Liberty Tax Service Online Basic Income Tax Course Lesson 2

1. Liberty Tax Service Online Basic Income Tax CourseLesson 2 Instructor: Julie Elliott Julie.elliott@libertytax.com Moderator: Meladie Croy libertytaxtiffin@hotmail.com

2. Chapter 1 Homework HOMEWORK 1: Use the appropriate Filing Requirement Table to determine who has to file. Yes or No. Ed’s filing status is single and in 2009 he was 54 years old. His gross income was $9,050 and he has withholding of $450. Jane’s filing status is qualifying widow(er) with dependent child. She was 42 years old in 2009 and her gross income was $14,350. Dick and Sally’s filing status is married, joint return. Dick was 68 and Sally was 61 years old in 2009. Their gross income was $18,820 Sam’s filing status is head of household. He was 29 years old in 2009 and his gross income was $12,500. Terry (single, age 17 in 2009) is claimed as a dependent by her parents. Her gross income was $5,750. Rufus (age 60 in 2009) is single and his son can claim him as a dependent. His only income was $2,250 in bank interest. 2

3. Chapter 1 Homework HOMEWORK 1: Use the appropriate Filing Requirement Table to determine who has to file. Yes or No. Ed’s filing status is single and in 2009 he was 54 years old. His gross income was $9,050 and he has withholding of $450. N (But he should because taxes have been withheld) Jane’s filing status is qualifying widow(er) with dependent child. She was 42 years old in 2009 and her gross income was $14,350. N Dick and Sally’s filing status is married, joint return. Dick was 68 and Sally was 61 years old in 2009. Their gross income was $18,820 N Sam’s filing status is head of household. He was 29 years old in 2009 and his gross income was $12,500. Y Terry (single, age 17 in 2009) is claimed as a dependent by her parents. Her gross income was $5,750. Y Rufus (age 60 in 2009) is single and his son can claim him as a dependent. His only income was $2,250 in bank interest. Y

4. Chapter 1 Homework HOMEWORK 1: Use the appropriate Filing Requirement Table to determine who has to file. Yes or No. Sonia (age 67 in 2009) is single, received nontaxable social security of $9,000 and made $750 net from selling Christmas ornaments at craft shows. Barbara (single, age 16 in 2009) can be claimed by her parents as a dependent. In 2009, Barbara earned wages of $680 as a dishwasher and $620 from her job as a clerk. She also had a savings account, which earned interest of $300. Barry (single, age 17 in 2009) can be claimed by his parents as a dependent. In 2009, Barry earned wages of $5,650 working at a fast food restaurant and he had no other income. Jackie was married in 2009 but chose the filing status married, separate return. In 2009, she had a gross income of $3,700. Len and Marge (ages 69 and 70 in 2009) will file a married joint return. Len received wages of $10,500 and Marge received a taxable pension of $8,000. They had a joint bank account, which paid them interest of $2,000 and Marge received $2,500 social security. Lorna (age 23 in 2009) is married but can be claimed as a dependent by her parents. Her earned income (wages) in 2009 was $5,750. 4

5. Chapter 1 Homework HOMEWORK 1: Use the appropriate Filing Requirement Table to determine who has to file. Yes or No. Sonia (age 67 in 2009) is single, received nontaxable social security of $9,000 and made $750 net from selling Christmas ornaments at craft shows. Y Barbara (single, age 16 in 2009) can be claimed by her parents as a dependent. In 2009, Barbara earned wages of $680 as a dishwasher and $620 from her job as a clerk. She also had a savings account, which earned interest of $300. N Barry (single, age 17 in 2009) can be claimed by his parents as a dependent. In 2009, Barry earned wages of $5,650 working at a fast food restaurant and he had no other income. N Jackie was married in 2009 but chose the filing status married, separate return. In 2009, she had a gross income of $3,700. Y Len and Marge (ages 69 and 70 in 2009) will file a married joint return. Len received wages of $10,500 and Marge received a taxable pension of $8,000. They had a joint bank account, which paid them interest of $2,000 and Marge received $2,500 social security. N Lorna (age 23 in 2009) is married but can be claimed as a dependent by her parents. Her earned income (wages) in 2009 was $5,750. Y

6. Chapter 1 Homework HOMEWORK 2: None of the following taxpayers can be claimed as a dependent. What is the gross income level at which each must file a return? Married (living together), joint return, both age 65 in 2009. Married (living together), joint return, both age 63 in 2009. Head of household, age 65 in 2009. Qualifying Widow(er) with dependent child, age 64 in 2009. Single, age 23 in 2009. Married, separate return, age 65 in 2009. Single, turned age 65 on January 1, 2010. Married (living together), joint return, one spouse age 67 and one spouse age 58 in 2009. Head of household, age 19 in 2009. Single, age 87 in 2009. 6

7. Chapter 1 Homework HOMEWORK 2: None of the following taxpayers can be claimed as a dependent. What is the gross income level at which each must file a return? Married (living together), joint return, both age 65 in 2009. $20,900 Married (living together), joint return, both age 63 in 2009. $18,700 Head of household, age 65 in 2009. $13,400 Qualifying Widow(er) with dependent child, age 64 in 2009. $15,050 Single, age 23 in 2009. $9,350 Married, separate return, age 65 in 2009. $3,650 Single, turned age 65 on January 1, 2010. $10,750 Married (living together), joint return, one spouse age 67 and one spouse age 58 in 2009. $19,800 Head of household, age 19 in 2009. $12,000 Single, age 87 in 2009. $10,750

8. Questions & Answers 8

9. Chapter 1 Homework HOMEWORK 3: Joshua S. Scott, (344-55-6677, born 3/16/1960) is single and lives at 1566 Piney Road, Mason City, IA 50401. He is a steel worker and his Form W-2 follows. He has no other income. Prepare a 2009 return for him.

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15. Chapter 2: EXEMPTIONS AND DEPENDENTS Chapter Content Personal Exemptions Dependent Exemptions Five Qualifying Child Tests Four Qualifying Relative Tests Exemption Phase-out Key Ideas Objectives Understand the Types of Exemptions Define the Qualifying Child Tests Define the Qualifying Relative Tests Understand the Phase-out of Exemptions

16. Exemptions reduce taxable income. Two types of exemptions: Personal exemptions Exemptions for dependents. Dollar amount adjusted each year for inflation. The exemption amount for 2009 is $3,650. Each person claimed as an exemption must have a valid social security number or other valid taxpayer identification number. EXEMPTIONS

17. EXEMPTIONS Form 1040 Page 1

18. PERSONAL EXEMPTIONS Generally, ONE exemption can be claimed for yourself unless you can be claimed as a dependent by someone else. Rules for your spouse: Never considered your dependent. Can claim ONE exemption for your spouse if filing MFJ. If filing MFS, you can claim ONE exemption for your spouse only if spouse has no gross income, filed no tax return, and was not the dependent of another taxpayer. If you are divorced or legally separated by the end of the tax year, you cannot claim former spouse as exemption. If spouse died during the year, you can generally claim the exemption for deceased spouse.

19. EXEMPTIONS FOR DEPENDENTS You are allowed ONE exemption for each person you can claim as a dependent. The term dependent means a qualifying child or a qualifying relative.

20. RULES FOR CLAIMING A DEPENDENT Dependent Taxpayer Test Person cannot claim a dependent if they can be claimed as a dependent by another person. A person filing a joint return and their spouse can be claimed as a dependent by someone else cannot claim any dependents on their return. Joint Return Test Generally you cannot claim a married person as a dependent if he or she files a joint return. Unless the joint return is being filed only to claim a refund and not tax liability would exist for either spouse on separate returns. Citizen or Resident Test A person cannot be claimed as a dependent unless that person is a U.S. citizen, U.S. resident, U.S. national, or a resident of Canada or Mexico, for some part of the year.

21. JOINT RETURN TEST – PROBLEM 1 Slade’s son and his wife each had less than $3,650 of wages and no unearned income. Neither is required to file a tax return. Taxes were taken out of their pay, so they filed a joint return to get a refund. Is Slade disqualified from claiming their exemptions just because they filed a joint return? Yes or No?

22. JOINT RETURN TEST – PROBLEM 1 Slade’s son and his wife each had less than $3,650 of wages and no unearned income. Neither is required to file a tax return. Taxes were taken out of their pay, so they filed a joint return to get a refund. Is Slade disqualified from claiming their exemptions just because they filed a joint return? No Slade is not disqualified from claiming their exemptions just because they filed a joint return.

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24. QUALIFYING CHILD The FIVE TESTS must ALL be met for a child to be your qualifying child. The five tests are: Relationship Age Residency Support Special test for qualifying child of more than one person

25. QUALIFYING CHILD Relationship Test (Test 1) Person must be your son, daughter, stepchild, eligible foster child, or a descendant of any of them, or brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of any of them. An adopted child is always treated as your own child. The term adopted child includes a child who was lawfully placed with you for legal adoption. An eligible foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

26. QUALIFYING CHILD Age Test (Test 2) Person must be under age 19 at the end of the year. A full-time student under age 24 at the end of the year, and younger than you (or your spouse if filing jointly) (To qualify, your child must be a student during some part of each of any 5 calendar months of the year). Permanently and totally disabled at any time during the year, regardless of age.

27. AGE TEST – PROBLEM 2 Beth’s son turned 19 on November 30. He was not disabled or a full-time student. Does he meet the age test? Yes or No?

28. AGE TEST – PROBLEM 2 Beth’s son turned 19 on November 30. He was not disabled or a full-time student. Does he meet the age test? No Beth’s son does not meet the age test because at the end of the year he was not UNDER age 19.

29. QUALIFYING CHILD Residency Test (Test 3) Person must have lived with you for more than half of the year. Exceptions apply for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents. A person is considered to have lived with you during periods of time when you, or both, are temporarily absent due to special circumstances such as illness, education, business, vacation, or military service. A child who was born or died during the year is treated as having lived with you all year if your home was the child’s home the entire time he or she was alive during the year.

30. QUALIFYING CHILD Residency Test (Test 3) A child will be treated as a qualifying child of his or her noncustodial parent if all of the following apply. The parents are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or lived apart at all times during the last 6 months of the year. The child received over half of his or her support for the year from the parents. The child is in the custody of one or both parents for more than half of the year. A decree or separate maintenance or written separation agreement that applies to 2009 provides that the noncustodial parent can claim the child as a dependent or the custodial parent signs a written declaration (such as Form 8332) that he or she will not claim the child as a dependent for the year.

31. RESIDENCY TEST – PROBLEM 3 Charles and Ellen Roper are divorced. Ellen has custody of their child, Erika. They both provide all the support for their daughter. Ellen is giving Charles the exemption for Erika. What form must Charles must attach to his return? Form 8879 Form 8332 Form 8453

32. RESIDENCY TEST – PROBLEM 3 Charles and Ellen Roper are divorced. Ellen has custody of their child, Erika. They both provide all the support for their daughter. Ellen is giving Charles the exemption for Erika. What form must Charles must attach to his return? Form 8332

33. QUALIFYING CHILD Support Test (Test 4) To meet this test, the child cannot have provided more than half of his or her own support for the year. This test is different from the support test to be a qualifying relative, which is described later.

34. QUALIFYING CHILD Special Test for qualifying child of more than one Person (Test 5) 1. If a child meets the relationship, age, residence, and support test to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child. 2. If you and the other person cannot agree on who will claim the child and more than one person files a return with the same child, the IRS will disallow all but one of the claims using the tie-breaker rules. Note: If your qualifying child is not a qualifying child for anyone else, this test does not apply to you.

35. QUALIFYING CHILD Table 2-2. When More Than One Person Files a Return Claiming the Same Qualifying Child (Tie-Breaker Rule)

36. Applying this special test to divorced or separated parents. If a child is treated as the qualifying child of the noncustodial parent under the rules for divorced or separated parents described earlier, the noncustodial parent can claim an exemption and the child tax credit for the child. But the noncustodial parent cannot claim the child as a qualifying child for head of household filing status, the credit for child and dependent care expenses, or the earned income credit. QUALIFYING CHILD

37. If the child is the qualifying child of more than one other person, ONLY one of those persons can claim the child as a qualifying child for head of household filing status, the credit for child and dependent care expenses, and the earned income credit. No other person can claim any of these three tax benefits unless he or she has a different qualifying child. If you and any other person file a return claiming the child as a qualifying child for any of these tax benefits, the IRS will disallow all but one of the claims using the tiebreaker rule in Table 2-2.

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39. QUALIFYING RELATIVE The FOUR TESTS must ALL be met for you to claim an exemption for a person to be your qualifying relative. The four qualifying relative tests are: 1. NOT a qualifying child test, 2. Member of household or relationship test, 3. Gross income test, and 4. Support test.

40. QUALIFYING RELATIVE Not a Qualifying Child Test (Test 1) A child cannot be your qualifying relative if the child is your qualifying child or the qualifying child of any other taxpayer. Example: Your 2-year-old son lives with your parents and meets all the tests to be their qualifying child. He is not your qualifying relative.

41. Qualifying Relative Not a Qualifying Child Test (Test 1) An individual is not a qualifying child of “any other taxpayer” if the individual’s parent (or other person with respect to whom the individual is defined as a qualifying child): Is not required to, and does not, file an income tax return, or Files an income tax return solely to obtain a refund of withheld income taxes

42. Qualifying Relative Not a Qualifying Child Test (Test 1) Example: Jack is single and supports as members of the household his girlfriend Mary, and Mary’s 3-year-old daughter. Mary and her daughter lived all year with Jack. Mary has no gross income and she is not required to file an income tax return. Because Mary does not have a filing requirement and did not file an income tax return, Mary’s daughter is not treated as a qualifying child of Maryor any other taxpayer, and Jackmay claim the child as his qualifying relative, provided all other requirements are met.

43. QUALIFYING RELATIVE Member of Household or Relationship Test (Test 2) A person must either live with you all year as a member of your household, or be related to you in one of the ways listed below who do not have to live with you. a. If the person is your child, stepchild, eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister, father, mother, grandparent, stepfather, stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law or a descendent of these they do not have to live with you as a member of your household. b. An eligible foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. c. A cousin meets this test only if he or she lives with you all year as a member of your household. d. A person does not meet this test if at any time during the year the relationship between you and that person violates local law.

44. QUALIFYING RELATIVE Gross Income Test (Test 3) To meet this test, a person’s gross income for the year must be less than $3,650. Gross income is all income in the form of money, property, and services that is not exempt from tax.

45. QUALIFYING RELATIVE Support Test (Test 4) You must provide more than half of the total support for the person to meet this test except for multiple support and children of divorced or separated parents. Total support includes amounts spent for food, lodging, clothing, education, medical and dental care, medical insurance premiums, recreation, transportation, and similar necessities.

46. QUALIFYING RELATIVE Support Test (Test 4) 3. State benefit payments like welfare, food stamps, and housing are considered support provided by the state, not by the parent, regardless of how the parent actually spends the money. a. In the case of multiple support, no one person provides more than half of the individual’s support, but two or more people together do. You can agree that any one of you who individually provided more than 10% of the individuals support can claim the exemption. The other contributors must sign a statement agreeing not to claim the exemption for that year. b. In most cases of divorced and separated parents a child will be the qualifying child of one of the parents. However, if the child does not meet the requirements to be a qualifying child of either parent, the child may be a qualifying relative of one of the parents. In that case follow the rules for divorce and separated parents.

47. SUPPORT TEST - PROBLEM 4 Your mother received $2,400 in social security benefits. She also received $300 in interest which she put into her savings account. She paid $2,000 toward the rent and $400 for recreation. The total rent was $2,820 and you paid all of her food expenses ($1,395). Do you pass the Support Test? Yes or No?

48. SUPPORT TEST - PROBLEM 4 Your mother received $2,400 in social security benefits. She also received $300 in interest which she put into her savings account. She paid $2,000 toward the rent and $400 for recreation. The total rent was $2,820 and you paid all of her food expenses ($1,395). Do you pass the Support Test? No Your mother’s total expenses were $4,615 (rent, food & recreation). She paid $2,400 and you only paid $2,215 ($820 and $1,395) which is less than half.

49. SUPPORT TEST - PROBLEM 5 Darlene spent $2,400 for food, clothing, and shelter for her 26-year-old son Bill. She received $3,000 from welfare for her son. Can she claim a dependency exemption for her son? Yes or No?

50. SUPPORT TEST - PROBLEM 5 Darlene spent $2,400 for food, clothing, and shelter for her 26-year-old son Bill. She received $3,000 from welfare for her son. Can she claim a dependency exemption for her son? No. The $3,000 from welfare is more than half of Bill’s total support of $5,400. Darlene cannot claim a dependency exemption for her son because she did not provide more than half of Bill’s support.