All references are to IRS Pub 4012. Convenient terminology (QC is "Qualifying Child," QR is "Qualifying Relative", and "custodial taxpayer" refers to a taxpayer who lived with his/her QC for more than half the year.)
Q: Do I have to file a tax return?
Check Tab A for answers. Page A-1 is "for most people" but if your taxpayer qualifies as the dependent of another taxpayer, check page A-2. Also check "special situations" on page A-3.
Q: Can I claim an exemption for myself on my tax return?
If someone else CAN claim you as their dependent (even if they choose not to do so), you may NOT claim a personal exemption for yourself.
1) If you provided more than 50% of your own support, nobody else can claim you.
2) If you were over 24 on Dec 31 and not disabled and made more than $4,050 in gross taxable income in 2016, nobody else can claim you. (Note: for this purpose, Social Security benefits would not count as gross taxable income unless you have a lot of other income as well.)
3) If you were over 19 on Dec 31 and not disabled AND not a full-time student and made more than $4,050 in gross taxable income in 2016, then nobody else can claim you.
Other cases are harder--you will need to work through Table 1 on page C-5 to rule out the possibility that you are someone else's QC dependent and then through Table 2 on page C-6 to rule out the possibility that you are somone else's QR dependent.
Q: Can I can claim someone else as my dependent?
If you yourself can be claimed as a dependent, the answer is unequivocally NO. Dependents may not claim others as dependents.
Otherwise, work carefully through Table 1 on page C-5 to see if the potential dependent is your QC dependent. If that doesn't work, carefully go through Table 2 on page C-6 to see if the potential dependent in your QR dependent.
Q: What happens if more than one person can qualify to claim the same person as their dependent?
See page C-4 of Tab C.
Q: How do I know if my child qualifies for the Child Tax Credit?
If your QC child was under 17, see pages G-8 and G-9 of Tab G.
Q: How do I know if I can qualify for the Child and Dependent Care Credit?
If you had a child under 13 or disabled dependent of any age in daycare to allow you to work, see pages G-3 and G-4 of Tab G. To enter the information about daycare expenses qualifying for that credit, go to line 49 of Form 1040 and click on that line.
Q: How do I know if a child is my QC for the Earned Income Credit (EIC)?
Check page I-4 of Tab I.
Q: What filing status is most advantageous?
For a given level of income, the hierarchy from lowest to highest tax is generally:
MFJ (or QW) < HOH < Single
Q: How do I know if I can claim Head of Household (HoH) filing status?
Carefully use the decision tree on page B-1 of Tab B. You MUST have at least one Qualifying Person (as defined on page B-3) in order to claim HoH.
Q: What counts as Minimum Essential Coverage (MEC) under the Affordable Care Act?
See page ACA-4 of the ACA tab (near the front of your book) for a list of the types of coverage that count.
Q: What happens if I (or my dependents) didn't have MEC for all 12 months of 2016?
Unless an exception applies, you will have to pay an additional penalty tax (called an "Individual Shared Responsibility Payment") on line 61 of your Form 1040 tax return.
Q: Where can I find a list of the exceptions to the ACA penalty?
See page ACA-7 in the ACA tab for the list.
Q: What are the types of education tax benefits allowed? Which one do I use?
These are described in a table on pages J-2 and J-3 of Tab J. There are many types and the details differ among them. The most common ones for current students are American Opportunity Credit, Lifetime Learning Credit, and the Tuition and Fees deduction. In general, a student enrolled in the first four years of post-secondary education at least half time will benefit most from the AOC, so you should always try that one first. Students who are very part-time or past the first four years will not not qualify for AOC, so you would go with Lifetime Learning credit or Tuition and Fees deduction for them.
Q: How do I enter education tax benefits for current students?
Go to Form 1040 and click on line 50 to go to the education benefit menu.
Q: How do I enter student loan interest?
Student loan interest of up to $2,500 paid by the taxpayer is deductible as an adjustment to income. Go to Form 1040 and click on line 33 to enter this deduction.
Q: What kinds of income needs to be reported on a tax return?
See page D-1 of Tab D for a list of what needs to be reported and doesn't need to be reported.
Q: I am not sure where to enter a particular type of income?
See pages D-3 through D-6 of Tab D.
Q: How do I enter my itemized deductions?
Itemized deductions go on Schedule A. Click on line 40 of Form 1040 to go to the itemized deductions menu.
Q: What expenses count as medical deductions on Schedule A?
The expenses must be UNreimbursed and paid by the taxpayer (or spouse if it is a joint return). The expenses must be for the medical care of the taxpayer, spouse, or dependents. Health insurance and long term care insurance count, as do hospital, doctor, dentist, and medical equipment bills. Prescription drugs and insulin count, but other over-the-counter nonprescription drugs do not.
Q: What taxes I paid count as Itemized Deductions on Schedule A?
Only state/local income taxes OR state/local sales taxes, real estate taxes, and personal property taxes count. (There are some obscure "other taxes" that might count but they are out of scope for VITA.)
Q: What expenses count as interest deductions on Schedule A?
Mortgage interest (including interest, late fees, and points) count. "Mortgage insurance premiums" reported on a 1098 are also deductible as mortgage interest but "homeowners insurance" premiums are NOT deductible. Note that you can often find real estate tax information on a Form 1098 because homeowners often pay their real estate taxes through the bank holding their mortgage.
Q: What are the rules for charitable deductions?
Taxpayers must have written documentation for ALL donations. A cancelled check or credit card receipt is enough if the donation is under $250. For donations of $250 and above the taxpayer must have a letter or statement from the organization stating that no good or services were provided in exchange for the contribution. The recipient must be a tax-exempt organization under IRS rules. Individuals and political organizations never qualify as tax-exempt.
Q: What are the rules for gambling income and losses?
Gross winnings must be declared as other income on line 21 of Form 1040. (Click on line 21 to go to the menu to enter this income.) If the taxpayer also had losses, they can only deducted if the taxpayer itemized deduction on Schedule A, and they are limited to the amount won.
Q: How does the Retirement Savings Tax Credit work?
Taxpayers who contribute to qualified retirement plans such as 401k plans, 403b plans, and IRAs may get this credit if their income qualifies and if they are NOT full-time students. Many taxpayers make their contributions on a W-2. Check the codes in box 12 of the W-2. If you do not recognize the code, look it up on page D-10 of Tab D. See Sheryl Berringer's Form 8880 for an example of how this credit is calculated.
Note: if your taxpayer underestimated their 2016 income at the time they originally purchased their policy, they will generally have to pay back some of their Advanced Premium Tax Credits (reported on line 46 of Form 1040) See example 7 in Pub 5157A for how this works.
If your taxpayer overestimated their 2016 income at the time they originally purchased their policy, they may get some additional Premium Tax Credit added to their refund (reported on line 69 of Form 1040). See example 6 in Pub 5157A for how this works.
Q: What do those mysterious codes in Box 7 of 1099R mean?
See page D-23 and D-24 of your Pub 4012.
Q: My taxpayer has a 1099-C form for "Cancellation of Debt"? What is that and what do I do with it?
Cancellation of debt means that someone that your taxpayer owed money to agreed to forgive some or all of their debt. The appropriate tax treatment of Cancellation of Debt depends on the type of debt.
If the debt forgiven is credit card debt, then you would report the amount of loan forgiven as "Other Income" on line 21 of Form 1040. See page D-44 and D-48 of your 4012 for more guidance.
If the debt forgiven is home mortgage debt on a primary residence, then you do NOT need to report the debt forgiven as income THIS year, but when you sell the home, you will need to reduce the basis by the amount of the loan forgiven. See page D-52.
Q: My taxpayer has a 1099-MISC with an amount listed in box 7 as "non-employee compensation." What do I do?
The IRS generally considers such taxpayers to be self-employed and you will need to prepare a Schedule C or Schedule C-EZ to report both the revenues and expenses for the business. See page D-30 of your Pub 4012.
Q: My taxpayer is self-employed but received cash payments instead of (or in addition to) the amounts reported on the 1099-MISC.
All receipts of the business MUST be reported on the Schedule C or C-EZ. See page D-29 of your Pub 4012.
Q: How do I deal with business expenses for a self employed person?
See pages D-34 and D-35
Q: My taxpayer sold securities? What do I do?
You will need to file a Schedule D for your taxpayer. See pages D-36 and D-37.
If your taxpayer realized a net gain on the sale of their securities, then the net gain will be reported on line 13 of their Form 1040. The applicable tax rate depends on whether the gain is short-term or long-term. Short-term gains are taxed the same as ordinary income, but long term gains are taxed far more generously.
If your taxpayer realized a net loss on the sale of their securities, they report up to $3,000 in net losses on line 13. If their net losses exceed $3,000, the losses in excess of $3,000 may be "carried forward" and applied to future year's returns.
Q: My taxpayer had "Capital Loss Carryforwards" from a prior year. What do I do with them?
See the guidance at the bottom of page D-36 of Pub 4012.
Q: What is the cost basis for a security my taxpayer sold?
If your taxpayer purchased the security, the basis is generally the original price paid for the security. Often (but not always) you will find that amount reported on a 1099-B brokerage statement.
If your taxpayer inherited the security, the basis is the value of the security ON THE DATE OF DEATH of the person from they inherited it.
Check the Table of Contents of Pub 4012 on pages 1-2.