jeff
was a freshman in college and he paid all expenses with money
he earned. If these expenses are qualified expenses, Sal and
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Bonita can claim the Hope credit on their 2008 tax return. T
Social Security Benefits
& Other Credits
CLASSWORK 1: True or False.
(10) Social security equivalent benefits for railroad workers are
reported on Form RRB-1099-R. F
(11) Use the social security benefits worksheet to figure the tax on
your social security benefits. F
(12) Because Shane is paying his college tuition with a student loan,
his expenses are not qualified for either education credit. F
(13) In 2008, George and Gracie were able to claim the maximum
adoption credit of $11,650. Their qualified adoption expenses
were $12,200. George and Gracie can take the additional $550
on their 2009 tax return. F
(14) The maximum lifetime learning credit is $1,000 for each eligible
student. F
112
Social Security Benefits
& Other Credits
CLASSWORK 2: Multiple Choice.
1. Fred and Ethel have three children who are eligible for the lifetime
learning credit. They paid qualified education expenses of $3,000,
$4,200, and $2,350 respectively. The maximum education credit
they can claim is:
a.$4,500
b.$2,000
c. $1,910
d.$3,000
2. Horace (born 3/22/1940) and his wife Hortense (born 4/4/1944)
file a joint return and want to figure the credit for the elderly and
disabled. Both of them are employed and their AGI is $17,540. The
initial amount they enter on line 10 of Schedule R is:
a.$5,000
b.$7,500
c. $3,750
d.$10,000
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Social Security Benefits
& Other Credits
CLASSWORK 2: Multiple Choice.
3. In 2008, Hugh and Helen adopted an eligible child. The child is a
U.S. citizen. In 2007, they paid qualified adoption expenses of
$2,000 (not claimed in 2007). In 2008, they paid qualified
adoption expenses of $3,500 and their modified AGI was $75,000.
The adoption was final in 2008. The amount of qualified adoption
expenses for 2008 is:
a.$3,500
b.$2,000
c. $5,500
d.$5,000
4. Drew lives with his three dependent children who are all under 17
years of age. His tax on line 46 of Form 1040 is $3,136 and he
claimed a child tax credit on line 52 of $3,000. Drew files as head
of household and his taxable earned income is $45,225. Drew can
claim an additional child tax credit of:
a. $1,200
b. $300
c. $136
d. $0
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Social Security Benefits
& Other Credits
5. In 2008, Chet entered college. He cannot be claimed as a
dependent on another person’s return. He paid $4,000 for
tuition and $3,500 for room and board. As a condition of
attendance he was required to pay to the college $250 for
a student activity fee and $105 for books for his classes. He
also paid $280 for transportation, $120 for athletic
equipment, and a $300 student health fee. His qualified
expenses for an education credit are:
a. $8,555
b. $4,355
c. $4,000
d. $3,855
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Social Security Benefits
& Other Credits
CLASSWORK 2: Multiple Choice.
1. Fred and Ethel have three children who are eligible for the lifetime
learning credit. They paid qualified education expenses of $3,000,
$4,200, and $2,350 respectively. The maximum education credit
they can claim is: c. $1,910
2. Horace (born 3/22/1940) and his wife Hortense (born 4/4/1944)
file a joint return and want to figure the credit for the elderly and
disabled. Both of them are employed and their AGI is $17,540. The
initial amount they enter on line 10 of Schedule R is: a. $5,000
3. In 2008, Hugh and Helen adopted an eligible child. The child is a
U.S. citizen. In 2007, they paid qualified adoption expenses of
$2,000 (not claimed in 2007). In 2008, they paid qualified
adoption expenses of $3,500 and their modified AGI was $75,000.
The adoption was final in 2008. The amount of qualified adoption
expenses for 2007 is: c. $5,500
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Social Security Benefits
& Other Credits
CLASSWORK 2: Multiple Choice.
4. Drew lives with his three dependent children who are all
under 17 years of age. His tax on line 46 of Form 1040 is
$3,136 and he claimed a child tax credit on line 52 of
$3,000. Drew files as head of household and his taxable
earned income is $45,225. Drew can claim an additional
child tax credit of: d. $0
5. In 2008, Chet entered college. He cannot be claimed as a
dependent on another person’s return. He paid $4,000 for
tuition and $3,500 for room and board. As a condition of
attendance he was required to pay to the college $250 for
a student activity fee and $105 for books for his classes. He
also paid $280 for transportation, $120 for athletic
equipment, and a $300 student health fee. His qualified
expenses for an education credit are: b. $4,355
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Social Security Benefits
& Other Credits
CLASSWORK 3: For the following taxpayers, use the filing status, total
income and net social security information given to determine
whether any of their social security benefits are taxable. Answer
yes or no.
Filing Status
1. MFJ
2. MFS (lived with spouse)
3. SINGLE
4. H/H
5. MFS
(lived apart for all of 2008)
Total Income
$28,400
$18,800
$16,440
$19,830
$16,475
Net SS Benefits
$ 7,200
$10,400
$22,120
$ 9,740
$ 6,560
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Social Security Benefits
& Other Credits
CLASSWORK 3: For the following taxpayers, use the filing status, total
income and net social security information given to determine
whether any of their social security benefits are taxable. Answer
yes or no.
Filing Status
1. MFJ
2. MFS (lived with spouse)
3. SINGLE
4. H/H
5. MFS
(lived apart for all of 2008)
Total Income
$28,400
$18,800
$16,440
$19,830
$16,475
Net SS Benefits
$ 7,200
NO
$10,400
YES
$22,120
YES
$ 9,740
NO
$ 6,560
NO
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Questions and Answers
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