1. © Kristina Shroyer 2011 VITA: Winter 2011 Lesson 29: Payments Winter 2011 Kristina Shroyer

2. © Kristina Shroyer 2011 Lesson 29: Payments Blank Forms for this Lesson 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 – look at the payments section lines 61,62,63,68,69) ♦ The Earned Income Credit and Additional Child Tax Credit are refundable credits covered in other Chapters Schedule M (page 266) – VERY IMPORTANT!!! Form 1040 ES (download from IRS website) Form 5405 ♦ download from IRS website

3. © Kristina Shroyer 2011 Lesson 29: Payments Introduction This Chapter covers certain refundable credits and payments made by the taxpayer ♦ You'll notice all refundable credits go in the Payments Section of Form 1040 What Parts of the Payments Section of the Form 1040 does this lesson cover? 1. Federal Income Tax Withheld from Forms W-2 and Forms 1099 (line 61) 2. Estimated Tax Payments for the Current Tax Year and Amounts Applied from the Prior Year Tax Return (line 62) 3. Making Work Pay Credit (line 63) ♦ The making work pay credit applies to tax years 2009 and 2010, so this is the last year (also no government retiree credit in 2010, that was for 2009 only) 4. Amounts Paid with a request for an extension to file (line 68) 5. Excess Social Security and tier 1 RRTA tax withheld (line 69) 6. Calculating the Total Payments (line 71) Tab 6 of your binder shows how you will be entering these things in Taxwise Whenever it says "link to" that means you will go to a supplemental form that will back up & calculate the number on the line rather than it just being directly entered there

4. Lesson 29: Payments Reporting Federal Income Tax Withheld (line 61) The Income Tax System is a pay as you go system Most of your taxpayers with W-2s and some of your taxpayers with 1099s will have some Federal Income Tax Withheld ♦ Line 2 Form W-2 ♦ Line 4 Form 1099-R ♦ NOTE: ANY Form 1099 could have Federal Withholding this includes 1099-INT and 1099-DIV, make sure and look closely at any Form 1099 the taxpayer receives and check for both Federal and State withholding and make sure you have entered it in Taxwise ♦ IMPORTANT: You are doing the taxpayer a MAJOR DISSERVICE if you do not report all federal (and state) income tax withheld on the return or don't enter it correctly in Taxwise. What types of income generally have tax withheld? See the list on page 29-2 ♦ Remember to check ALL 1099s even if they aren't on this list Look at the example on page 29-2 TIP You will be entering all the forms with Federal Withholding in Taxwise and Taxwise will add together all the Federal withholding from these forms and put the total on line 61 HOWEVER – you should DOUBLE CHECK THE AMOUNT ON LINE 61 When you are checking the tax return for accuracy, manually add together all the Federal Withholding on all W-2s and 1099s and make sure your figure agrees to the amount on line 61 ♦ I check every single figure on the tax return this way when I prepare a return, basically what you are doing is proving each number on the Form 1040 agrees to your backup paper records Attaching the proper forms to a paper return Most of our taxpayers will e-file but some will insist on filing a paper return (or may be required to) If you are assembling a paper return for the taxpayer refer to page 1 of the return to see what to attach and where ♦ Let's take a look, see where it says Attach Forms W-2 Here, also see where it says attach Forms W-2G and Form 1099-R if tax was withheld here

5. © Kristina Shroyer 2011 Lesson 29: Payments Estimated Tax Payments (line 62) Taxpayers that are not employees or retirees and do not receive Forms W-2 or 1099-R where the payer's are responsible for withholding Federal Tax and the taxpayer's request STILL NEED TO PAY INTO THE SYSTEM AS THEY GO ♦ These taxpayers are generally people who are self employed or receive most of their income from dividends, interest, capital gains and/or rent/royalties ♦ These taxpayers pay as they go by making estimated tax payments How are Estimated Tax Payments Made Taxpayers make Estimated tax payments on a quarterly basis using Form 1040- ES ♦ Make sure and take a look at a Form 1040-ES There is a formula for computing the amount of Estimated Taxes the taxpayer is required to pay quarterly (beyond scope here) ♦ However if the taxpayer does not make estimated payments or does not pay enough according to the formula a penalty could be imposed  This happens in VITA sometimes when the taxpayer doesn't understand they are being paid as an Independent Contractor instead of as an Employee  They talk more about this in Chapters 31 and 33 ♦ The self employed taxpayer should make enough Estimated Tax Payments to cover BOTH their Federal Income tax and their Self Employment tax Where to get this information Taxpayers who make Estimated Tax Payments will generally make sure you know it and will know to bring canceled checks or other documentation However when interviewing the taxpayer if you see they have self employment income or income from which taxes may not have been withheld (or if they paid estimates in the prior year) ask them about estimated payments and if they say they made estimated payments ask for documentation Where to report estimated tax payments Line 62 of Form 1040

6. © Kristina Shroyer 2011 Lesson 29: Payments Tax Payments Applied from a previous year (line 62) Taxpayers who overpay their income taxes and are entitled a refund may instead of getting the refund elect to apply all or part of their overpayment to the next year's tax liability ♦ Look at line 74 of the tax return, if the taxpayer's 2009 return has an amount on this line this is the part of their 2009 refund they wanted to apply to their 2010 tax liability ♦ Self employed taxpayers who always have to make estimated tax payments often do this How to get this information Ask the taxpayer: 1. If last years tax return had an overpayment 2. If they answer yes to question 1 then ask them if they applied any part of the overpayment to this tax year ♦ Where to report this ♦ If the taxpayer did apply an overpayment from last year to this years return add it to any estimated tax payments they made on line 62

7. © Kristina Shroyer 2011 Lesson 29: Payments Making Work to Pay Credit (line 63) This is a refundable tax credit available for 2009 and 2010 for working families ♦ This refundable tax credit is up to $400 for working individuals and $800 for married taxpayers filing joint returns ♦ The credit is fully refundable so if it reduces the tax below zero that amount is refunded to the taxpayer How is the credit calculated? The credit is calculated at a rate of 6.2% of earned income up to a maximum of $400 for individual taxpayers and $800 for married filing joint taxpayers There is also an AGI limitation on this credit (using Modified AGI) ♦ The credit begins to phase out for individual taxpayers with MAGI in excess of $75,000 and married filing joint taxpayers with MAGI in excess of $150,000 Who is NOT eligible for the Making Work to Pay Credit? Taxpayers with no earned income are not eligible ♦ This means taxpayers with only retirement income and/or investment income are not eligible Taxpayers who CAN BE claimed as a dependent on someone else's return Taxpayers who do not have a valid social security number ♦ Exception married filing joint payers – if one spouse does not have a social security number BUT the other spouse does

8. Lesson 29: Payments Making Work to Pay Credit (line 63) - continued The making work pay credit must be reduced by any of the 2009 Economic Recovery payment the taxpayer RECEIVED IN 2010 $250 Economic Recovery Payment (was for 2009: but a FEW taxpayers may have not gotten this payment UNTIL 2010) Certain recipients of social security, supplemental security income (SSI), railroad retirement benefits, veterans disability compensation/pension benefits received a $250 economic recovery payment in 2009 ♦ For a joint return both spouses may have received this for a total of $500 ♦ Most taxpayers eligible for this probably did receive it in 2009 ♦ HOWEVER, some may have not received the payment until 2010  This is important because it affect their making work pay credit for 2010 The $250 economic recovery payment is not taxable income HOWEVER……. Taxpayers who received the $250 Economic recovery payment in 2010 must reduce the amount of the Making Work to Pay Credit by the amount they received (the calculation is made on Sch M) CAUTIONS: Most W-2 employees did NOT receive this and won't (unless they also have retirement or disability income) Most people should have gotten this in 2009 if they were eligible but it is still VERY IMPORTANT to check ♦ We got a lot of rejected returns last year based on this issue If the taxpayer received the payment in 2009 their LAST YEAR'S making work pay credit was already reduced, don't do it twice, this is only for people that received the Economic Recovery Payment for 2009 in 2010 IMPORTANT: Many older taxpayers will not know if they got this You need to check! Do not assume they didn't get it if they don't know Here is the link on the IRS website where they can check: http://www.irs.gov/individuals/article/0,,id=219514,00.htmlhttp://www.irs.gov/individuals/article/0,,id=219514,00.html ♦ Let's take a look at this now so you know how to help the taxpayer through it if it comes up IF IN DOUBT HAVE THE TAXPAYER CHECK!!! This is only an issue for taxpayers that have earned income AND received social security SSI, RRBs or Veterans benefits If the taxpayer didn't have earned income they aren't eligible for the credit anyway Let's read the example at the bottom of page 29-5

9. © Kristina Shroyer 2011 Lesson 29: Payments How to report the credit What form is used to calculate the credit and how is it calculated? Schedule M (let's take a look, go to page 266 of Book 4491-W) Line 1a on Schedule M addresses some restrictions on the credit ♦ Taxpayers may not be entitled to claim the entire credit if they do not have enough earned income  There are some exceptions to this on line 1a but I think most of them are outside the scope of VITA Look though Schedule M and you will see the credit being calculated based on earned income along with the phase out and subtraction of the economic recovery payment received in 2010 (received in 2010 only!) if the taxpayer received one Once the credit is calculated on line 11 of Schedule M it goes to line 63 of Form 1040 This credit is calculated on Schedule M – line 11 The making work pay credit must be reduced by any economic recovery payment received in 2010 (line 10) The making work pay credit calculated on Schedule M, the total credit goes on line 63 of Form 1040

10. © Kristina Shroyer 2011 Lesson 29: Payments First Time Homebuyer Credit (line 67) This is a refundable credit for eligible taxpayers who purchase qualifying homes within the time period ♦ So if it reduces the tax below zero the taxpayer can get a refund There have been some changes to the credit from last year, let's read through them at the top of page 29-6 1. Deadlines have been extended 2. There is a new "long time resident" credit for a home purchase  In this lesson I'll refer to the "first time homebuyer credit" and the "long time resident credit" – both are calculated on Form 5405 and then go to line 67 of form 1040 3. Income limitations have changed 4. New documentation requirements for claiming the credit The calculation for the credit amount is done on Form 5405 (Parts I and II) (the credit is calculated on line 10) and then the credit goes on line 67 of Form 1040 Maximum Credit Amount (other than "long time resident") ♦ The maximum amount of the credit is $8000 ($4000 for MFS)

11. © Kristina Shroyer 2011 Lesson 29: Payments First Time Homebuyer Credit (line 67) - continued Qualifying for the credit – general rules (continued on next few slides) Which Home Purchases May Qualify for the First Time Homebuyer Credit 1.Taxpayer must be a first time homebuyer ♦ To qualify as this the taxpayer can NOT have owned a home in the last three years ♦ In addition the taxpayer must live in the home purchased to qualify for the credit for 3 years to avoid having to repay the credit 2.The home must be located in the United States 3.The home must be the taxpayer's main home ♦ main home is where the taxpayer lives most of the time  can be a house, houseboat, house trailer, cooperative apartment or other reasonable structure  Vacation homes and rental property are NOT eligible 4.The credit was extended from last year to include qualifying home purchases from November 30, 2009 – April 30, 2010 ♦ There is an settlement date was also extended – as long as the homebuyer entered into a binding contract by April 30, 2010 the home still qualifies as long as they settle the purchase (meaning have a closing date) by September 30, 2010 5.Credit can be taken on the 2009 or 2010 return ♦ For homes purchased in 2010 the taxpayer can make an election to claim the credit on their 2009 original or amended return –OR- ♦ They can take the credit on their 2010 return  NOTE: They can NOT efile if they take the credit on their ♦ No matter when they take credit they must use the MOST RECENT VERSION of Form 5405 to compute and claim the credit

12. © Kristina Shroyer 2011 Lesson 29: Payments First Time Homebuyer Credit (line 67) - continued Qualifying for the credit (continued) What is the long time resident credit? 1.This is a version of the first time homebuyer credit for taxpayers who don't qualify as "first time homebuyers" (they qualify in all ways EXCEPT the three year rule on owning a main home) 2.This is a credit of up to $6500 ($3500 for Married Filing Separately) 3.To qualify for the long time resident credit The buyer must have used the same home as a principal or primary residence at lest five consecutive years of the eight year period ending on the date of the purchase of the new home as a primary residence The other rules are the same (dates etc) What are the income limitations? For homes purchased after November 6, 2009 The credit will start to phase out for MFJ when MAGI (modified AGI) exceeds $225,000 and completely phase out at $245,000 The credit will start to phase out for other filing statuses (other than MFJ) when MAGI exceeds $125,000 and completely phase out at $145,000 For homes purchased prior to (before) November 6, 2009 The credit will start to phase out for MFJ when MAGI (modified AGI) exceeds $150,000 and completely phase out at $170,000 The credit will start to phase out for other filing statuses (other than MFJ) when MAGI exceeds $75,000 and completely phase out at $95,000 What are the other requirements? (These are new for homes purchased after 11/06/09) No credit is available if the purchase price of the home exceeds $800,000 The purchaser must be at least 18 years old on the date of purchase, for married taxpayers only one spouse needs to meet the age requirement Someone claimed as dependent on another person's return is not eligible for the credit What are the new administrative requirements? (For homes purchased after 11/06/09) Taxpayers must attach a copy of the settlement statement for the home sale to the tax return IRS now has broader authority to deny the credit without an audit and this applies retroactively to 2008 returns

13. © Kristina Shroyer 2011 Lesson 29: Payments First Time Homebuyer Credit (line 67) Qualifying for the credit (continued) Summing it up - Who can NOT claim the credit? This is on page 29-7 and 29-8 in your book, some are repeats of the new rules we've already stated and some are rules that applied to homes purchased after 11/06/09, I'm just going to point out the ones we haven't talked about yet The following makes it so the taxpayer can NOT claim the credit (#5-10 in your book) 5.The taxpayer is a non-resident alien 6.The home is located outside the United States 7.Taxpayer sells the home or the home is no longer the taxpayer's main home before the end of year in which it was purchased 8.The taxpayer acquired the home as a gift or part of an inheritance 9.Taxpayer bought the home from a related entity  A taxpayer who bought the home from a close relative including a spouse, parent, grandparent, child or grandchild (so ancestors or lineal descendants)  One example is a corporation or partnership in which the taxpayer has more than a 50% interest 10.New for homes purchased after 11/06/09 – if home was purchased from a person related to the ancestor's spouse (same rules as above, ancestors or lineal descendants)

14. © Kristina Shroyer 2011 Lesson 29: Payments First Time Homebuyer Credit (line 67) - continued Calculating the Credit Amount The credit is generally the smaller of: ♦ $8000 ($4000 for MFS) – OR – ♦ 10% of the purchase price of the home ♦ Remember the amounts are $6500 and $3500 max for long time residents The credit is phased out (reduced or eliminated) for higher income taxpayers based on the taxpayers Modified Adjusted Gross Income (MAGI) ♦ Remember the phase out is different for homes purchased after 11/06/09 Form 5405 is used to calculate the credit and it is reported on line 67 of Form 1040 You want to make sure you answer all questions correctly, attach the settlement statement to the return if required and double check the form 5405 after completion Remember we said for 2010 returns with the credit they can not be e-filed

15. © Kristina Shroyer 2011 Lesson 29: Payments First Time Homebuyer Credit (line 67) Special rules for members of the military You will want to read through these if you are assisting a member of the military and keep in mind there are special rules to look up (extra year) Repaying the Credit We already talked about situations in which the taxpayer may have to repay the credit in Lesson 28 ♦ It is summarized again on page 29-8

16. © Kristina Shroyer 2011 Lesson 29: Payments Amount Paid with an Extension to File Form 1040 (line 68) Taxpayers can get a 6 month extension to file (NOT TO PAY) their tax return by Filing Form 4868 ♦ This extends the filing date for the return until October 17 (since the 15 th is on a Saturday) ♦ This is only an extension to file not to pay When taxpayers file an extension they can make a payment with the extension ♦ This payment is reported on line 68 of Form 1040 Let's take a look at Form 4868

17. © Kristina Shroyer 2011 Lesson 29: Payments Other Payments (line 70) The Payments Section of Form 1040 also lists these credits on line 70: ♦ Form 2439: Notice to Shareholder of Undistributed Long Term Capital Gains ♦ Form 4136: Credit for Federal Tax Paid on Fuels ♦ Form 8801: Refundable Credit for Prior Year Minimum Tax ♦ Form 8885: Health Coverage Tax Credit ALL of these credits are out of the scope of the VITA program and any client who would like to claim these credits should be referred to a professional tax preparer

18. © Kristina Shroyer 2011 Lesson 29: Payments Excess social security and tier 1 RRTA tax withheld (line 69) Tier 1 RRTA tax is the equivalent Social Security tax for those who worked for the railroad ♦ The wage base may be different and will need to be looked up if possible tier 1 excess RRTA tax withheld comes up General Information on Social Security and Medicare Taxes Employer's withhold both Social Security and Medicare taxes from an Employee's wages The wage base for Medicare taxes is unlimited ♦ this means no matter how much money an employee makes the employer still needs to withhold 1.45% from the employee's wages (and match it before remitting it to the government) The wage base for Social Security taxes is NOT Unlimited ♦ For 2010 the wage base for Social Security taxes is $106,800  This means an employer withholds 6.2% in social security (and matches it before remitting it to the government for the employee's contribution to the social security system) for the employees wages UP TO AND INDUCLING $106,800 – never more  Once an employee has made more than $106,800 during the tax year, no more social security is withheld from their earnings, this is what they mean by the Social Security limit  IMPORTANT: the wage base for social security is the base for a TAXPAYER from ALL JOBS, so this means no matter how many jobs the taxpayer works they should never pay social security taxes for the year (via withholding) in excess of the base - $106,800 in 2010

19. © Kristina Shroyer 2011 Lesson 29: Payments Excess social security and tier 1 RRTA tax withheld (line 69) Tier 1 RRTA tax is the equivalent Social Security tax for those who worked for the railroad What do we mean by Excess Social Security The social security base becomes an issue for a taxpayer when they work for more than one employer during the year and between the two employers they make more than the social security base of $106,800 ♦ remember the base is for all wages (social security income) earned by an employee – from all sources ♦ The two employers have no way of knowing about each other and would not know when the employee's TOTAL wages have exceeded the Social Security base of $106,800 – this results in the taxpayer have EXTRA (excess) social security withheld on their overall wages in excess of the maximum Example: Maybe an employee has one W-2 from ABC Company with $80,000 of Social Security wages and another W-2 from XYZ company with $50,000 of Social Security Wages ♦ The amount of Social Security wages used to withhold Social Security from an Employee is reported in Box 3 of Form W-2 (this is often different than the amount in Box 1 so be careful), the actual Social Security withheld is reported in Box 4 of Form W-2 ♦ This employee has a total of $130,000 that social security wages were withheld from when the wage base is $106, 800 – this means EXCESS social security was withheld on $23,200 (130,000-106800) or wages ♦ This means the taxpayer paid excess social security tax of 1,438.40 (23.200 *.062) The excess social security tax is refunded to the taxpayer and should be reported on line 69 Taxwise will calculate any excess social security tax (and excess 1 RRTA tax) withheld for you as long as you enter the W-2s correctly and in their entirety into the software

20. © Kristina Shroyer 2011 Lesson 29: Payments Total Payments (total payments and refundable credits) – line 72 Form 1040 line 72 is where all the payments and refundable credits from lines 61-71 (not including 64b) are totaled ♦ This figure will then be subtracted from the total tax on line 60 to figure out if the taxpayer has an overpayment of taxes (refund) or owes taxes