Liberty Tax Service Online Basic Income Tax Course. Lesson 10

Liberty Tax Service Online Basic Income Tax Course. Lesson 10

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, George had contributed $26,000 to a qualified plan and had received no distribution before 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.

Chapter 9 Homework

Chapter 9 Homework HOMEWORK 2:
Joel S. Pryce (born 6/24/1954) lives at 1322 Nineteenth Street, St. Louis, MO 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.

Chapter 9 Homework

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 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.

Chapter 9 Homework

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 Be Able to Figure and Report the Other Credits

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.

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 OTHER CREDITS are the credit for the elderly and disabled, the education and adoption credits. These credits are nonrefundable credits. You can use these credits up to the amount of your tax on line 44 of Form The additional child tax credit is a refundable credit. You will receive a refund of any part of the credit that is more than your total tax.

TAXABLE SOCIAL SECURITY BENEFITS
Social security benefits include retirement, survivor, and disability benefits. 1. Reported to you and to the IRS on Form SSA-1099 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. The taxable amount of your social security benefits, if any, depends on the amount of benefits you receive and your other income. Generally, as this total amount increases, a greater percentage of your benefits is subject to tax.

Social security benefits are reported to you and to the IRS on Form SSA-1099, Social Security Benefit Statement.

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 Some percentage of your benefits will be taxable if your total income plus one half your net benefits shown in box 5 of Form SSA-1099 exceeds a base amount for your filing status. If you are married, filing jointly and both spouses receive benefits, use one half of your combined 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. Generally, for the purpose of figuring the amount of taxable benefits, total income is all your taxable income (and that of your spouse if you are married filing jointly) reported on lines 7 through 19 and line 21 of Form 1040 (your total income except for social security benefits) plus your nontaxable interest from line 8b minus the adjustments on lines 23-32, plus any write in adjustments on line 36 of Form 1040.

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. Before using the worksheet, complete page 1 of Form 1040, lines 7 through 19, line 21, and 23 through 36. On the worksheet, use the amount of net benefits shown in box 5 of Form SSA-1099 to figure the taxable part of your benefits. Net benefits are the gross payments you received minus any repayments you made during the tax year to the Social Security Administration (SSA). Make sure you use only the box 5 amount on the worksheet. The net benefits you received shown in box 5 of SSA-1099 are entered on line 20a of Form Report the taxable social security benefits on line 20b. If none of your benefits are taxable, do not report them on your tax return. Leave line 20b blank.

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) $ 1,569 Line 8b (tax-exempt interest) Line 9a (ordinary dividends) 1,500 Line 13 (capital gain or loss) Line 15b (taxable IRA distributions) ,119 Walter’s filing status is head of household. He would fill out the Social Security Benefits worksheet and Form 1040 as follows:

Form 1040, Page 1

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 SSA-1099 2. A child’s benefits belong to the child and are NOT reported on the parent’s return. Benefits, if taxable, are included in the income of the person with the legal right to receive them. The name and social security number of the owner of the benefits is shown in boxes 1 and 2 of the SSA If a child receives benefits, the check for a child’s benefits may be in the parent’s name. However, because these benefits belong to the child, they are not reported on the parent’s tax return. The child will receive a Form SSA-1099 and must use the reported benefits in preparing his or her own tax return if he or she is required to file.

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 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

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 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.

LUMP-SUM PAYMENTS A lump sum payment is a retroactive payment of benefits. 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. In any year you may receive a lump-sum payment (a retroactive payment of benefits), even if this payment includes benefits for an earlier year, the taxable part must be included in your income in the year you receive the lump-sum payment. Do not confuse the lump-sum benefit payment with the lump-sum death benefit that the SSA pays to many of its beneficiaries. No part of the death benefit is included in taxable income. Generally, you use your current year income to determine the total taxable benefits received that year. However, you may be able to figure the taxable part of a lump sum payment for an earlier year separately using your income from the earlier year. You can choose this method if it lowers the amount of your taxable benefits. This is called a lump-sum election.

LUMP-SUM PAYMENTS 5. Do NOT file an amended return for the prior year.
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. If you receive benefits for one or more earlier years, follow the instructions in Publication 915 to see whether making the election will lower the amount of your taxable benefits. If so, include the lower taxable amount on line 20b of Form 1040 and write “LSE” to the left of line 20a. Either way, you report the taxable part of your total benefits on your current year Form You do not file an amended return for the earlier year.

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 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.

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 If you are a retired railroad worker, a part of the tier 1 railroad retirement benefits you receive is treated as social security benefits for tax purposes. These are commonly called social security equivalent benefits. Use the same worksheets and follow the same rules to determine if any of these benefits are taxable. If any part of your tier 1 benefits is taxable, report the net amount of benefits on line 20a of Form 1040 and the taxable portion on line 20b. Railroad retirement benefits that are treated as social security benefits are reported on Form RRB-1099, Payments by the Railroad Retirement Board.

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. Tier 1 benefits that are not social security equivalent benefits, tier 2 benefits, and certain other railroad employee benefits are treated as amounts received from a qualified employer plan. You figure the taxable amount of these payments under the rules for regular pensions. These benefits are reported on Form RRB-1099-R, Annuities or Pensions by the Railroad Retirement Board.

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 If you are at least 65 years old at the end of the year or retired on permanent and total disability, you may be a qualified individual for this credit. To take this credit, your income must be within certain limits for your filing status.

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. To qualify for the credit for the elderly or the disabled, you must have been a U.S. citizen or resident for the entire tax year. If you are married, you generally must file a joint return. However, if you and your spouse did not live in the same household at any time during the tax year, you can file either joint or separate returns and still take the credit. If you are married but qualify for head of household filing status, you can file as head of household and take the credit.

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.

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. You are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or in work generally done for pay. A physician must certify that you were totally and permanently disabled on the day you retired. You must keep this statement with your records.

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?

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.

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. Taxable disability income must meet the following two requirements: 1. The income must be paid under your employer’s accident, health plan or pension plan. 2. The income must be included as wages for the time you are absent from work because of permanent and total disability.

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. For purposes of the credit for the elderly or the disabled, disability income does not include amounts you receive after you reach mandatory retirement age. Mandatory Retirement Age is the age set by your employer at which you would have had to retire, if you had not become 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. There are two income limits you must consider to determine if you can claim the credit. The first is the amount of your AGI. The second is the amount of nontaxable social security and other nontaxable pensions you received during the tax year. See Table 10-1 for the income limits.

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 10-2) 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. The credit for the elderly or the disabled is computed on Schedule R, Credit for the Elderly or the Disabled, using an initial amount based on your age (and if married filing jointly, your spouse’s age), your filing status and whether one or both of you is retired on permanent and total disability. See Table 10-2 below for initial amounts. • Determine the initial amount (lines of Schedule R) • Total any nontaxable social security and certain other nontaxable pension and disability benefits (lines 13a, 13b, and 13c). • Determine your excess adjusted gross income (lines 14-17) Excess adjusted gross income is one half the amount by which your adjusted gross income exceeds the following amount for your filing status: $7,500 if your filing status is single, H/H or QW $10,000 if you’re filing status is MFJ $5,000 if your filing status is MFS and you and your spouse did not live in the same household at any time during the year. • Determine your credit (lines 18-24 The actual amount of the credit you can claim is 15% of the reduced initial amount.

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 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:

Initial Amount

Excess AGI

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 If you paid higher education expenses during the tax year, you may be able to claim a credit for part of your eligible expenses. The Hope credit is only available for expenses paid during the first two years of postsecondary education. You may be able to claim the lifetime learning credit for an unlimited number of years. The amounts of both credits are reported on line 50 of Form 1040.

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. To claim either credit, you must meet all of the following requirements. You paid qualified expenses for an eligible student and the eligible student is yourself, your spouse, or a dependent you can claim on your tax return. In general, qualified expenses are tuition and fees you are required to pay to the institution as a condition of enrollment or attendance. Course-related books, supplies and equipment, and student activity fees are included in qualified tuition and related expenses only if the fees must be paid to the institution as a condition of enrollment or attendance.

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

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

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

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. 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. The school will be able to tell you if it is an eligible institution. An eligible student must be enrolled at an eligible educational institution for at least one academic period (semester, quarter, and summer session) during the tax year.

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). You can take the credit for expenses for an academic period that begins the same year you paid the expenses or for prepaid expenses. Prepaid expenses are expenses for an academic period (semester, trimester, quarter) that begins in the first three months of the year following the year of payment. Tax year 2008 credits are based on expenses paid in 2008 for academic periods beginning after December 31, 2007, and the first three months of 2009.

In November 2008, Carl paid qualified tuition of $3,500 for the winter semester beginning in January Can Carl use the $3,500 in figuring the credit on his 2008 tax return? Yes or No?

In November 2008, Carl paid qualified tuition of $3,500 for the winter semester beginning in January Can Carl use the $3,500 in figuring the credit on his 2008 tax return? Yes

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 though he or she was not. You can claim the credit using expenses you paid with gifts, inheritances, or the proceeds of a loan. You cannot claim either credit if your filing status is married filing separately. The amount of the credit is reduced or eliminated depending on your modified AGI and your filing status. You cannot take the credit if you can be claimed as a dependent on someone else’s tax return. You can claim the credit for any qualified expenses paid by a dependent you claim on your tax return.

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?

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

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 You can claim the Hope credit for the first two years of postsecondary education. Usually, this means the freshman and sophomore years. You cannot have expenses that were used to figure the Hope credit in any 2 earlier years. The student must also be: • enrolled at least half-time in a program that leads to a degree, certificate, or other recognized educational credential for at least one academic period beginning in 2007 • free of any felony conviction for possessing or distributing a controlled substance.

EDUCATION CREDITS The maximum Hope credit is $1,800 of qualified expenses for each eligible student ($1,800 x the number of eligible students). The maximum Hope credit is $1800 for each eligible student. In other words, the maximum credit you can claim is $1,800 times the number of eligible students. If the student’s expenses are $1,200 or less, the credit is the amount of the expenses. If the student’s expenses are $2,400 or more, the credit is $1,800. If the student’s expenses are between $1,200 and $2,400, the credit is $1,200 plus one half of the expenses over $1,200.

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).

EDUCATION CREDITS Lifetime Learning Credit
The lifetime learning credit can be claimed throughout an eligible student’s lifetime. 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). The lifetime learning credit is not limited to students in the first two years of postsecondary education. The credit does not depend on the student’s workload and there is no limit to the number of years you can take this credit. Education expenses are qualified for the lifetime learning credit if they are: • for courses taken as part of a postsecondary degree program, or • for courses that are taken to improve or acquire job skills. Unlike the Hope credit, the lifetime learning credit does not increase based on the number of students for whom you pay qualified expenses. The amount of the credit is 20% of the first $10,000 of qualified tuition you pay for all students in your family. That is, the maximum credit is $2,000 ($10,000 x 20%).

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

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%.

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. In any tax year, you can receive only one tax benefit for each student. You cannot take the tuition and fees deduction on line 34 of Form 1040 and use the same expenses to claim the Hope or lifetime learning credit, but it may be more advantageous to claim those expenses as an adjustment instead of as a credit. If you choose the Hope credit for a child on your 2008 tax return, you cannot also include that child’s expenses in figuring the lifetime learning credit for that child. You can claim the Hope credit for the first two years of a student’s postsecondary education and claim the lifetime learning credit for that same student in later tax years. You can claim a different credit for the qualified expenses of each eligible student in the same tax year.

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

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 than her tax liability, the credit is limited.

EDUCATION CREDITS

EDUCATION CREDITS Table 10-3 summarizes the differences between the credits

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. An eligible educational institution is required to issue a Form 1098-T, Tuition Statement to each student by January 31 of the year following the year of the academic periods for which the expenses were paid. The Form 1098-T will give you information to help determine whether you can claim an education tax credit. Use Form 8863, Education Credits, to figure your credit. The Hope credit is figured in Part I of the form and the lifetime learning credit is figured in Part II. Complete Part III of Form 8863 to determine the amount to enter on line 50 of Form 1040.

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

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. To qualify for the adoption credit, your expenses must be reasonable and necessary for the adoption such as attorney fees, court costs, traveling expenses (including meals and lodging) while away from home, and other expenses directly related to the legal adoption of an eligible child

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. An eligible child is: • any child under age 18 at the time of adoption. • any individual who is physically or mentally incapable of caring for himself or herself. An eligible child is also a child with special needs if he or she is a U.S. citizen or resident and a state determines that the child cannot or should not be returned to his or her parent’s home and probably will not be adopted unless assistance is provided to the adoptive parents.

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. To claim the adoption credit, you generally must file a joint return if you are married. However, you may take the credit on a separate return if you are legally separated or if you are married and living apart from your spouse and: • You lived apart from your spouse for the last 6 months of the year • The eligible child lived with you for more than half the year • You paid over half the cost of keeping up a home for yourself and the eligible child. The amount of the adoption credit is limited to $11,650 for each effort to adopt an eligible child. If you pay expenses for an adoption that is not successful and then pay additional expenses to successfully adopt a different child, this is considered one effort. The amount of the credit for all your expenses is limited to $11,650. Also, if you are claiming a credit for expenses in 2008 and you have taken a credit in a previous year for the same adoption effort, you must reduce the $11,650 by the Chapter 10 Social Security Benefits & Other Credits amount of the previous qualifying expenses. The $11,650 credit is allowed for a special needs child even if you do not have qualified adoption expenses.

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 Income Limit

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. When you take the credit depends on whether the eligible child is a citizen or resident of the United States at the time the adoption attempt begins. If the child is a U.S. citizen or resident, you can claim the credit even if the adoption never becomes final. You cannot take the credit for a foreign child unless the adoption becomes final. See Tables 10-5 and 10-6.

ADOPTION CREDIT Table 10-6. Foreign Child
Table Child Who is a U.S. Citizen or Resident Table Foreign Child

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.

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. To claim the credit, you must complete Form 8839, Qualified Adoption Expenses. On the form, you must give the child’s name, year of birth, and identifying number. This can be a social security number, an individual taxpayer identification number (ITIN), or an adoption taxpayer identification number (ATIN). If you cannot claim the full amount of the credit because the amount of your credit exceeds your tax, you can claim the unused amount of the credit over the next five years or until it is used up, whichever comes first.

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 .

ADOPTION CREDIT

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.

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 If you cannot use the entire amount of your child tax credit on line 52 of Form 1040 because it is more than your tax, you may be able to claim the unused amount of the credit as an additional child tax credit on line 66. The additional child tax credit is a refundable credit (you may get a refund even if you do not owe any tax).

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 and attaching it to Form 1040. If you have taxable earned income in excess of $8,500, the credit is generally the lower of the amount you were unable to claim on line 52 or 15% of your taxable earned income in excess of $8,500. For purposes of the additional child tax credit, your taxable earned income is generally the amount on line 7 of your Form 1040. If you have three or more qualifying children, you can claim a credit for the amount 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 line 52 credit. If you answered “Yes” on line 4 or 5 of the Child Tax Credit Worksheet, use Form 8812, Additional Child Tax Credit to see if you can claim the additional child tax credit. First, figure the amount of the child tax credit on line 52. The amount of that credit must be more than your tax. Then complete Form 1040 through line 65 before completing Form 8812.

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 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:

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. 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. This includes labor costs properly allocable to the onsite preparation, assembly, or original installation of the property and for piping or wiring to interconnect such property to the home. This credit is limited to: $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.

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.

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.

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.

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 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.

CLASSWORK 1: True or False. (5) Rudy (born 3/5/1948) retired on permanent and total disability in 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 Bonita can claim the Hope credit on their 2008 tax return.

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.

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 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

CLASSWORK 1: True or False. (5) Rudy (born 3/5/1948) retired on permanent and total disability in 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 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 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 Bonita can claim the Hope credit on their 2008 tax return. T

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

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: $4,500 $2,000 $1,910 $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: $5,000 $7,500 $3,750 $10,000

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 The amount of qualified adoption expenses for 2008 is: $3,500 $2,000 $5,500 $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

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

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 The amount of qualified adoption expenses for 2007 is: c. $5,500

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

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 Total Income Net SS Benefits 1. MFJ $28,400 $ 7,200 2. MFS (lived with spouse) $18,800 $10,400 3. SINGLE $16,440 $22,120 4. H/H $19,830 $ 9,740 5. MFS $16,475 $ 6,560 (lived apart for all of 2008)

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 Total Income Net SS Benefits 1. MFJ $28,400 $ 7,200 NO 2. MFS (lived with spouse) $18,800 $10,400 YES 3. SINGLE $16,440 $22,120 YES 4. H/H $19,830 $ 9,740 NO 5. MFS $16,475 $ 6,560 NO (lived apart for all of 2008)

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Liberty Tax Service Online Basic Income Tax Course. Lesson 10

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Liberty Tax Service Online Basic Income Tax Course. Lesson 10

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