1. Standard Deduction and Tax Computation

2. Line 40 – Standard Deduction Use interview techniques and other tools to determine if the standard deduction or itemizing will result in the largest possible deduction for the taxpayer Pub 4012 (Tab F), Standard Deduction for Most PeopleStandard Deduction for Most People Pub 4012 (Tab F), Interview Tips for persons not eligible for the Standard DeductionInterview Tips for persons not eligible for the Standard Deduction 2

3. Standard Deductions Taxpayers who cannot take standard deduction and must itemize: Filing as Married Filing Separately and the spouse itemizes. Both must itemize. Refer to the Standard Deduction Worksheet – Line 40 from either Pub 17 or Form 1040 Instructions Form 1040 Instructions 3

4. Age and Blindness Standard deduction is higher for a taxpayer or spouse 65 or older, or if one or both spouses are blind Use Pub 4012 (Tab F), Standard Deduction Chart for People Born Before January 2, 1947 or Who Are Blind Chart, as a guide to computing the standard deductionStandard Deduction Chart for People Born Before January 2, 1947 or Who Are Blind Chart Taxpayers can take the higher standard deduction if one spouse is 65 or older, or is blind, and if: Taxpayer files a joint return Taxpayer files a separate return and can claim an exemption for the spouse 4

5. Taxpayers Who Can be Claimed as Dependents A lower standard deduction is offered for an individual who can be claimed as a dependent on another persons tax return Form 13614-C has a check box for a dependent being claimed by another taxpayer Use Form 1040 Instructions, Standard Deduction Worksheet – Line 40 to calculate the deductionForm 1040 Instructions TaxWise will calculate 5

6. Examples of types of expenses that generally warrant itemizing deductions: Large out-of-pocket medical and dental expenses State and local income taxes, real estate taxes, and/or personal property taxes Mortgage interest Gifts to charity Casualty, theft, and certain other miscellaneous deductions Estimate before entering in TW Standard Deduction vs. Itemizing 6

7. Line 40 - Itemized Deductions

8. Medical and Dental Expenses 8 Unreimbursed medical and dental expenses that exceed 7.5% of taxpayers AGI can be deducted for: Taxpayer Spouse Dependents

9. Adjusted Gross Income (AGI) = $40,000 $40,000 X 7.5% for those 65 and older until 12/31/2016 $3,000 Only the amount above $3000 can be included on Schedule A for Medical $40,000 X 10% for anyone under age 65 starting 2013 tax year $4,000 Only the amount above $4000 can be included on Schedule A for Medical 9

10. Miscellaneous Deductions Miscellaneous itemized deductions subject to the 2% limit are reported on Schedule A, lines 21-27 Deductions not subject to the 2% limit are reported on Schedule A, line 28 Refer to Pub 17, Miscellaneous Deductions, and Pub 4012 (Tab 4), Schedule A – Itemized Deductions, for more informationPub 17 Schedule A – Itemized Deductions 10

11. Line 42 - Exemptions $3,900 x Number of exemptions 11

12. Line 43 - Determining Taxable Income and Tax Taxable income = adjusted gross income (AGI) and subtracting: Personal and dependency exemptions Standard or itemized deductions A separate worksheet is used to calculate tax for taxpayers with: Capital gains Qualifying dividends Foreign earned income 12

13. Line 47– Foreign Tax Credit

14. Foreign Tax Credit 14 Credit applies to taxpayers who have paid taxes to a foreign country on foreign-sourced income and are subject to U.S. tax on the same income If the foreign tax paid is reported on Form 1099-INT or Form 1099-DIV, the taxpayer may be able to report it on Form 1040 Taxpayers can report foreign tax on Form 1040 without filing Form 1116 as long as the total qualified foreign taxes are: $300 or less ($600 or less if Married Filing Jointly) Derived from passive income (e.g., interest, dividends, or royalties) (Mutual Funds)

15. Line 48 – Credit for Child and Dependent Care Expenses

16. Nonrefundable Credit 16 Child and dependent care credit is a nonrefundable credit Generally, nonrefundable credits are applied against tax in the order they are listed on Form 1040, page 2, in the Tax and Credits section

17. Child and Dependent Care Credit 17 Credit can be claimed by taxpayer with: A qualifying dependent Work-related dependent care expenses The credit can range from 20% to 35% of a taxpayers qualifying child or dependent care expenses Taxpayers may be able to exclude employer-provided dependent care benefits from income Form W-2, box 10, shows dependent care benefits from employers

18. Determining Taxpayer Eligibility Use Pub 4012 (Tab G), Credit for Child & Dependent Care Expenses – Decision Tree, to determine if a taxpayer can claim the creditCredit for Child & Dependent Care Expenses – Decision Tree Five eligibility tests to qualify for the credit: Qualifying person test Earned income test Work-related expense test Joint return test Provider identification test 18

19. Line 49 – Education Credits

20. Education Credits Introduction 20 Education credit amounts are based on qualified education expenses paid during the tax year For an overview of education credits, see Pub 4012 (Tab 13), Highlights of Education Tax BenefitsHighlights of Education Tax Benefits To help guide your interview, use Pub 4012 (Tab G), Education CreditsEducation Credits Disqualifying conditions include if a taxpayer: Can be claimed as a dependent on someone elses tax return Files as Married Filing Separately Has an AGI above the limit for the taxpayers filing status Was a nonresident alien for any part of the tax year, and did not elect to be treated as a resident alien for tax purposes

21. Dependents / Eligible Institutions 21 To claim the credit for a students qualified expenses, the taxpayer must claim the student as a dependent Expenses must have been paid to an eligible educational institution

22. Qualifying Expenses 22 Qualified education expenses are tuition and certain related expenses required for attendance at an eligible educational institution The definition for certain related expenses differs between the lifetime learning credit and the American opportunity credit Necessary proof of expenses includes such documents as receipts or Form 1098-T, Tuition Statement, issued by the school Form 1098-T, Tuition Statement Qualified expenses must be reduced by the amount of any tax-free educational assistance taxpayers receive (scholarships)

23. 23

24. American Opportunity Tax Credit Available for the first four years of college per eligible student The credit covers 100% of the first $2,000 and 25% of the second $2,000 of eligible expenses, up to the amount of tax or a maximum of $2,500 40% of the credit is a refundable credit See Form 8863 Instructions for more informationForm 8863 Instructions 24

25. Lifetime Learning Credit The credit is 20% of the first $10,000 of eligible expenses, up to the amount of tax or a maximum of $2,000 The credit is non-refundable Eligible students are not required to be enrolled at least half-time or in a degree program, and a felony drug conviction is not a disqualification Refer to Pub 4012 (Tab G), Education Credits for basic requirementsEducation Credits 25

26. Choosing Between the Credits / No Double Benefits Refer to Pub 4012 (Tab G), Education Credits for summary of differences between education creditsEducation Credits Taxpayers cannot receive multiple benefits for the same students expenses Taxpayers have several options for claiming education expenses: American opportunity credit or lifetime learning credit Tuition and fees deduction Itemizing on Schedule A Reporting as business expenses on Schedules C or C-EZ 26

27. Determining the Amount of the Credit General steps for calculating the education credit amounts: Review the expenses and decide which education credit is more advantageous Enter each qualifying student in the appropriate sections of Form 8863Form 8863 Enter each students expenses Find the totals and apply any limits, if applicable 27

28. Summary Two education credits may reduce a taxpayers tax liability: American opportunity credit Lifetime learning credit Education expenses can be applied to those credits, applied to the tuition and fees deduction, deducted on Schedules C and C-EZ, or itemized on Schedule A 40% of the American opportunity credit is a refundable credit, which means taxpayers can receive up to $1,000 even if they have no tax liability Compare the tax effects of the various education benefits and choose the method that results in the lowest tax 28

29. Line - 50 Retirement Savings Contributions Credit 29 Taxpayers who contributed to a retirement plan or IRA may be eligible for the nonrefundable retirement savings contributions credit Use Pub 4012 (Tab G), Retirement Savings Contribution Credit Decision Tree to determine if a taxpayer qualifiesRetirement Savings Contribution Credit Decision Tree Check taxpayers Form W-2 for amounts listed in box 12 and 14 Form 8880

30. Line 51– Child Tax Credit

31. A Nonrefundable Credit 31 Child tax credit allows taxpayers to claim a nonrefundable tax credit of up to $1,000 per child Taxpayers who claim the child tax credit, but do not qualify for the full amount, may be able to also take the refundable additional child tax credit by completing Form 8812, Additional Child Tax Credit Review Pub 4012 (Tab G), Child Tax CreditChild Tax Credit

32. Eligibility 32 Qualifying child for the child tax credit must be claimed as the taxpayers dependent A child must meet certain criteria to qualify for the credit Review Pub 4012 (Tab G), Child Tax Credit Interview TipsChild Tax Credit Interview Tips Special rules for children of divorced or separated parents, as well as children of parents who live apart TaxWise automatically determines a taxpayers eligibility based on entries for children on the Main Information Screen

33. Miscellaneous Credits

34. Credit for the Elderly or Disabled 34 Calculated on Schedule R and reported on Form 1040, line 53Schedule R Qualified individuals must be: Age 65 or older at end of tax year, or Under age 65, retired on permanent and total disability See Pub 4012 (Tab G) Credit for Elderly or Disabled Decision Tree Figure A. Are You a Qualified Individual? Figure B. Income Limits

35. Reporting Nonrefundable Credits Nonrefundable credits are reported on Form 1040, lines 47-53, and the total is reported on line 54 Credits cannot exceed taxpayers federal income tax Refer to Pub 4012 (Tab 5), Nonrefundable Credits for more informationNonrefundable Credits 35

36. Summary Taxpayers who contributed to a retirement plan or an IRA may be eligible for the retirement savings contributions credit Form 8880 is used to calculate the credit Elderly individuals, age 65 or older, and individuals under age 65 who retired on permanent and total disability may be able to claim a special nonrefundable credit Schedule R is used to calculate the credit Residential energy credits are available to homeowners for making qualified energy-saving improvements to their home. Review 2013 options. 36 Lesson 26 – Miscellaneous Credits