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4491 VITA/TCE Training Guide Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly

4491

VITA/TCE Training Guide

Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE)

2017 RETURNS

(VITA) / Tax Counseling for the Elderly (TCE) 2017 RETURNS Take your VITA/TCE training online at
(VITA) / Tax Counseling for the Elderly (TCE) 2017 RETURNS Take your VITA/TCE training online at

Take your VITA/TCE training online at www.irs.gov (keyword: Link & Learn Taxes). Link to the Practice Lab to gain experience using tax software and take the certification test online, with immediate scoring and feedback.

test online, with immediate scoring and feedback. Publication 4491 (Rev. 10-2017) Catalog Number 47499R

How to Get Technical Updates?

Updates to the volunteer training materials will be contained in Publication 4491X, VITA/TCE Training Supplement. The most recent version can be downloaded at: https://www.irs.gov/pub/irs-pdf/p4491x.pdf

Volunteer Standards of Conduct

VITA/TCE Programs

The mission of the VITA/TCE return preparation programs is to assist eligible taxpayers in satisfying their tax responsibilities by providing free tax return preparation. To establish the greatest degree of public trust, volunteers are required to maintain the highest standards of ethical conduct and provide quality service.

All VITA/TCE volunteers (whether paid or unpaid workers) must complete the Volunteer Standards of Conduct (VSC) certification and agree to adhere to the VSC by signing Form 13615, Volunteer Standards of Conduct Agreement, prior to working at a VITA/TCE site. In addition, return preparers, quality reviewers, and VITA/TCE tax law instructors must certify in tax law prior to signing this form. This form is not valid until the site coordinator, sponsoring partner, instructor, or IRS contact confirms the volunteer’s identity and signs and dates the form.

As a volunteer in the VITA/TCE Programs, you must:

1. Follow the Quality Site Requirements (QSR).

2. Not accept payment, solicit donations, or accept refund payments for federal or state tax return preparation.

3. Not solicit business from taxpayers you assist or use the knowledge you gained (their information) about them for any direct or indirect personal benefit for you or any other specific individual.

4. Not knowingly prepare false returns.

5. Not engage in criminal, infamous, dishonest, notoriously disgraceful conduct, or any other conduct deemed to have a negative effect on the VITA/TCE Programs.

6. Treat all taxpayers in a professional, courteous, and respectful manner.

Failure to comply with these standards could result in, but is not limited to, the following:

Your removal from all VITA/TCE Programs;

Inclusion in the IRS Volunteer Registry to bar future VITA/TCE activity indefinitely;

Deactivation of your sponsoring partner’s site VITA/TCE EFIN (electronic filing ID number);

Removal of all IRS products, supplies, loaned equipment, and taxpayer information from your site;

Termination of your sponsoring organization’s partnership with the IRS;

Termination of grant funds from the IRS to your sponsoring partner; and

Referral of your conduct for potential TIGTA and criminal investigations.

TaxSlayer® is a copyrighted software program owned by Rhodes Computer Services. All screen shots that appear throughout the official Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) training materials are used with the permission of Rhodes Computer Services.

Confidentiality Statement:

All tax information you receive from taxpayers in your volunteer capacity is strictly confidential and should not, under any circumstances, be disclosed to unauthorized individuals.

Table of Contents
Table of Contents

Part 1: Getting Started

Important Changes for 2017. . . . . . . . . . . .
Important Changes
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.iii
Course Introduction
1-1
Legislative Extenders
2-1
Affordable Care Act
3-1
Filing Basics
4-1
Part 2: Determining Filing Status and Exemptions
Filing Status
5-1
Personal Exemptions
6-1
Dependency Exemptions
7-1
Unique Filing Status and Exemption Situations
8-1
Part 3: Determining Taxable Income
Income – Wages, Interest, Etc.; Form 1040, Lines 7–11
9-1
Income – Business; Form 1040, Line 12
10-1
Income – Capital Gain or Loss; Form 1040, Line 13
11-1
Income – Retirement Income; Form 1040, Lines 15-16
12-1
Income – Schedules K-1 and Rental
13-1
Income – Unemployment Compensation; Form 1040, Line 19
14-1
Income – Social Security Benefits; Form 1040, Line 20a
15-1
Income – Other Income; Form 1040, Line
16-1
Military Income
17-1
Part 4: Determining Adjusted Gross Income (AGI)
Adjustments to Income
18-1
Military Moving Expenses.
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19-1
Table of Contents
i

Part 5: Computing the Tax and Credits

Standard Deduction and Tax Computation 20-1 Itemized Deductions 21-1 Military Employee Business 22-1 Credit for
Standard Deduction and Tax Computation
20-1
Itemized Deductions
21-1
Military Employee Business
22-1
Credit for Child and Dependent Care Expenses
23-1
Education Credits
24-1
Foreign Tax Credit
25-1
Child Tax Credit
26-1
Miscellaneous Credits
27-1
Part 6: Computing Other Taxes and Total Tax
Other Taxes
28-1
Part 7: Applying Refundable Credits and Computing Payments/Refund
Payments
29-1
Earned Income Credit (EIC)
30-1
Refund and Amount of Tax Owed
31-1
Part 8: Completing and Filing the Return
Completing the Return
32-1
Military Finishing and Filing the Return
33-1
Part 9: Amending and Filing Returns
Amended
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Prior Year
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34-1
Appendix
Appendix: Affordable Care Act (ACA) Exercises
A-1
Index
I-1

ii Table of Contents

Important Changes for 2017 Due Date of Return The due date for filing a 2017

Important Changes for 2017

Important Changes for 2017 Due Date of Return The due date for filing a 2017 return

Due Date of Return

The due date for filing a 2017 return is Tuesday, April 17, 2018. This is because April 15, 2018 is a Sunday and Emancipation Day, a legal holiday in the District of Columbia, is observed on Monday, April 16, 2018.

Standard Deduction Increases

The standard deduction for taxpayers who do not itemize deductions on Schedule A (Form 1040) has increased. The standard deduction amounts for 2017 are:

• $12,700 – Married Filing Jointly or Qualifying Widow(er) (increase of $100)

• $9,350 – Head of Household (increase of $50)

• $6,350 – Single or Married Filing Separately (increase of $50)

Taxpayers who are 65 and Older or are Blind

For 2017, the additional standard deduction for taxpayers who are 65 and older or blind is:

• $1,550 – Single or Head of Household (no change)

• $1,250 for married taxpayers or Qualifying Widow(er) (no change)

Personal Exemption Amount

The amount a taxpayer can deduct for each exemption increased to $4,050 for 2017 (no change).

Retirement Savings Contribution Credit Income Limits Increased

To claim this credit, the taxpayer’s modified adjusted gross income (MAGI) must not be more than $31,000 for Single, Married Filing Separately, or Qualifying Widower (increase of $250). MAGI must not be more than $46,500 (increase of $375) for Head of Household, and $62,000 (increase of $500) for Married Filing Jointly.

Earned Income Credit (EIC)

For 2017, the maximum credit increased to:

• $6,318 with three or more children

• $5,616 with two children

• $3,400 with one child

• $510 with no children

Earned Income Amount Increased

To be eligible for a full or partial credit, the taxpayer must have earned income of at least $1 but less than:

• $48,340 ($53,930 if Married Filing Jointly) with three or more qualifying children

• $45,007 ($50,597 if Married Filing Jointly) with two qualifying children

• $39,617 ($45,207 if Married Filing Jointly) with one qualifying child

• $15,010 ($20,600 if Married Filing Jointly) with no qualifying child

Investment Income

Taxpayers whose investment income is more than $3,450 cannot claim the EIC.

Important Changes for 2017

iii

Standard Mileage Rate

For 2017, the following rates are in effect:

• 53.5 cents per mile for business miles driven

• 17 cents per mile driven for medical or moving purposes

• 14 cents per mile driven in service of charitable organizations (no change)

Itemized Deductions

Medical – The 7.5% threshold for taxpayers who are age 65 or older has expired. All taxpayers are now subject to a 10% AGI threshold.

Education Benefits

American opportunity credit for 2017 is gradually reduced (phased out) if taxpayers’ MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if Married Filing Jointly). Taxpayers cannot claim a credit if their MAGI is $90,000 or more ($180,000 or more if Married Filing Jointly). There is no change.

To claim the American opportunity credit, taxpayers must provide the educational institution’s employer identification number (EIN) on Form 8863. Taxpayers should be able to obtain this information from Form 1098-T or the educational institution.

Lifetime learning credit for 2017 is gradually reduced (phased out) if taxpayers’ MAGI is between $56,000 and $66,000 ($112,000 and $132,000 if Married Filing Jointly). Taxpayers cannot claim a credit if their MAGI is $66,000 or more ($132,000 or more if Married Filing Jointly).

Student loan interest deduction begins to phase out for taxpayers with MAGI in excess of $65,000 ($135,000 for joint returns) and is completely phased out for taxpayers with MAGI of $80,000 or more ($165,000 or more for joint returns).

Eligible Long-Term Care Premium Limits Increased

For 2017, the maximum amount of qualified long-term care premiums includible as medical expenses has increased. Qualified long-term care premiums up to the amounts shown below can be included as medical expenses on Schedule A (Form 1040) Itemized Deductions.

$410: age 40 or under

$770: age 41 to 50

$1,530: age 51 to 60

$4,090: age 61 to 70

$5,110: age 71 and over

age 51 to 60 $4,090: age 61 to 70 $5,110: age 71 and over The limit

The limit on premiums is for each person.

Foreign Earned Income Exclusion

For 2017, the maximum foreign earned income exclusion will be $102,100, up from $101,300 for 2016.

Link & Learn Taxes – Optional Courses

Health Savings Account (HSA) Deduction

The annual contribution limits on deductions for HSAs for individuals with self-only coverage is $3,400 (increase of $50) and $6,750 for family coverage (no change). There is an additional contribution amount for taxpayers who are age 55 or older.

iv Important Changes for 2017

Deduction Amount and Modified AGI Limit for Traditional IRA Contributions Increased For 2017, the maximum

Deduction Amount and Modified AGI Limit for Traditional IRA Contributions Increased

For 2017, the maximum IRA deduction remains at $5,500 ($6,500 if age 50 or older). For taxpayers who are covered by a retirement plan at work, the deduction for contributions to a traditional IRA is reduced (phased out) if the modified AGI is:

More than $99,000 but less than $119,000 for a married couple filing a joint return or a qualifying widow(er) if both spouses are covered by a retirement plan,

• More than $62,000 but less than $72,000 for a single individual or head of household, or

Less than $10,000 for a married individual filing a separate return

For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $186,000 and $196,000.

if the couple’s income is between $186,000 and $196,000. Extended and Expired Legislation As a reminder,

Extended and Expired Legislation

As a reminder, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made the following tax provisions permanent:

Adjustments for up to $250 for educator classroom expenses. This provision was modified to include certain expenses related to professional development courses the taxpayer takes related to the curricu- lum they teach or to their students. The deduction amount will be indexed for inflation for future years.

Qualified Charitable Distribution (QCD).

• State and local general sales tax deduction.

The PATH Act extended the following provisions only through December 31, 2016. They are expired for 2017.

Exclusion from gross income of qualified principal residence indebtedness

Mortgage insurance premiums deductible as qualified residence interest

Deduction for qualified tuition & fees

• Credit for nonbusiness energy property (residential energy credit)

Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2017, and ITINs with middle digits 70, 71, 72 or 80 will also expire at the end of the year. Affected taxpayers who expect to file a tax return in 2018 must submit a renewal application.

a tax return in 2018 must submit a renewal application. Congress may enact additional legislation that

Congress may enact additional legislation that will affect taxpayers after this publication goes to print. Any changes will be reflected in Publication 4491-X, VITA/TCE Training Supplement, available in mid-January on www.irs.gov.

Important Changes for 2017

v

Affordable Care Act: Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

New rules enacted under the 21st Century Cures Act of 2016 allow eligible employers to offer a quali- fied small employer health reimbursement arrangement (QSEHRA) to their eligible employees. Under a QSEHRA, an eligible employer can reimburse eligible employees for health care costs, including premiums for Marketplace health insurance. If taxpayers were covered under a QSEHRA, their employer should have reported the annual permitted benefit in box 12 of Form W-2 with code FF. If the QSEHRA is affordable for a month, no PTC is allowed for the month. If the QSEHRA is unaffordable for a month, taxpayers must reduce the monthly PTC (but not below -0-) by the monthly permitted benefit amount.

W-2 Verification Code

This initiative is one in a series of steps to combat tax-related identity theft and refund fraud. The objective is to verify Form W-2 data submitted by taxpayers on e-filed individual tax returns.

Form W-2 will include these instructions to taxpayer and tax preparers: If you are e-filing and if there is a code in Box 9, enter it when prompted by your software. This code assists the IRS in validating the W-2 data submitted with your return. The code is not entered on paper-filed returns.

Proposed Regulations

Certain changes were made to Publications 4491 and 4012 due to proposed regulations published by the IRS on January 19, 2017. These regulations are proposed to apply to taxable years beginning after the date the regulations are published as final regulations in the Federal Register. However, pending the issuance of the final regulations, taxpayers may choose to apply these proposed regulations in any open taxable years. Since most of these provisions are advantageous to taxpayers, we have included them in the training publi- cations:

An individual is not a qualifying child of a person if that person is not required to file an income tax return, and either does not file an income tax return or files an income tax return solely to claim a refund of esti- mated or withheld taxes.

• A taxpayer may treat a home’s fair market rental value as a cost of maintaining a household (instead of the sum of payments for mortgage interest, property taxes, and insurance).

• The annual cost of maintaining a household when a qualifying child or dependent resides in the house- hold for less than the entire taxable year, in certain circumstances, may be prorated on a monthly basis.

• The proposed regulations also, in certain circumstances, recognize the creation of a new household during a year and treat shared living quarters as separate households.

If an individual meets the definition of a qualifying child for more than one taxpayer and the individual is not treated as the qualifying child of one of those taxpayers under the tiebreaker rules, then the individual will not prevent that taxpayer from claiming the childless EIC if he or she meets the other requirements of that section.

Governmental payments (such as TANF) made to a recipient that is used, in part, to support others are treated as support of the others provided by the recipient, whereas any part of such a payment used for the support of the recipient would constitute support of the recipient by a third party. For example, if a mother receives TANF and uses the TANF payments to support her children, the proposed regulations treat the mother as having provided that support.

vi Important Changes for 2017

• A nonpermanent failure to occupy a home by reason of illness, education, business, vacation, military service, institutionalized care for a child who is permanently and totally disabled, or incarceration may be treated as a temporary absence due to special circumstances. This definition of temporary absence applies to the residency test for a qualifying child, to the relationship test for a qualifying relative who does not have a listed relationship to the taxpayer, and to the requirements to maintain a household for surviving spouse and Head of Household.

The qualifying child of a Qualifying Widow(er) is a child, stepchild, or adopted child who qualifies as the taxpayer’s dependent for the year or would qualify as the taxpayer’s dependent except that he or she does not meet the gross income test, or does not meet the joint return test, or except that the taxpayer may be claimed as a dependent by another taxpayer.

• A taxpayer other than the adopting “individual” may be eligible to claim an exemption for an adopted child. For example, the parent of the adopting parent may claim a dependency exemption for the legally adopted child of the taxpayer’s son or daughter (just as biological grandparents may claim an exemption for a grandchild) if all other requirements are met.

• An authorized placement agency also may be an Indian Tribal Government (ITG), or an agency or organization authorized by, or a political subdivision of, an ITG that places children in foster care or for adoption.

Changes to Order of Pub 4012

Tabs B, K, and N have been reconfigured.

Tab B is now called “Starting a Return/Filing Status” and contains all the information about the intake sheet, starting a return in TaxSlayer, determining the filing status and entering it in TaxSlayer.

• Tab K has been renamed “Finishing the Return” and now contains information from the prior year’s Tabs K and N about completing the e-File section, performing the quality review and printing the return.

Tab N contains information about moving around in TaxSlayer. It also contains the list of navigation hints that used to be in Tab D.

• ACA information has been moved to Tab H, which is now called “Other Taxes, Payments, and ACA.”

Important Changes for 2017

vii

Notes

viii Important Changes for 2017

Course Introduction Welcome We’re glad you decided to take advantage of this challenging, yet rewarding

Course Introduction

Course Introduction Welcome We’re glad you decided to take advantage of this challenging, yet rewarding experience

Welcome

We’re glad you decided to take advantage of this challenging, yet rewarding experience as an important player in the tax administration process. This training material will introduce you to the major components of the Volunteer Income Tax Assistance and Tax Counseling for the Elderly (VITA/TCE) return preparation process.

Your course instructor will provide all the available technical publications and forms required for this course. If any of the suggested forms and publications are not available in the classroom or at the site, they can be viewed or downloaded at www.irs.gov.

What do I need? □ Form 13614-C □ Publication 4012 □ Publication 17 □ Publication
What do I need?
□ Form 13614-C
□ Publication 4012
□ Publication 17
□ Publication 4491
□ Publication 4491-W
□ Publication 5101
□ Form 6744
□ Form 13614-C Job Aid in
Publication 4012
□ Form 13615
Optional:
□ Publication 3
□ Publication 596
□ Publication 972
□ Publication 4299
□ Publication 4403
□ Publication 4575
□ Internet Access (optional
but highly recommended)

Objectives

At the end of this lesson you will be able to describe:

The various course levels and certification process

The responsibilities of a VITA/TCE volunteer, including due diligence

• The critical components involved in the return preparation process

• The resources available to assist you

• The procedures for helping a taxpayer with identity theft

What will I learn?

To successfully assist taxpayers in satisfying their tax responsibilities, you must understand tax law and the tools available to assist you in preparing and filing accurate tax returns – Forms 1040EZ, 1040A, and 1040. A tax return is accurate when tax law is applied correctly and it is free from error based on your interview of the taxpayer, the taxpayer’s supporting docu- mentation, and a completed Form 13614-C, Intake/Interview & Quality Review Sheet.

The VITA/TCE return preparation process consists of several critical components that will be taught in your training class or taken through Link & Learn Taxes:

VITA/TCE Volunteer Standards of Conduct – Ethics Training

• Tax law training – understanding and applying tax law

• Research skills – using references, resources, and tools including return preparation software

Intake/Interview and Quality Review Training

• Tax return preparation (screening and interviewing taxpayers)

return preparation (screening and interviewing taxpayers) Volunteer Standards of Conduct training and test are located

Volunteer Standards of Conduct training and test are located in Publication 4961, VITA/TCE Volunteer Standards of Conduct – Ethics Training, and on Link & Learn Taxes. The Intake/Interview and Quality Review Training (Publication 5101) can be found on VITA/TCE Central. Form 6744, VITA/TCE Volunteer Assistor’s Test/Retest, contains both the Volunteer Standards of Conduct and Intake/Interview and Quality Review tests.

Course Introduction

1-1

Unlike most classes, there is no need to memorize a lot of information. You can use information from irs.gov, your course materials, and other print and electronic sources to gain the knowledge and insights you need to serve the taxpayers you assist.

At the completion of your course of study, you will fully understand how to apply critical aspects of each component of the process and complete an accurate return for each taxpayer you assist.

Thank you for your interest in helping the IRS achieve its mission of providing America’s taxpayers with top quality service by helping them understand their tax responsibilities and by applying the tax law with integ- rity and fairness to all.

Let’s get started!

How is the course structured?

to all. Let’s get started! How is the course structured? Due to the production schedule for

Due to the production schedule for this training guide, draft forms may be used in illustrations. The draft forms should never be used for actual tax preparation. Final forms are available on www.irs.gov, in the tax preparation soft- ware, in the instruction booklet (e.g., Form 1040 Instructions), or in other publications.

There are two tax law certification paths and two optional specialty courses presented in this publication, each representing a level of certification. The first six lessons apply to all levels of certification. Beginning with the Income lessons, the course levels for the subject being covered will be indicated by the following icons:

Basic covers the completion of wage earner type returns.being covered will be indicated by the following icons: Advanced covers the completion of the full

Advanced covers the completion of the full scope of VITA/TCE returns.Basic covers the completion of wage earner type returns. Military covers topics applicable to members of

Military covers topics applicable to members of the Armed Forces, Reserve, and National Guard.covers the completion of the full scope of VITA/TCE returns. International covers topics applicable to military

International covers topics applicable to military and non-military taxpayers living outside the United States.to members of the Armed Forces, Reserve, and National Guard. Volunteers wishing to certify in Military

Volunteers wishing to certify in Military or International must follow the Advanced certification path and should also review the applicable specialty course.

Health Savings Accounts (HSA) is an optional specialty course available electronically. Volunteers wishing to certify can follow the Basic or higher certification path.

certify can follow the Basic or higher certification path. The Affordable Care Act (ACA), or health

The Affordable Care Act (ACA), or health care law, contains health insurance coverage and financial assis- tance options for individuals and families. The IRS administers the tax provisions included in the law. Refer to the Affordable Care Act (ACA) lesson presented in this publication for information on the advanced premium tax credit, the premium tax credit, and the individual shared responsibility payment.

At the beginning of each lesson, icons are displayed after the lesson title. If a section of a lesson is associated with only one certification level, the corresponding icon is displayed at the beginning of that section. If no icons are displayed in a section, all icons displayed after the lesson title apply.

1-2

Course Introduction

What is the training approach?

Each course uses the process based training (PBT) approach. PBT is a structured fact-gathering process that combines tax software and tax law training to help you prepare an accurate return. To complete the process, you will use:

The questions from Form 13614-C to interview the taxpayer for filing status, dependency, credits, deduc- tions, eligibility, validate the information provided, and prepare the return.

• Reference materials, such as Publication 4012, Volunteer Resource Guide; Publication 17, Your Federal Income Tax for Individuals; and tax software help features, as well as other resources available at your site, to prepare the return. These materials will provide you with standardized questions to ask taxpayers during your interview, to help you prepare a 100% accurate tax return.

• Form 13614-C, Quality Review section to conduct a quality review of all returns. Adhering to a quality review process helps ensure accurate returns are prepared at all VITA/TCE sites.

In most cases, when you have completed the return, it will be filed electronically. There should only be rare instances when the taxpayer may need to mail the tax return to the IRS.

What do I need to get started?

In addition to this publication, VITA/TCE training materials include the following items:

• Publication 4491-W, Comprehensive Problems and Practice Exercises Workbook (electronic only)

Publication 4012, Volunteer Resource Guide

Form 6744, Volunteer Assistor’s Test/Retest

Publication 4961, VITA/TCE Volunteer Standards of Conduct – Ethics Training

Publication 5101, Intake/Interview & Quality Review Training

What other resources are available to help me learn?

Finalized blank forms can be accessed at www.irs.gov/Forms-&-Pubs.

Publication 4491-W, a companion book to this course, provides many opportunities to practice tax return preparation using the information taught in this guide.

Directions at the end of many lessons suggest using Publication 4491-W to practice the lesson material. Although it might not be possible to work each exercise with the knowledge you have at that point, at the end of the course, you will have the opportunity to complete all of the comprehensive problems and exer- cises in Publication 4491-W.

You may use the Practice Lab integrated with the online course, Link & Learn Taxes, to complete exercises, practice returns, and test scenarios using tax software.

practice returns, and test scenarios using tax software. Keep in mind that the Practice Lab contains

Keep in mind that the Practice Lab contains current tax year calculations, but is not updated with late tax law changes.

What happens after I complete this course?

After completing this course, you will have an understanding of tax law and the guidelines and tools needed to prepare an accurate return. After you have been certified, and have completed and signed Form 13615, you will be ready to volunteer at a VITA/TCE site.

Course Introduction

1-3

How does this certification work?

To participate in the VITA/TCE programs, all volunteers must pass the Volunteer Standards of Conduct certification test. In addition, all tax preparers, Quality Reviewers, instructors, and Site Coordinators must pass the Intake/Interview and Quality Review test. To prepare tax returns in the VITA/TCE programs, you must then pass at least the Basic certification test. Alternatively, you may certify at the Advanced level. You are not required to certify in Basic before taking the Advanced test. A minimum score of 80% is required to pass any certification test. You may take online tests that are available in Link & Learn Taxes on www.irs. gov. Online testing is fast and efficient; you will know immediately if you passed, and can print out the certi- fication for your Site Coordinator. Volunteers who do not pass the test the first time may review the course material and try again. A paper test option (Form 6744) may also be available. Talk with your instructor or Site Coordinator for more information on these options.

or Site Coordinator for more information on these options. You must pass the Volunteer Standards of

You must pass the Volunteer Standards of Conduct and Intake/Interview and Quality Review tests prior to accessing the Basic or Advanced certification test.

All designated reviewers and peer-to-peer reviewers are required to have Basic certification at a minimum, or higher certification based on the complexity of the return. It is strongly encouraged for volunteers to certify at the Advanced level. SPEC encourages the Quality Reviewers to be the most experienced volunteers in tax law application. Volunteer instructors must certify at Advanced or higher depending on the tax topics instructed.

If a volunteer does not achieve the minimum required score on the test or the retest, the volunteer is encouraged to participate in the program in another capacity such as greeter, client facilitator, communica- tion specialist, or technical support.

When you achieve the certification(s) and present your signed Form 13615, your Site Coordinator or instructor may provide you with a VITA/TCE programs Form 14509, Volunteer ID Insert. The insert was created to acknowledge the accomplishment of certified volunteers, as well as to assist internal and external stakeholders in identifying certified volunteers, but is not intended to be used as proof of certification. You should bring your Form 13615 (and Form 14509 if you have one) and photo ID to the tax preparation site.

What types of returns can I prepare?

It is important that you assist only with returns, supporting schedules, and forms for which you have been trained and certified. You are protected by the federal Volunteer Protection Act of 1997 as long as you are only preparing returns within the scope of the VITA/TCE programs. Refer taxpayers with tax situations outside your scope of training and certification to your Site Coordinator and/or a professional tax return preparer. The training resources and tools discussed in this guide only support the completion of a basic Form 1040 and associated tax forms. A complete list of what is within the scope of the VITA/TCE programs can be found in the front of the Volunteer Resource Guide. Do not prepare returns that fall outside the scope of the VITA/TCE programs. Applicable lessons list some out of scope tax law topics for the VITA/TCE programs.

1-4

Course Introduction

Am I legally liable for returns I prepare?

VITA/TCE program volunteers are not considered paid preparers; therefore, you are not legally liable under federal law for the return you prepare. This means you cannot accept payment of any kind from the taxpayer for preparing a federal tax return or for providing any other tax-related assistance. You are protected by the federal Volunteer Protection Act of 1997, as long as all of the following conditions are true:

• You are acting within the scope of your volunteer responsibilities.

You completed the level of training and certification required for preparing tax returns at your site.

The harm was not caused by willful, criminal, reckless, grossly negligent, or conscious, flagrantly indifferent acts.

How does the IRS identify volunteer-prepared returns?

Each return should be identified with the appropriate site identification number (SIDN) to ensure it is read- ily identifiable by the IRS. Your site’s SIDN is an 8-digit number preceded by the letter “S” that must appear in the Paid Preparer Use Only section on all returns you prepare, both paper and electronic. Your Site Coordinator provides this number along with other necessary guidelines for completing the return.

Identity Protection PIN (IP PIN) Program

Nationwide, identity theft continues to grow at an alarming rate. In 2004, the IRS developed a strategy to address the problem of identity theft-related tax administration issues. The IRS strategy continues to evolve, but is focused on three priorities that are fundamental to addressing this challenge: victim assistance, outreach, and prevention.

Victim assistance: The IRS is working to speed up case resolution and provide more training for employ- ees who assist victims of identity theft.

• Outreach: The IRS is educating taxpayers so they can prevent and resolve tax-related identity theft issues quickly.

Prevention: The IRS is implementing new processes for handling returns, new filters to detect fraud, new initiatives to partner with stakeholders, and a continued commitment to investigate the criminals who perpetrate these crimes.

Refer to the IRS Identity Protection Home Page at http://www.irs.gov/uac/Identity-Protection to stay current on IRS efforts to combat this growing problem. A wide range of information on identity theft is presented, ranging from how to contact the IRS with a case of identity theft to tips for keeping taxpayer records safe.

How to assist taxpayers who may be victims of identity theft at VITA/TCE sites

Being sensitive towards victims of identity theft is critical to assisting taxpayers through a confusing and frustrating situation. Remember victims of identity theft are:

Victimized by identity thieves – mostly through no fault of their own and

Trying to comply with tax laws – file tax return and pay their fair share of taxes

Course Introduction

1-5

Use the following table when assisting taxpayers who are victims or may be victims of identity theft at a VITA/TCE site.

If…

 

Then…

Identity Protection PIN (IP) PIN was issued to primary/ secondary taxpayer and dependent.

Ensure the IP PIN is input correctly on the tax return.

Taxpayer received an IP PIN but did not bring it.

1.

Complete a paper tax return for the taxpayer.

2.

Provide taxpayer with a complete copy of the tax return. (Provide two copies if the taxpayer will mail the tax return.)

3.

Refer to the Replacing Lost or Missing IP PIN information below.

4.

If taxpayer wants to e-file, arrange for the taxpayer to provide the IP PIN by returning to the site or via telephone.

Taxpayer received an IP PIN but misplaced or lost it.

1.

Complete a tax return for the taxpayer.

2.

Provide taxpayer with a complete copy of the tax return. (Provide two copies if the taxpayer will mail the tax return.)

3.

Refer to the Replacing Lost or Missing IP PIN information below.

4.

If the taxpayer receives an original or a replacement IP PIN and wants to e-file, arrange for the taxpayer to provide the IP PIN by returning to the site or via telephone.

Taxpayer did not receive an IP PIN, but IRS rejected the e-filed tax return because the IP PIN was not entered.

1.

Refer to the Replacing Lost or Missing IP PIN information below.

2.

Provide taxpayer with two complete copies of the tax return.

3.

If the taxpayer receives the original or a replacement IP PIN and wants to e-file, advise the taxpayer to provide the IP PIN by returning to the site or via telephone.

 

4.

If Identity Protection Specialized Unit (IPSU) does not provide the IP PIN, advise taxpayer to follow IPSU instructions in mailing the tax return. There may be processing delays as IRS verifies the taxpayer’s identity.

IRS rejected the taxpayer’s tax return because the taxpayer’s primary/second- ary and dependent SSN was previously used.

1.

Advise the taxpayer to contact the IPSU for assistance. If required, the IPSU will advise the taxpayer to complete Form 14039 and to mail it with their tax return to the IRS.

2.

Provide the taxpayer with two copies of the tax return.

Replacing a Lost or Missing IP PIN

If a taxpayer did not receive a new IP PIN or the taxpayer misplaced it, the taxpayer has two options:

1. Register and create a user profile to get a current IP PIN at

https://www.irs.gov/individuals/get-an-identity-protection-pin. The registration process will require the taxpayer to provide specific personal information and answer a series of questions to validate his/her identity.

2. Contact IPSU at 1-800-908-4490 to receive a replacement IP PIN if the taxpayer is unable or unwilling to

create an account on IRS.gov.

is unable or unwilling to create an account on IRS.gov. Using a replacement IP PIN will

Using a replacement IP PIN will cause a delay in processing the tax return and the issuance of any refund the taxpayer may be entitled to.

1-6

Course Introduction

If a replacement IP PIN letter is issued, the mailing date of the replacement IP

If a replacement IP PIN letter is issued, the mailing date of the replacement IP PIN is generally 4-5 business days after the transaction completion date.

Identity Protection PIN on Form 1040 Series Returns

The Form 1040 series (1040EZ, 1040A, and 1040) includes a series of six boxes just to the right of the spouse’s occupation. These boxes are clearly marked as “Identity Protection PIN.” Refer to the Volunteer Resource Guide, Tab P, or go to www.irs.gov to view Form 1040.

If taxpayers choose to file the return on paper, the letter issued by the IRS will instruct them to write the six- digit IP PIN in the area just to the right of the spouse’s occupation.

in the area just to the right of the spouse’s occupation. For the IP PIN to

For the IP PIN to be accepted, all six digits must be input on Form 1040. The IP PIN may begin with a zero.

Effect of the IP PIN on Tax Administration

The IP PIN acts as an identity validation tool only. The IP PIN indicates that taxpayers previously provided IRS with information that validates their identity and that IRS is satisfied that the taxpayers are the valid owners of the SSNs.

Returns that are filed on accounts with an IP PIN indicator present are processed as valid returns using standard processing procedures.

Returns that are filed on accounts with an IP PIN indicator present that do not have an IP PIN, or the IP PIN was not input correctly, will experience delays while IRS validates the identity of the taxpayer against IRS records.

What are my responsibilities as a VITA/TCE programs volunteer?

As a VITA/TCE programs volunteer, you have a responsibility to provide quality service and to uphold the ethical standards of the program. When you begin as a volunteer, you will be asked to sign Form 13615, which states that you will adhere to these standards:

• Follow the Quality Site Requirements (QSR)

Not accept payment, solicit donations, or accept refund payments for federal or state tax return preparation

Never solicit business from taxpayers you assist or use the knowledge gained about a taxpayer for any direct or indirect personal benefit

Never knowingly prepare false returns

Never engage in criminal, infamous, dishonest, notoriously disgraceful conduct, or any other conduct deemed to have a negative effect on the IRS

• Treat all taxpayers in a professional, courteous, and respectful manner

As a volunteer, follow these standards for return preparation: become certified, use the intake/interview and quality review process, use reference materials, complete the steps to electronically file tax returns, and adhere to the privacy and confidentiality guidelines.

What is due diligence?

Due diligence means doing your part to ensure tax returns are correct. As an IRS-certified volunteer, you ensure the information on the return you are preparing or reviewing is correct and complete.

Course Introduction

1-7

Doing your part includes:

Confirming a taxpayer’s (and spouse if applicable) identity

• Providing top-quality service by helping taxpayers understand and meet their tax responsibilities

• Making sure the facts presented by the taxpayer paint a reasonable picture

Generally you can rely on good faith for taxpayer information without requiring documentation as verifica- tion. However, exercise caution when taxpayers want to claim a refundable credit such as EIC or education credits, especially if these credits are maximized.

Top 4 Things to Remember about Due Diligence

1. Do your part to ensure a tax return is correct.

2. Question any unusual, inconsistent, or incomplete items.

3. If you are unsure about a deduction or credit, make an effort to research the answer, or ask another certi- fied volunteer for assistance.

4. Remind taxpayers that when they sign their tax returns, they are stating under penalty of perjury that the return is accurate to the best of their knowledge.

The following examples illustrate unusual or questionable situations that call for more information from the taxpayer.

example Larry goes to a VITA/TCE site to have his taxes prepared. Larry tells the
example
Larry goes to a VITA/TCE site to have his taxes prepared. Larry tells the tax preparer:
• His filing status is Head of Household
• He wants to claim his 2-year-old nephew for EIC
• He has no child care expenses
• He earned $19,000 in wages
• He is 26 years old
Larry’s information regarding his qualifying child and filing status is questionable. Further inquiries are
needed to determine:
• Why the uncle is claiming the child and not the parents?
• Why isn’t there child care expense and who cares for the child while the taxpayer works?
• Is there anyone else living in the household that contributes?
• Is there anyone else eligible to claim the child?
• Do the tie-breaker rules apply?
• If asked, can the taxpayer provide proof that the qualifying child lived with him for more than half of the
year?
example Steven goes to a VITA/TCE site to have his taxes prepared. Steven tells the
example
Steven goes to a VITA/TCE site to have his taxes prepared. Steven tells the tax preparer:
• He is 22 years old
• He has two sons, ages 10 and 11
• He has Social Security cards for both boys and himself
• His W-2 wage indicates earnings of $20,000
1-8
Course Introduction
Steven’s age and the age of the qualifying children appear to be inconsistent. Further inquiries
Steven’s age and the age of the qualifying children appear to be inconsistent. Further inquiries are
needed to determine:
• Are the boys his sons by birth, foster sons, adopted sons, step-sons?
• Is there anyone else eligible to claim the children as qualifying children?
• Do the tie-breaker rules apply?
• If asked, can the taxpayer provide proof that the qualifying children lived with him for more than half of
the year?

As a certified volunteer, remember due diligence and take reasonable steps to ensure the tax return is correct:

• Ask enough questions to determine if allowable expenses were incurred and that income reported is correct.

• Add all taxable income to the tax return, even if the taxpayer does not agree with you.

If the item is questionable and/or unallowable, do not claim the deduction or credit on the tax return.

If you are uncomfortable with the information and/or documentation provided by a taxpayer, do not prepare the tax return.

• If the taxpayer does not agree with your advice, you should not prepare the return.

Tax return integrity means volunteers must take reasonable steps to ensure the tax return is correct, which includes:

Verifying that all Social Security numbers presented by the taxpayer match the Social Security numbers listed on the tax return.

Not preparing out of scope returns.

Not preparing returns for which you have not been certified.

• Explaining to the taxpayer why the deduction or credit can or cannot be included on their return. Use IRS reference materials to support your statements.

Having a second certified volunteer review the completed return with the taxpayer.

Not making changes or corrections to the tax return after the taxpayer leaves the site without notifying the taxpayer.

In conclusion, as an IRS-certified volunteer preparer, you have the responsibility to perform adequate due diligence on EVERY return. The goal is not to prepare as many tax returns as possible, but to accurately report taxpayer income and deductions.

How do I maintain the taxpayer’s trust?

You are the key to the integrity of the VITA/TCE programs. Taxpayers will trust that all information you receive from them is protected from disclosure. To maintain this trust:

• Do not disclose any personal tax information gained as a result of the service provided.

• Do not openly discuss taxpayers by name in the presence of other volunteers or taxpayers. You may discuss tax situations with other volunteers. For example, a volunteer may refer to a situation (not a taxpayer) and ask or give advice about the appropriate tax treatment for that specific situation.

• Do not retain taxpayers’ documents for a follow-up visit. If you cannot fully complete the taxpayer’s return at the time of service, return all documents to the taxpayer.

• Do not take taxpayers’ information for preparation of the return outside the presence of the taxpayer, unless Virtual VITA/TCE procedures are being used.

Course Introduction

1-9

• Do not prepare a tax return when you suspect an individual is not providing truthful information.

• Do not exclude any of the taxpayer’s relevant income or expenses, regardless of whether they increase or decrease the amount of tax due or refund.

Having the taxpayer present in the tax preparer’s site is not always possible. In these cases, Virtual VITA/ TCE processes can be used to prepare returns without taxpayer face-to-face contact. Certified volunteers may interview taxpayers over the phone while preparing their return. The alternative process used to prepare returns must be approved by the responsible IRS Territory Manager prior to the start of the filing season to ensure all procedures are in place as described in the QSR. Most importantly, the taxpayer’s and government’s interests must be properly protected. In some cases, the taxpayer information must be left at the site to be prepared and mailed to the taxpayer. Adequate security and privacy is expected to ensure taxpayer records are properly safeguarded.

Some individuals may attempt to defraud the government by filing false tax returns. If you have any ques- tion about the validity of information provided by a taxpayer, or are uncomfortable with a taxpayer situation, discuss your concern with your Site Coordinator.

If you or a taxpayer should have a concern or issue regarding unethical behavior at a site, e-mail WI.Voltax@irs.gov. Also, see Publications 730, 4454, or 4053 for reporting Civil Rights (Title VI) and EEO concerns.

Taxpayer Civil Rights

The Department of the Treasury – Internal Revenue Service will not tolerate discrimination based on race, color, national origin (including limited English proficiency), disability, reprisal, sex (in education programs or activities) or age in programs or activities receiving federal financial assistance from the Internal Revenue Service.

If a taxpayer believes that he or she has been discriminated against, a written complaint should be sent to:

Operations Director, Civil Rights Division Internal Revenue Service, Room 2413 1111 Constitution Avenue, NW Washington, DC 20224

For all questions about taxpayer civil rights, contact us at the above address, or by e-mail at edi.civil.rights.division@irs.gov

Do not send tax returns, payments, or other non-civil rights information to this address.

Low Income Tax Clinics

Low Income Taxpayer Clinics (LITCs) represent low income individuals in disputes with the Internal Revenue Service, including audits, appeals, collection matters, and federal tax litigation. LITCs can also help taxpayers respond to IRS notices and correct account problems. Some LITCs provide education for low income taxpayers and taxpayers who speak English as a second language (ESL) about their taxpayer rights and responsibilities.

LITC services are free or low cost for eligible taxpayers. LITCs are independent from the IRS but receive some of their funding from the IRS through the LITC grant program. Each clinic determines whether prospective clients meet income guidelines and other criteria before agreeing to represent them.

Find a clinic near you on the LITC Map or IRS Publication 4134, Low Income Taxpayer Clinic List. This publication is also available by calling 1-800-829-3676 or at your local IRS office.

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Course Introduction

Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS, led by the National Taxpayer Advocate. Its job is to ensure every taxpayer is treated fairly and that taxpayers know and under- stand their rights. TAS offers free help to taxpayers in dealing with the often confusing process of resolving tax problems they haven’t been able to resolve on their own. TAS has at least one taxpayer advocate office located in every state, the District of Columbia, and Puerto Rico. The local advocate’s number is in the local directory and at taxpayeradvocate.irs.gov.

The Taxpayer Advocate Service’s website, taxpayeradvocate.irs.gov, is a resource for all taxpayers. The website covers a variety of tax-related concepts and problems, breaking each down to describe what the taxpayer should know, what they should do, and where they can get more help if needed. Taxpayers can also learn about their taxpayer rights. The site is mobile-responsive, so it’s easy to use on any device.

If a taxpayer comes into a VITA/TCE site with a tax problem for which they have been unsuccessful in resolving with the IRS, TAS may be able to help.

For more information, the taxpayer can call toll-free 1-877-777-4778 (1-800-829-4059 for TTY/TDD) or locate the closest advocate at taxpayeradvocate.irs.gov.

Are there other materials available to assist me?

When you arrive at the tax preparation site, your Site Coordinator will assist you with your resource needs. Your site may even have a technical research library from which you can access various forms, publica- tions, and worksheets. These materials can also be downloaded from www.irs.gov.

You should not use this guide at your tax preparation site; it is designed for training purposes only. The Volunteer Resource Guide and Publication 17 will be available for use in printed or electronic format. Your Site Coordinator should be able to provide access to the following key resources as well:

• Instruction booklets, schedules, and worksheets for Form 1040

• Frequently used tax publications (e.g., Publication 596, Earned Income Credit; Publication 972, Child Tax Credit; and Publication 3, Armed Forces’ Tax Guide)

• Equipment and supplies along with security requirements and use restrictions

along with security requirements and use restrictions Recipients of government property and equipment must certify

Recipients of government property and equipment must certify that the equipment will be used for volunteer tax return preparation purposes. Commercial and certain personal uses of the property may terminate the agreement. This applies to hardware and software, as well as supplies.

You may reinforce your knowledge of tax law by viewing online training courses such as Link & Learn Taxes and Understanding Taxes on www.irs.gov.

A toll-free tax information hotline is available for volunteer use only. If you have a tax law question and cannot get the answer from your Site Coordinator or your reference material, call 1-800-829-8482 (1-800-TAX-VITA). Do not give this phone number to taxpayers. The volunteer hotline is generally available from February 1 until the filing deadline.

For inquiries about refund offsets, taxpayers can call the Treasury Offset Program toll-free at 1-800-304- 3107. Other helpful contact information can be found near the back of the Volunteer Resource Guide.

Course Introduction

1-11

How do I get started using the tax software?

The majority of VITA/TCE sites use IRS-sponsored tax preparation software. The tax software is used to prepare returns and includes a help feature to assist in understanding the application of tax law; it is avail- able in both desktop and online (Internet-based) versions.

Your instructor or Site Coordinator will provide you with the information, user names, and passwords required for logging into the program for training and tax preparation purposes.

Where do I find information about the tax software?

The Volunteer Resource Guide contains step-by-step procedures for electronic return preparation and help- ful hints for using the tax software within each applicable tax law topic. Information about completing the return is listed in the Volunteer Resource Guide, Finishing the Return tab.

Summary

Welcome to the VITA/TCE programs. Remember:

• Make sure you have the resources and support you need to provide each taxpayer with high-quality service and an accurate return.

• A return is accurate when tax law is applied correctly and the return is free from error based on the taxpayer’s interview and supporting documentation, and a completed Form 13614-C.

Know your roles and responsibilities, adhere to the Volunteer Standards of Conduct, and follow due diligence.

• Prepare returns that are:

within the scope of the VITA/TCE programs

within your certification level

Use VITA/TCE equipment and supplies (including hardware and software) for their intended purposes.

• The procedures for helping a taxpayer with identity theft.

1-12

Course Introduction

Legislative Extenders Introduction The content in this lesson is being provided because these are not

Legislative Extenders

Legislative Extenders Introduction The content in this lesson is being provided because these are not considered

Introduction

The content in this lesson is being provided because these are not considered permanent provisions in the tax law. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended the following provisions through 2016. At the time this publication went to print these provisions were expired for 2017. Do not refer to this lesson unless directed here by Publication 4491X, VITA/TCE Training Supplement. Publication 4491X, which will be released in mid-January, will contain any legislative changes to these and any other provisions. Tax law provisions that were made permanent have been removed from this lesson and added to the appropriate tax law lesson in this publication.

How do I handle tuition and fees?

What is the deduction?

Taxpayers can deduct up to $4,000 in qualified tuition and related expenses paid during the tax year. The amount of the deduction is determined by the taxpayer’s filing status, modified adjusted gross income (MAGI), and other factors. For the amount of the allowable deduction see the Tuition and Fees Deduction chart in the Legislative Extenders tab of the Volunteer Resource Guide.

example Leonard, a single taxpayer who had a total income of $24,000, meets all the
example
Leonard, a single taxpayer who had a total income of $24,000, meets all the requirements to take the
deduction. He paid $4,427 in tuition and fees. Because his gross income is well below the MAGI limit, he
would be able to deduct the maximum amount ($4,000) for his tuition and fees payments.

Who is eligible for this deduction?

The deduction can be claimed for the taxpayer, the taxpayer’s spouse (if filing a joint return), and any dependent (for whom the taxpayer claims a dependency exemption) who attended an eligible educational institution during the tax year.

The tuition and fees deduction cannot be claimed by married taxpayers who file as Married Filing Separately or by an individual who is a dependent of another taxpayer.

example Juanita is married but uses the Married Filing Separately status. She cannot deduct tuition
example
Juanita is married but uses the Married Filing Separately status. She cannot deduct tuition and fees.

In order to claim a deduction for expenses paid for a dependent who is the eligible student, the taxpayer must have paid the qualified expenses and claim an exemption for the dependent. If the student is eligible to be claimed as a dependent (even if not actually claimed) and paid his or her own expenses, no one can take the adjustment. However, if the student would not qualify as a dependent, he or she can claim the deduction even if tuition and fees were paid by another person. In that case, the student can treat the amounts paid for tuition and fees as a gift.

Taxpayers who are not eligible for the tuition and fees adjustment because of the dependency issue may be eligible for an education tax credit, covered in the Education Credits lesson.

Legislative Extenders

2-1

example Joseph is 30. Although he lives at home and goes to school full time,
example
Joseph is 30. Although he lives at home and goes to school full time, he earns about $5,000 each year,
so his parents cannot claim him as a dependent. Only Joseph can take the tuition and fees adjustment,
even if his parents pay his education expenses.
example Carly is 18 and claimed by her parents as a dependent. She took out
example
Carly is 18 and claimed by her parents as a dependent. She took out student loans and paid all of her
own tuition and fees. Carly cannot take the deduction because she is a dependent. Carly’s parents can’t
claim the deduction either because they did not pay the education expenses. Carly’s parents should look
into the education credits.

What are qualified tuition and fees expenses?

Generally, qualified education expenses are amounts paid for tuition and fees required for the student’s enrollment or attendance at an eligible educational institution. Required fees include amounts for books, supplies, and equipment used in a course of study if required to be paid to the institution as a condition of enrollment or attendance. It does not matter whether the expenses were paid in cash, by check, credit card, or with borrowed funds.

Qualified education expenses does not include payments for:

• Insurance, room and board, medical expenses (including health fees), transportation, or similar personal, living, or family expenses

• Course-related books, supplies, nonacademic activities and equipment unless it is paid as a condition of enrollment or attendance

• Any course or other education involving sports, games, hobbies, and noncredit courses unless the course or other education is part of the student’s degree program

Ask the taxpayer if the qualified tuition and expenses were offset by distributions from qualified state tuition programs, Coverdell ESAs, or interest from savings bonds used for higher education expenses. Subtract these from the total payments for tuition and fees.

To help you figure the tuition and fees deduction, the taxpayer should have received Form 1098-T, Tuition Statement. Generally, an eligible education institution must send Form 1098-T or a substitute to each enrolled student by January 31.

Beginning in tax year 2016, the deduction for qualified tuition and related expenses will not be allowed unless the taxpayer receives a statement (Form 1098-T) from the educational institution. The receipt of the statement by a dependent is treated as received by the taxpayer.

by a dependent is treated as received by the taxpayer. Form 1098-T may have incomplete information.

Form 1098-T may have incomplete information. You must question the taxpayer to determine the amount of qualified expenses actually paid and adjust this amount by any non-taxable items, such as scholarships or tuition program distributions.

What is an eligible educational institution?

An eligible educational institution is generally any accredited public, nonprofit, or private post-secondary institution eligible to participate in the student aid programs administered by the Department of Education. It includes virtually all accredited public, nonprofit, and privately owned profit-making post-secondary insti- tutions. Taxpayers who do not know if an educational institution is an eligible institution should contact the school or the U.S. Department of Education website.

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Legislative Extenders

How do I determine the amount of the deduction?

When determining the deduction, use only the amounts actually paid. Remember to reduce the qualified education expenses by any tax-free educational assistance. Also remember that the taxpayer may be able to increase the combined value of an education credit and certain education assistance if the student includes some or all of the educational assistance in income in the year it is received.

educational assistance in income in the year it is received. Tax Software Hint: Form 8917, Tuition

Tax Software Hint: Form 8917, Tuition and Fees Deduction, is automatically completed from data input in the Education Credits screen.

How do I determine the best education benefit for the taxpayer?

If taxpayers claim the tuition and fees adjustment to income, they cannot claim an education tax credit. The education credits include the American Opportunity and Lifetime Learning Credits, discussed in more detail in the Education Credits lesson or Publication 970, Education Benefits.

For most taxpayers, the tax credit is more beneficial than the adjustment. However, it is important to calcu- late and compare the education benefits to determine which one is better for the taxpayer.

Complete the entire tax return separately using first the tuition and fees deduction, then the education credit. Compare the returns and choose the best one for the taxpayer.

To compare the benefits see the Highlights of Education Tax Benefits chart in the Education Benefits tab of the Volunteer Resource Guide.

the Education Benefits tab of the Volunteer Resource Guide. The tuition and fees deduction may affect

The tuition and fees deduction may affect state income tax returns. Consider the overall income – both federal and state – before choosing the best option.

Taxpayer Scenario

Here is how a volunteer helped Glenda deduct the tuition and fees she paid for a class.

SAMPLE INTERVIEW . . . . . . . . . . . . .
SAMPLE INTERVIEW
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VOLUNTEER SAYS…
GLENDA RESPONDS…
Let’s talk about your education-related expenses. Were you or
someone else in your family going to school?
I took one class in the fall.
You’re filing as Head of Household and your income is below
the limit for taking the full deduction. Do you know how much
you paid for tuition?
Yes, I have a copy of my account
statement. Will that work?
I see $450 for tuition and $80 for books. Were you required to
purchase the books through City College or could you have
bought them elsewhere?
Those books were written specifically
for the course; I had to purchase them
through the school when I registered
and they were an enrollment require-
ment in the course.
OK, then we can include the books. That totals $530. I just
need to ask a few more questions. Did you receive any funds
from an educational assistance program from your employer?
Yes, the Educational Assistance
Program provided $100.
Did you make any tax-free withdrawals from a Coverdell
educational savings account or another qualified tuition
program, or from U.S. savings bonds?
No.
Legislative Extenders
2-3
SAMPLE INTERVIEW (continued) . . . . . . . . . . . .
SAMPLE INTERVIEW (continued)
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VOLUNTEER SAYS…
GLENDA RESPONDS…
Did you get any other nontaxable payments, not counting
gifts, bequests, or inheritances, that were specifically for
educational expenses?
Well, my mom gave me $100 to help
with tuition.
The $100 was a gift, so we don’t count it. Your total payments
were $530 and then we must subtract the $100 employer
benefit. You can deduct $430 for tuition and fees. Do you
have any questions about all this?
No, I’m really glad I can deduct that.
There is also a credit for people who are paying for college
expenses. You can take one or the other, but not both. When
we get to the end of the return, I will ask you some more
questions to figure out if the credit would be better for you
than this deduction.
Okay, I’d appreciate that.
[Note on the intake and interview sheet that you have addressed this adjustment.]

Itemized Deductions

What about qualified mortgage insurance premiums?

Taxpayers can deduct private mortgage insurance premiums paid or accrued during the current tax year on Schedule A. The insurance must have been in connection with home acquisition debt, and the insur- ance contract must have been issued after 2006. Volunteers need to be aware that this potential deduction may not be reported on Form 1098. Ask homeowners with a mortgage if they paid mortgage insurance premiums during the tax year. Failure to ask could result in a substantial deduction loss for taxpayers filing Schedule A.

substantial deduction loss for taxpayers filing Schedule A. Other itemized deductions are discussed in a later

Other itemized deductions are discussed in a later lesson.

Other itemized deductions are discussed in a later lesson. What are residential energy credits? Individuals who

What are residential energy credits?

Individuals who make purchases for qualified energy efficient improvements for their main home may be allowed nonrefundable tax credits. There are two types of residential energy credits:

Residential energy efficient property credit (Form 5695, Residential Energy Credits, Part I, which is out of scope for the VITA/TCE programs)

Nonbusiness energy property credit (Form 5695, Part II)

• Nonbusiness energy property credit (Form 5695, Part II) Other credits are discussed in the Miscellaneous

Other credits are discussed in the Miscellaneous Credits lesson.

The IRS provides guidance on what property qualifies for the energy credits, and homeowners generally can rely on manufacturers’ certifications. See the Volunteer Resource Guide, Legislative Extenders tab, www.irs.gov, or www.energystar.gov for more information.

Tax Software Hint: Answer the questions for Form 5695 in the software. The software will calculate the credit Answer the questions for Form 5695 in the software. The software will calculate the credit and enter it on Form 1040.

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Legislative Extenders

What is the residential energy efficient property credit?

This residential energy credit is claimed on Form 5695, Part I, and is out of scope for the VITA/TCE programs. For awareness only, taxpayers may claim an energy credit for qualified solar electric, solar water heating, small wind energy, and geothermal heat pump property costs. Check for qualifying energy property purchases to determine if the taxpayer should see a professional tax preparer to claim the credit.

What is the nonbusiness energy property credit?

The nonbusiness energy property credit is available for certain qualifying energy efficiency improvements or residential energy property costs. The qualifying items are:

• Biomass stoves

Heating, ventilating, air-conditioning (HVAC)

• Insulation

• Roofs (metal and asphalt)

• Water heaters (non-solar)

• Windows and doors

The nonbusiness energy property credit is subject to the following limitations:

The total combined credit limit for all tax years after 2005 is $500, and the combined credit limit for windows is $200.

The maximum credit for residential energy property costs is $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace, or hot water boiler; and $300 for any item of energy efficient building property.

It

is important to note that:

The credit is only available for existing homes that are the taxpayer’s main home – new construction and rentals do not qualify. The taxpayer must own the home to qualify.

Amounts provided by subsidized federal, state, or local energy financing do not qualify for the credit.

or local energy financing do not qualify for the credit. Costs for on-site preparation and installation

Costs for on-site preparation and installation depend on the type of qualified property. Review the Form 5695 Instructions for more information.

Review the Form 5695 Instructions for more information. Cancellation of Debt (COD) This lesson will help

Cancellation of Debt (COD)

This lesson will help you recognize when you can help taxpayers who have a canceled debt and when you must refer them elsewhere for help with their tax returns.

Cancellation of Debt – Basics

A debt includes any indebtedness for which a taxpayer is liable or which attaches to the taxpayer’s property.

Cancellation of indebtedness can involve auto loans, credit card debt, medical care, professional services,

installment purchases of furniture or other personal property, mortgages, and home equity loans. Generally,

if a debt for which a taxpayer is personally liable is canceled or forgiven, the taxpayer must include the canceled amount in income. There is no income from canceled debt if the cancellation or forgiveness of debt is a gift or bequest.

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Use Form 13614-C, Intake/Interview & Quality Review Sheet, to determine if the taxpayer received one or both of Forms 1099-C, Cancellation of Debt, or 1099-A, Acquisition or Abandonment of Secured Property.

In Scope for VITA/TCE Programs

Refer to Publication 4731-A, Screening Sheet for Foreclosures/Abandonments and Cancellation of Debt, to ensure that the tax return being prepared is within scope of the VITA/TCE programs. This screening sheet is contained in the Volunteer Resource Guide, Legislative Extenders tab.

• Use Publication 4731-A, Part I for taxpayers with Form 1099-A for a foreclosure or abandonment of their principal residence

• Use Publication 4731-A, Part II for taxpayers with Form 1099-C, or Forms 1099-A and 1099-C resulting from cancellation of debt on a home mortgage loan

resulting from cancellation of debt on a home mortgage loan Cancellation of credit card debt is

Cancellation of credit card debt is included in the Other Income lesson of Publication 4491 for Advanced certification.

Taxability of Canceled Debt

Taxpayers often question the taxability of canceled debt because they did not receive money in hand. In situations where property is surrendered, such as a foreclosure, taxpayers feel that by giving up the prop- erty they are relieved from any further obligation. Explain that the benefit to the taxpayer is the relief from personal liability to pay the debt. Information in Publication 17, Your Federal Income Tax for Individuals, can assist with the explanation.

Additional resources include:

• Publication 523, Selling Your Home

Publication 525, Taxable and Nontaxable Income

• Publication 544, Sales and Other Dispositions of Assets

• Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments

Generally, when debt is canceled, the lender will issue Form 1099-C, Cancellation of Debt, which is then reported as income by the recipients on their tax return. There are exceptions and exclusions to the general rule that determines whether a canceled debt is included as income. This is covered in greater detail later in this lesson.

Recourse vs. Nonrecourse Debt

There are two types of debts: recourse and nonrecourse. A recourse debt holds the borrower personally liable. All other debt is considered nonrecourse.

In general, recourse debt (loans) allows lenders to collect what is owed for the debt even after they’ve taken

collateral (home, credit cards). Lenders have the right to garnish wages or levy accounts in order to collect what is owed.

A nonrecourse debt (loan) does not allow the lender to pursue anything other than the collateral. For exam-

ple, if a borrower defaults on a nonrecourse home loan, the bank can only foreclose on the home. The bank generally cannot take further legal action to collect the money owed on the debt. Whether a debt is recourse

or nonrecourse may vary from state to state, depending on state law.

If a lender cancels a debt and issues Form 1099-C, the lender will indicate on the form if the borrower was personally liable (recourse) for repayment of the debt. Go to www.irs.gov to view Form 1099-C.

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Legislative Extenders

If property securing the debt was foreclosed on or abandoned, the taxpayer may need to

If property securing the debt was foreclosed on or abandoned, the taxpayer may need to report the disposition (sale) on Form 8949 and Schedule D. This is covered in more detail later in this course.

D. This is covered in more detail later in this course. Generally, if taxpayers abandon property

Generally, if taxpayers abandon property that secures debt for which they are personally liable, they do not have a gain or loss until the foreclosure is completed.

If taxpayers abandon property that secures debt for which they are not personally liable, the abandonment is treated as a sale or exchange.

For more information on abandonments see Publication 4681.

Recourse debt holds the borrower personally liable for any amount not satisfied by the surrender of secured property.

• If a lender forecloses on property subject to a recourse debt and cancels the portion of the debt in excess of the fair market value (FMV) of the property, the canceled portion of the debt is treated as ordi- nary income from cancellation of indebtedness. This amount must be included in gross income unless it qualifies for an exception or exclusion.

• In addition to this cancellation of indebtedness income, the taxpayer may realize a gain or loss on the disposition of the property; this amount is generally the difference between the FMV of the property at the time of the foreclosure and the taxpayer’s basis in the property.

Nonrecourse debt is satisfied by the surrender of the secured property regardless of the FMV at the time of surrender, and the borrower is not personally liable for the debt.

• If property that is subject to nonrecourse debt is abandoned, foreclosed upon, subject of a short sale, or repossessed by the lender, the circumstances are treated as a sale of the property by the taxpayer.

• In determining the gain or loss on the disposition of the property, the balance of the nonrecourse debt at the time of the disposition of the property is included in the amount realized (generally the selling price). Since the borrower is not personally liable for the debt, the difference between the FMV of the property and the balance of the loan is not included in gross income.

 

Recourse Debt

Nonrecourse Debt

Borrower is…

Personally liable

Not personally liable

Canceled portion of debt is generally…

Treated as ordinary income and included in gross income (unless it qualifies as an exception or exclusion)

Not applicable. Nonrecourse debt is satisfied by the surrender of the secured property regardless of the FMV at the time of surrender.

Gain or loss on disposition of the property

Generally determined by the difference between the FMV of the property and the adjusted basis

The amount realized includes the balance of the nonrecourse debt at the time of the disposition of the property. This is true even if the FMV of the property is less than the outstanding debt.

example Jason lost his home to foreclosure because he could no longer make his mortgage
example
Jason lost his home to foreclosure because he could no longer make his mortgage payments. At the
time of foreclosure, he owed a balance of $170,000 to the lender and the FMV of the property was
$140,000.
If Jason is personally liable for the debt (recourse loan), the selling price would be $140,000.
If Jason is not personally liable for the debt (nonrecourse loan), the selling price would be $170,000.
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Exceptions and Exclusions

Some canceled or forgiven debts may be eliminated from income by applying exceptions, or reduced by applying exclusions to the general rule. Exceptions are applied before exclusions.

Exceptions

Exceptions may allow the taxpayer to eliminate the following types of canceled debt from income:

• Amounts otherwise excluded from income (e.g., gifts and bequests)

• Certain student loans (e.g., doctors, nurses, and teachers serving in rural or low-income areas)

• Deductible debt (e.g., home mortgage interest that would have been deductible on Schedule A)

• Price reduced after purchase (e.g., debt on solvent taxpayer’s property is reduced by the seller; basis of property must be reduced)

For more information on exceptions, refer to Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Exclusions

There are several exclusions from the general rule for reporting canceled debt as income.

Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, must be filed with the taxpayer’s return to show the amount of the canceled debt excluded.

The exclusions are:

• Discharge of debt through bankruptcy

• Discharge of debt of insolvent taxpayer

Discharge of qualified farm indebtedness

Discharge of qualified real property business indebtedness

Discharge of qualified principal residence indebtedness

• Discharge of qualified principal residence indebtedness The issues involved in exclusions can be complex. Only

The issues involved in exclusions can be complex. Only cancellation of qualified principal residence indebted- ness is within the scope of VITA/TCE.

Cancellation of Debt (COD) – Principal Residence

Mortgage Forgiveness Debt Relief Act 2007

Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude from income certain debt forgiven or canceled on their principal residence. This exclusion is applicable to the discharge of “quali- fied principal residence indebtedness.” If the canceled debt qualifies for exclusion from gross income, the debtor may be required to reduce tax attributes (certain credits, losses, and basis of assets) by the amount excluded.

If a property was taken by the lender (foreclosure) or given up by the borrower (abandonment), the lender usually sends the taxpayer Form 1099-A, Acquisition or Abandonment of Secured Property. Form 1099-A will have information needed to determine the gain or loss due to the foreclosure or abandonment.

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Legislative Extenders

If the debt is canceled, the taxpayer will receive Form 1099-C, Cancellation of Debt. If foreclosure/aban- donment and debt cancellation occur in the same calendar year, the lender may issue only Form 1099-C, including the information that would be reported on Form 1099-A.

The Mortgage Forgiveness Debt Relief Act of 2007 allows for the exclusion of discharged qualified principal residence indebtedness canceled in 2007, 2008, and 2009.

The Emergency Economic Stabilization Act of 2008 extended the exclusion for tax years 2010 through 2012. The American Taxpayer Relief Act of 2012 extended the exclusion to 12/31/2013.

The Tax Increase Prevention Act of 2014 extended the exclusion to 12/31/2014. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended the exclusion for qualified principal residence indebted- ness that is discharged before January 1, 2017, or subject to an arrangement that is entered into and evidenced in writing before January 1, 2017.

Qualified Principal Residence Indebtedness

Qualified principal residence indebtedness includes:

• Any debt incurred in acquiring, constructing, or substantially improving a principal residence that is secured by the principal residence

• Any debt secured by the principal residence resulting from the refinancing of debt incurred to acquire, construct, or substantially improve a principal residence, but only to the extent that the amount of debt does not exceed the amount of the refinanced indebtedness

does not exceed the amount of the refinanced indebtedness A principal residence is generally the home

A principal residence is generally the home where the taxpayer lives most of the time. A taxpayer can have only one principal residence at a time.

Exclusion Limit

The maximum amount that can be treated as qualified principal residence indebtedness is $2 million ($1 million if Married Filing Separately).

Canceled qualified principal residence indebtedness cannot be excluded from income if the cancellation was for services performed for the lender or on account of any factor not directly related to a decline in the value of the residence or the taxpayer’s financial condition.

Criteria for Canceled Principal Residence Debt

Volunteers may assist taxpayers who meet the following requirements:

• The home was never used in a business or as rental property

The debt was not canceled because the taxpayer filed bankruptcy

• The taxpayer is not in bankruptcy when he/she comes to the site for assistance

• Form 1099-C does not include an amount for interest

• The debt must be a mortgage used only to buy, build, or substantially improve the taxpayer’s primary residence, i.e., this money was not used to pay off credit cards, medical/dental expenses, vacations, etc.

• The mortgage was secured by the taxpayer’s primary residence

• The mortgage was not more than $2 million ($1 million if Married Filing Separately)

example Bob refinanced his personal residence and used the loan proceeds from the equity in
example
Bob refinanced his personal residence and used the loan proceeds from the equity in his home to build
a new master bedroom suite on the main level of his house. This debt is qualified principal residence
indebtedness.
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example Tom refinanced his personal residence and used the loan proceeds from the equity in
example
Tom refinanced his personal residence and used the loan proceeds from the equity in his home to pay
off credit cards and buy a car. This debt is not qualified principal residence indebtedness.
EXERCISES Use Publication 4731-A, Part II, to answer the following questions. The answers appear at
EXERCISES
Use Publication 4731-A, Part II, to answer the following questions. The answers appear at the end of
the lesson.
Question 1: A volunteer with Advanced certification is working with Angie. Angie confirmed that she
had to give up her principal residence and produced Form 1099-C for the cancellation of the mortgage
loan. Angie explains that she did not file for bankruptcy, even though she experienced hardship due to
the loss of income from no longer being able to rent out an upstairs bedroom and bath. Angie also veri-
fied that the mortgage loan was used entirely to purchase the home and was secured by the home. Her
Form 1099-C lists the amount of debt canceled as $60,000.
Should the volunteer assist Angie with her return?
¨ Yes
¨ No
Question 2: Fred went to his local VITA site to have his tax return prepared. The volunteer went
through Fred’s records and noticed Form 1099-C reflecting a canceled debt of $50,000.
Using Publication 4731-A, Part II, as a guide, the volunteer learned Fred lost his job and could no
longer make his mortgage payments. The bank foreclosed on Fred’s home. Due to the housing market
slump, the value of Fred’s home had declined, and his mortgage balance was more than the fair market
value of the home. The bank sold Fred’s home and canceled the remaining debt ($50,000) not covered
by the sale price.
Upon further questioning, the volunteer learned Fred had refinanced his home two years ago and used
the equity in the home to pay off some credit cards and take a trip to Las Vegas.
Should the volunteer assist Fred with the preparation of his return at the VITA site?
¨ Yes
¨ No

Foreclosures and Capital Gain or Loss

If a taxpayer does not make payments owed on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale from which the taxpayer may realize a gain or loss. This is true even if the taxpayer voluntarily returns the property to the lender.

Figure the gain or loss from a foreclosure or repossession the same way as the gain or loss from a sale. The gain is the difference between the amount realized and the adjusted basis of the transferred property (amount realized minus adjusted basis). The loss is the difference between the adjusted basis in the trans- ferred property and the amount realized (adjusted basis minus amount realized).

When a residence that is security for a mortgage is abandoned or foreclosed upon, the gain or loss must be reported on the return and is subject to the rules for a Sale of Residence.

Generally, the amount realized on a foreclosure is considered to be the selling price. But this selling price depends, in part, on whether the debt was recourse debt or nonrecourse debt. In addition, the taxpayer may also have ordinary income from the cancellation of debt.

Use the Worksheet for Foreclosures and Repossessions in Publication 4681 to figure the ordinary income from the cancellation of debt and the gain or loss from a foreclosure or repossession.

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Legislative Extenders

A loss on the sale or disposition of a personal residence is not deductible. A

A loss on the sale or disposition of a personal residence is not deductible. A gain may qualify for the Section 121 exclusion ($250,000 or $500,000 for Married Filing Jointly taxpayers) for a gain on the sale of a personal residence.

Generally, the taxpayer’s gain or loss from a foreclosure or abandonment is reported on Form 8949 and Schedule D.

If the taxpayer is personally liable for the debt (recourse debt), and the amount of outstanding debt (mort- gage) is more than the home’s FMV, the difference is treated as cancellation of debt income.

If the canceled debt qualifies as excludable from gross income, the exclusion is reported on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (And Section 1082 Basis Adjustment)

• Otherwise, the canceled debt is reportable as ordinary income on Form 1040, line 21 and is beyond the scope of VITA/TCE

on Form 1040, line 21 and is beyond the scope of VITA/TCE If the canceled debt

If the canceled debt is reportable on Form 1040, line 21 or the canceled debt is not fully excludable from gross income, the issue is beyond the scope of the VITA/TCE programs.

Form 1099-A, Acquisition or Abandonment of Secured Property

When a personal residence is foreclosed upon, and the lender cancels a portion of the debt, the taxpayer will generally receive Form 1099-A and Form 1099-C. If, in the same calendar year, the debt is canceled in connection with a foreclosure of secured property, the lender has the option of issuing Form 1099-C only.

The filing requirements of Form 1099-A are met by the lender completing the following on Form 1099-C:

• Debt description

• The debtor was personally liable for the repayment of the debt

• Fair market value of property

the repayment of the debt • Fair market value of property For more information on determining

For more information on determining the basis for sale of residence see the lesson on Income – Capital Gain or Loss, or Publication 17.

Verify with the taxpayer that the information on Form 1099-A and Form 1099-C is correct. Pay particular attention to the amount of debt forgiven and the fair market value reported. Advise the taxpayer to contact the lender immediately if any of the information is not correct.

Form 1099-A, issued by the lender, reports the outstanding debt and the fair market value of the property. This form provides information needed to determine the amount of any gain or loss due to foreclosure or abandonment. Report the gain or loss from Form 1099-A on Form 8949 and Schedule D.

The sale price (amount realized) is based on whether the taxpayer is personally liable (recourse loan) or not personally liable (nonrecourse loan) for the debt.

• If the taxpayer is personally liable, the sale price is the lesser of the balance of the principal mortgage debt outstanding or the fair market value

• If the taxpayer is not personally liable, then the sale price is the full amount of the outstanding debt, as reflected on Form 1099-A

• For both recourse and nonrecourse loans, add any proceeds the taxpayer received from the foreclosure sale to the amount realized

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Generally, if there is a loss on the sale of a principal residence or the entire gain is excluded under the Section 121 exclusion ($250,000 or $500,000 for Married Filing Jointly), the sale does not have to be reported. However, taxpayers who receive Form 1099-A should report the sale to account for the basis in the property.

report the sale to account for the basis in the property. Failure to report a foreclosure

Failure to report a foreclosure or abandonment transaction on Form 8949 and Schedule D may result in an IRS notice to the taxpayer.

Form 1099-C, Cancellation of Debt

Lenders or creditors are required to issue Form 1099-C if they cancel a debt owed to them of $600 or more. Generally, an individual taxpayer must include all canceled amounts (even if less than $600) on the “Other Income” line of Form 1040.

However, under certain circumstances, a taxpayer may not have to include canceled debt in income. For example, if the canceled debt is related to the taxpayer’s principal residence, the taxpayer may be able to exclude all or a portion of canceled debt if it is “qualified principal residence indebtedness.” The amount excluded due to the “discharge of qualified principal residence indebtedness” is reported on Form 982.

In addition to debtor information, Form 1099-C reports the amount of debt canceled and the date canceled. If the form has event code “A” indicating bankruptcy, or if an amount is included for interest, refer the taxpayer to a professional tax preparer.

Form 982 must be filed with the taxpayer’s return to report the excluded amount of discharged indebted- ness and the reduction of certain tax attributes. Taxpayers excluding discharged debt from “qualified princi- pal residence indebtedness” must complete only a few lines on Form 982; check the discharge of qualified principal residence indebtedness box and include the amount of debt discharged from Form 1099-C to Form 982. If the taxpayer kept ownership of the home, the basis adjustment to the principal residence for the excluded canceled debt must be reflected on the form.

Coordination with Form 1099-A

As mentioned earlier, if a personal residence is foreclosed upon, and the debt is canceled in the same year, the taxpayer may receive Form 1099-C only. The required filing information from Form 1099-A will be shown on Form 1099-C.

Generally, the gross foreclosure bid price is considered to be the FMV. For an abandonment or voluntary conveyance in lieu of foreclosure, the FMV is generally the appraised value of the property.

For a recourse loan, the sale price is the lesser of the balance of the principal debt (mortgage) outstanding or fair market value.

Mortgage Workouts and Form 1099-C

Homeowners whose mortgage debt is partly forgiven through a loan modification, or “workout,” which allows them to continue owning their residence, will receive Form 1099-C reporting the amount of debt discharged. Because the taxpayer kept ownership of the home, there is no gain or loss to be reported.

However, if the canceled debt meets the requirements of “qualified principal residence indebtedness,” Form 982 must be completed to report the amount excluded from gross income and the reduction of tax attributes. See Publication 4012, Legislative Extenders tab, Capital Loss on Foreclosure, on how to complete Form 982.

Taxpayers who are not personally liable for the debt (nonrecourse debt) do not have ordinary income from the cancellation of the debt unless the lender:

• Offered a discount for the early payment of the debt or

Agreed to a loan modification that resulted in the reduction of the principal balance of the debt

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Legislative Extenders

If a lender offers to discount (reduce) the principal balance of a loan that is paid off early, or agrees to a loan modification (“workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of the principal reduction is canceled debt whether or not the taxpayer is personally liable for the debt. The amount of the canceled debt must be included in income unless the exceptions or exclusions discussed earlier apply.

Gain or Loss Reported on Form 8949 and Schedule D

Form 8949, Sales and Other Dispositions of Capital Assets, includes all capital gain and loss transactions. The subtotals from Form 8949 are carried over to Schedule D, Capital Gains and Losses, where gain or loss is calculated in aggregate.

Losses on a personal residence are never deductible. Gains (all or part) may be excluded under the rules regarding the sale of a personal residence (Section 121 exclusion).

For more information on how to report the gain or losses, see the instructions for Form 8949.

See Publication 4012, Legislative Extenders tab, Capital Loss on Foreclosure that shows how a foreclosure was reported on the Capital Gain or Loss Transaction Worksheet based on the information provided on Form 1099-A.

Worksheet based on the information provided on Form 1099-A. The following case studies are only examples

The following case studies are only examples of how the mentioned issues and forms can look and be reported. The dates and years of the forms are not relevant for these case studies.

Case Study – Reporting a Foreclosure and Canceled Debt

Frank bought his home on May 14, 2003. His basis in the home was $200,000. After he lost his job last year, he was not able to make the payments. The bank foreclosed in June of the current tax year, and Frank moved out. At the time of the foreclosure, the fair market value of the home was $125,000 and the principal balance of the mortgage was $195,000. All of the debt was incurred to purchase the home. Frank received Form 1099-C for the amount of debt canceled by his bank.

Frank has qualified principal residence indebtedness. His tax return should include Form 8949 and Schedule D to show the basis of the home disposed of through foreclosure, and Form 982 to exclude the debt cancellation from income.

of through foreclosure, and Form 982 to exclude the debt cancellation from income. Legislative Extenders 2

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2 - 1 4 Legislative Extenders
2 - 1 4 Legislative Extenders

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Legislative Extenders

Case Study Alternative – Mortgage Workout If Frank had been able to negotiate a workout

Case Study Alternative – Mortgage Workout

If Frank had been able to negotiate a workout with his mortgage lender (reducing the amount he owed on the mortgage and staying in the home), he would not have completed Form 8949 and Schedule D because he had not disposed of the asset.

Assume Frank’s lender agreed to reduce his mortgage debt from $195,000 to $175,000. The lender issued Frank a Form 1099-C showing $20,000 of canceled debt. Frank’s Form 982 would be completed, but the amount of debt forgiven (or his basis in the home, whichever was smaller) would need to be entered on the form, and his basis in the home would be decreased by that amount.

to be entered on the form, and his basis in the home would be decreased by

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EXERCISES (continued) Question 3: A volunteer with Advanced certification is working with Robert. The volunteer
EXERCISES (continued) Question 3: A volunteer with Advanced certification is working with Robert. The volunteer
EXERCISES (continued)
Question 3: A volunteer with Advanced certification is working with Robert. The volunteer asks Robert if
he underwent foreclosure or had to give up his home during the tax year. Robert confirmed that he did,
and produced Form 1099-A. The volunteer asked Robert if he had received Form 1099-C, and Robert
replied that he did not. Examining the form, the volunteer noted the balance of principal outstanding
was $234,000. What should the volunteer do next?
A. Ask the questions on Publication 4731-A, Screening Sheet for Foreclosures/Abandonments and
Cancellation of Debt
B. Ask enough probing questions to determine if Robert had a gain or loss on the foreclosure
C. Refer Robert to a professional tax preparer
D. Complete Form 982

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Legislative Extenders

EXERCISES (continued) Question 4: Mary purchased her main home in June 2004 for $175,000. She

EXERCISES (continued)

Question 4: Mary purchased her main home in June 2004 for $175,000. She lost her job and was no longer able to make her mortgage payments during the current year. In July of the current tax year, Mary moved out of the home to live with relatives. On July 15, the bank foreclosed on the home. On November 15, the bank discontinued its collection activity and canceled the remaining debt. The fair market value at the time of foreclosure was $100,000 because of the poor housing market, but Mary still owed $150,000 on the mortgage. None of the loan proceeds were used for any purpose other than to buy, build, or substantially improve the principal residence. Mary never used the home for business or rental purposes and has not filed for bankruptcy. Based on this information, what should the volunteer do?

A. Refer Mary to another source for tax return preparation

B. Report a loss of $50,000 on Schedule D

C. Report $50,000 debt canceled on Form 982

D. Include the debt cancellation amount in income

Question 5: After Tom became ill and could not work full time, he and his wife, Grace, were having difficulty making their mortgage payments. Rather than go through the expense of a foreclosure, the lender agreed to reduce the principal on their loan and refinance it with a better interest rate and lower payments. The principal balance before November 1 of the current tax year workout was $130,000, and the lender reduced the loan to $110,000. None of the loan proceeds were used for any purpose other than to buy, build, or substantially improve the principal residence. The home has never been used for business or as rental property, and the taxpayers have not filed for bankruptcy.

Based on this information, what should the volunteer do?

A. Refer Tom and Grace to another source for tax return preparation

B. Report the reduction in the basis of the home on line 10b of Form 982

C. Report the $20,000 as a loss on Schedule D

D. Include the debt cancellation amount in income

Question 6: Gene bought his home in 2003. His basis in the home was $210,000. He lost his job in

January of the current tax year and was not able to make the mortgage payments. The bank foreclosed

in August and Gene moved out. At the time of the foreclosure, the fair market value was $145,000 and

the principal balance of the mortgage was $185,000. All of the debt was incurred to purchase the home,

it was never used for business or as a rental property, and Gene has not filed for bankruptcy. Gene has

a Form 1099-C. Gene is personally liable for repayment of the debt.

How should the foreclosure and loss be reported?

A. Report the $40,000 debt cancellation on Form 982, line 10b

B. Report the $40,000 debt cancellation on Form 982, line 2, only

C. Report the $40,000 debt cancellation on Form 982, line 2, and the foreclosure on Form 8949 and Schedule D

D. Report the $40,000 debt cancellation on Form 1040, line 21

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Summary

Legislative extenders are temporary provisions. At the time this publication went to print these provisions were expired for 2017. Do no refer to this lesson unless directed here by Publication 4491X.

Tuition and Fees

Taxpayers can deduct up to $4,000 in qualified tuition and related expenses paid during the tax year as an adjustment to income.

Itemized Deductions

Taxpayers may be able to deduct qualified mortgage insurance premiums.

Nonbusiness Energy Property Credit

Taxpayers who make certain energy-efficient improvements to their main home may be eligible for this credit (Form 5695, Part II). The limit for this credit is $500 for all tax years.

Cancellation of Debt (COD)

A debt includes any indebtedness for which a taxpayer is liable or which attaches to the taxpayer’s property.

Cancellation of indebtedness can involve auto loans, credit card debt, medical care, professional services, installment purchases of furniture or other personal property, mortgages, and home equity loans.

Cancellation of debt can be complex. VITA/TCE volunteers may assist a taxpayer with issues related to cancellation of debt as long as the taxpayer meets all the criteria for discharge of qualified principal resi- dence indebtedness or if all debt canceled and reported on Form 1099-C was nonbusiness credit card debt.

Taxpayers who go through a foreclosure or abandonment of their principal residence receive Form 1099-A, Acquisition or Abandonment of Secured Property. Form 1099-A will have information needed to determine the gain or loss due to the foreclosure or abandonment.

If the debt on the principal residence is canceled, the taxpayer will receive Form 1099-C, Cancellation of Debt. If foreclosure/abandonment and debt cancellation occur in the same calendar year, the lender may issue only Form 1099-C, including the information that would be reported on Form 1099-A.

Use Publication 4731-A, Screening Sheet for Foreclosures/Abandonments and Cancellation of Debt, which provides questions and step-by-step guidance to determine whether the cancellation of debt issue is within scope for the VITA/TCE programs.

• Use Publication 4731-A, Part I for taxpayers with Form 1099-A for a foreclosure or abandonment of their principal residence.

Use Publication 4731-A, Part II for taxpayers with Form 1099-C, and/or Forms 1099-A and 1099-C resulting from cancellation of debt on a home mortgage loan.

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Legislative Extenders

What situations are out of scope for the VITA/TCE programs?

The following are out of scope for this lesson. While this list may not be all inclusive, it is provided for your awareness only.

Residential energy-efficient property credit (Form 5695, Part I)

Cancellation of debt for issues other than “qualified principal residence indebtedness” or nonbusiness credit card debt

• Cancellation of debt for a principal residence that was used in a business or as rental property

• Cancellation of debt when Form 1099-C includes an amount for interest

Cancellation of debt was because the taxpayer filed bankruptcy or was insolvent immediately before the debt was canceled

EXERCISE ANSWERS Answer 1: No. Because Angie used part of the home as rental property,
EXERCISE ANSWERS
Answer 1: No. Because Angie used part of the home as rental property, all the canceled debt may not
qualify to be excluded from income. The rules involving mortgage debt exclusions are complex. Angie
should be referred to a professional tax preparer.
Answer 2: No. Fred’s situation is outside the scope of the volunteer program since a portion of his refi-
nanced debt was used for purposes other than to buy, build, or substantially improve his principal resi-
dence. Fred should be referred to a professional tax preparer, per the guidance on Publication 4731-A.
Answer 3: A. The volunteer should use Publication 4731-A, Part I to determine if Robert had a gain or
loss on the foreclosure. If the taxpayer receives a Form 1099-C, the volunteer would use the screening
sheet to determine if the related tax issues are within scope.
Answer 4: C. The volunteer would need to complete Form 8949, Schedule D, and Form 982. Although
there is a loss, it cannot be deducted. The mortgage debt cancellation is not included in income on the
tax return because it is covered by the qualified principal residence indebtedness exclusion on Form 982.
Answer 5: B. The volunteer would complete Form 982 and report the reduction in the basis of the
home. The $20,000 in debt cancellation can be excluded as qualified principal residence indebted-
ness on Form 982 and is not counted as income on the tax return. Form 8949 and Schedule D are not
required because Tom and Grace did not dispose of the home.
Answer 6: C. Form 982, Form 8949, and Schedule D should be completed. When a residence that is
security for a mortgage is abandoned or foreclosed upon, it is treated as having been sold. This results
in the foreclosure being reported on Form 8949 and Schedule D as sale of home. Failure to file Form
8949 and Schedule D may result in an IRS notice to the taxpayer.

Legislative Extenders

2-19

Notes

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Legislative Extenders

Affordable Care Act Introduction This lesson covers some of the tax provisions of the Affordable

Affordable Care Act

Affordable Care Act Introduction This lesson covers some of the tax provisions of the Affordable Care

Introduction

This lesson covers some of the tax provisions of the Affordable Care Act (ACA). You will learn how to deter- mine if taxpayers satisfy the individual shared responsibility provision by enrolling in minimum essential

coverage, qualifying for an exemption, or making a shared responsibility payment. You will also learn how to determine if taxpayers are eligible to receive the premium tax credit. A list

of terms you may need to know is included at the end of the lesson.

What do I need?

Form 13614-C

Publication 4012

Publication 17

Publication 974

Form 1095-A & Instructions

Form 8962 & Instructions

Form 8965 & Instructions

Optional

Publication 5120

Publication 5121

Publication 5156

Publication 5172

Form 1095-B & Instructions

Form 1095-C & Instructions

Objectives

At the end of this course, using your resource materials, you will be able to:

• Determine what is minimum essential coverage (MEC)

• Determine if taxpayers qualify for a health care coverage exemption

• Calculate the shared responsibility payment (SRP), if applicable

• Determine eligibility for the premium tax credit (PTC)

• Calculate the premium tax credit, if applicable

• Report taxpayers’ health insurance coverage, premium tax credit, exemption from coverage, or shared responsibility payment on the tax return

What is the Affordable Care Act?

Under the Affordable Care Act (ACA), the federal government, state governments, insurers, employers, and individuals share responsibility for improving the quality and availability of health insurance coverage in the United States. The ACA reforms the existing health insurance market by prohibiting insurers from denying coverage or charging higher premiums because of an individual’s preexisting conditions. The ACA also creates the Health Insurance Marketplace. For more information about the Marketplace, see www.healthcare.gov. Some states have established their own health insurance marketplaces. We will refer to them all simply as the Marketplace.

The Marketplace is where taxpayers find information about health insurance options, purchase health insurance, and, if eligible, obtain help paying premiums and out-of-pocket costs. The Marketplace estimates the amount of the premium tax credit (PTC) that eligible taxpayers may be able to claim on their federal income tax returns. Based on that estimate, eligible taxpayers can decide if they want to have all, some or none of their estimated credit paid in advance to their insurance company to help pay for coverage.

The ACA requires individuals to have qualifying health care coverage (called minimum essential coverage, or MEC) for each month of the year, qualify for a coverage exemption, or make a shared responsibility payment (SRP) when filing their federal income tax returns.

or make a shared responsibility payment (SRP) when filing their federal income tax returns. Affordable Care

Affordable Care Act

3-1

Some taxpayers may qualify for a coverage exemption, which means they are not required to have MEC or make an SRP when filing their federal income tax return.

Who must have health care coverage?

For each month of the tax year, individuals must:

• Have MEC, or

• Qualify for a coverage exemption, or

Make an SRP when filing their federal income tax return

Individuals are treated as having MEC for a month as long as they are enrolled in and entitled to receive benefits under a plan or program identified as MEC for at least one day during that month.

A taxpayer is subject to an SRP for the taxpayer, the taxpayer’s spouse (if filing a joint return), and any indi- vidual who is claimed, or could be claimed, as a dependent on the tax return if they don’t have MEC or a coverage exemption.

All U.S. citizens are subject to the individual shared responsibility provision, as are all non-U.S. citizens who are in the U.S. long enough during a calendar year to qualify as resident aliens for federal income tax purposes (see the Resident or Nonresident Alien Decision Tree in the Volunteer Resource Guide, Resident/ NR Alien tab). Foreign nationals who are present in the U.S. for a short enough period that they do not become resident aliens for tax purposes are exempt from the individual shared responsibility provision even though they may have to file U.S. income tax returns.

All bona fide residents of U.S. territories are treated as having MEC and are not required to take any action to comply with the individual shared responsibility provision other than to indicate their status on their federal income tax returns if they are required to file.

federal income tax returns if they are required to file. An individual who cannot claim his

An individual who cannot claim his or her own exemption, but files a tax return, is generally not required to indicate their coverage or lack thereof on the return.

What is minimum essential coverage (MEC)?

Under the ACA, minimum essential coverage (MEC) is a health care plan or arrangement specifically identi- fied in the law as MEC, including:

Specified government-sponsored programs (e.g., Medicare Part A, Medicare Advantage, most Medicaid programs, CHIP, most TRICARE programs, and comprehensive health care coverage of veterans)

• Employer-sponsored coverage under a group health plan (including self-insured plans)

• Individual health coverage (e.g., health insurance purchased through the Marketplace or directly from an insurance company)

• Grandfathered health plans (in general, certain plans that existed before the ACA and have not changed since the ACA was passed)

• Other plans or programs that the Department of Health and Human Services, in coordination with the Treasury, recognizes as MEC for the purposes of the ACA

The chart in The Volunteer Resource Guide, Tab H, shows these and other types of coverage that qualify as MEC and some that do not. Family members are not required to have the same type of coverage. Each individual may be covered by a different plan.

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Affordable Care Act

Tax Software Hint: See the Volunteer Resource Guide, Tab H, for software entries. EXERCISES Please

Tax Software Hint: See the Volunteer Resource Guide, Tab H, for software entries.

EXERCISES Please use the Minimum Essential Coverage Chart in Publication 4012, Tab H, and this
EXERCISES
Please use the Minimum Essential Coverage Chart in Publication 4012, Tab H, and this text to answer
the following questions.
Question 1: Sandy is covered under health insurance offered by her spouse’s employer. Does she
have MEC?
¨ Yes
¨ No
Question 2: Keith and Kathy are married with dependent children. Must they all be covered under the
same policy or plan to have MEC?
¨ Yes
¨ No
Question 3: James is retired and too young to be eligible for Medicare. He received his health cover-
age through a retiree health insurance plan offered by his former employer. Is the retiree plan MEC?
¨ Yes
¨ No
Question 4: Valerie is a local government employee and she enrolls in group health insurance cover-
age offered by her employer. Does she have MEC?
¨ Yes
¨
No
Question 5: Jessie is 20 years old, going to school full-time and working to support herself (she
provides more than half of her own support), although Jessie still lives with her parents. Is Jessie
responsible for her health coverage under ACA?
¨ Yes
¨ No
Question 6: (Continuing from Question 5) If Jessie’s parents provided more than half of Jessie’s
support, are they responsible for Jessie’s health coverage under ACA?
¨ Yes
¨ No

How do I know if taxpayers have MEC?

While conducting an interview with taxpayers using Form 13614-C, Intake/Interview & Quality Review Sheet, you will determine whether taxpayers, their spouse (if filing a joint return), and their dependents had MEC for the entire year, part of the year, or not at all. Taxpayers may have insurance cards or receive Forms 1095-A, 1095-B, or 1095-C from the Marketplace, their insurance provider, or employer. These forms may indicate the taxpayer or a member of the tax household had MEC for some or all months during the year, but volunteers should rely primarily on their interview with the taxpayer.

Form 1095-A, Health Insurance Marketplace Statement

• The Health Insurance Marketplace sends this form to individuals who enrolled in coverage through the Marketplace. The form includes information about the coverage, who was covered, and when.

Form 1095-B, Health Coverage

• Health insurance providers send this form to individuals they cover for one or more months of the calendar year, with information about who was covered and when (e.g., private insurers, Medicaid, Medicare, etc.).

Form 1095-C, Employer-Provided Health Insurance Offer and Coverage

• Certain large employers send this form to certain employees, with information about what coverage, if any, the employer offered to the employees. Employers that offer health coverage referred to as “self-insured coverage” send this form to individuals they cover, with information about who was covered and when. Note that the offer amounts shown on Form 1095-C are for employee-only coverage. If the employer made an offer for spousal or family coverage, the taxpayer will need to provide those offer amounts.

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The deadline for the Marketplaces, insurers, other coverage providers, and certain employers to provide these forms to taxpayers is January 31. Taxpayers expecting to receive a Form 1095-A should wait to file their income tax return until they receive that form. Some taxpayers may not receive a Form 1095-B or Form 1095-C by the time they are ready to file their tax return. While the information on these forms may assist in preparing a return, it is not necessary to wait for Forms 1095-B or 1095-C in order to file. These forms may indicate the taxpayer or a member of the tax household had or was offered MEC for some or all months during the year, but volunteers should rely primarily on their interview with the taxpayer.

should rely primarily on their interview with the taxpayer. Be sure to complete the ACA preparer

Be sure to complete the ACA preparer section of Form 13614-C, Intake/Interview & Quality Review Sheet. Note MEC and coverage exemptions as applicable for the taxpayer, spouse, and dependents.

What are the health coverage exemptions?

Members of the tax household may be eligible to claim an exemption from the requirement to have MEC. Some exemptions apply to the entire tax household for the tax year.

Filing threshold exemptions

Household income below the return filing threshold – The taxpayer’s household income is below the taxpayer’s minimum threshold for filing a tax return. Include the Modified Adjusted Gross Income (as defined in the instructions for Form 8965) of any dependent who has a filing requirement.

Gross income below the filing threshold – Gross income of taxpayer (and spouse if Married Filing Jointly) is below the filing threshold (do not include income of dependents).

The following exemptions apply to each member of the tax household individually and apply on a monthly basis with one exception, as noted below:

• Coverage considered unaffordable (Code A) – The required contribution is more than 8.16 percent of household income. See the example later in this lesson.

• Short coverage gap (Code B) – The individual went without coverage for less than three consecu- tive months during the year. The exemption is only valid for a 1- or 2-month gap in insurance coverage, which can be sandwiched in between months of coverage or other types of exemptions. For example, if someone was incarcerated in March through the end of the year, they could claim the gap exemption for January and February and then claim the incarceration exemption for March through December.

There is a look-back rule for gaps of coverage at the start of the year. In order to claim the short cover- age gap exemption, you must consider gaps at the end of the prior year. So someone without coverage from October 2016 through February 2017 (who is not eligible for another exemption for October through December 2016) does not qualify for the coverage gap exemption for tax year 2017 since it was not less than 3 months. There is no “look forward rule” at the end of the tax year, so gaps from November 2017 through January 2018 would qualify for the exemption for tax year 2017.

• Citizens living abroad and certain noncitizens (Code C) – The individual was:

– A U.S. citizen or resident who spent at least 330 full days outside of the U.S. during a 12-month period;

330 full days outside of the U.S. during a 12-month period; If taxpayers meet one of

If taxpayers meet one of these conditions, they qualify for this exemption even if they have a Social Security number (SSN).

A U.S. citizen who was a bona fide resident of a foreign country or U.S. territory;

– A resident alien who was a citizen of a foreign country with which the U.S. has an income tax treaty with a nondiscrimination clause, and was a bona fide resident of a foreign country for the tax year;

– A nonresident alien; or

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Affordable Care Act

Not a U.S. citizen, not a U.S. national, and not an individual lawfully present in the U.S. For this purpose, an immigrant with Deferred Action for Childhood Arrivals (DACA) status is not considered lawfully present and therefore qualifies for this exemption. For more information about who is treated as lawfully present for purposes of this coverage exemption, visit www.healthcare.gov.

• Members of a health care sharing ministry (Code D) – The individual was a member of a health care sharing ministry.

• Members of federally recognized Indian tribes (Code E) – The individual was a member of a feder- ally recognized Indian tribe, including an Alaska Native Claims Settlement Act (ANCSA) Corporation Shareholder (regional or village), or was otherwise eligible for services through an Indian health care provider or the Indian Health Service.

• Incarceration (Code F) – The individual was in a jail, prison, or similar penal institution or correctional facility after the disposition of charges. Does not include time in jail pending disposition of charges (being held but not convicted of a crime), time in probation, parole, or home confinement.

• Resident of a state that did not expand Medicaid (Code G) – Taxpayer’s household income was below 138 percent of the federal poverty line for the family size and at any time in 2017 the individual resided in a state that didn’t participate in the Medicaid expansion under the Affordable Care Act.

• Aggregate self-only coverage considered unaffordable (Code G) – Taxpayers can claim this exemp- tion if: (1) Offers of self-only coverage for two or more members of the tax household are each afford- able, but (2) two or more family members’ aggregate cost of self-only employer-sponsored coverage was more than 8.16 percent of household income, (3) as was the cost of any available employer-sponsored coverage for the entire family. Exception: This exemption applies to the whole year for the entire family.

exemption applies to the whole year for the entire family. See Publication 5157-A, Affordable Care Act

See Publication 5157-A, Affordable Care Act – Taxpayer Scenarios, for detailed instructions on claiming the affordability exemptions.

Member of tax household born or adopted during the year (Code H) – The months before and including the month that an individual was added to a taxpayer’s tax household by birth or adoption. An individual is included in a taxpayer’s tax household in a month only if he or she is alive for the full month. Also, if a taxpayer adopts a child during the year, the child is included in a taxpayer’s tax house- hold only for the full months that follow the month in which the adoption occurs.

Member of tax household died during the year (Code H) – The months after the month that a member of the tax household died during the year.

There are some other coverage exemptions granted by the Marketplace:

• General hardship – Taxpayers experienced hardships, such as bankruptcy or eviction, that prevented them from obtaining coverage under a qualified health plan. Refer to the Volunteer Resource Guide, Tab H, for a complete list of hardships identified by the Marketplace.

• Members of certain religious sects – The individual was a member of a religious sect in existence since December 31, 1950, that is recognized by the Social Security Administration (SSA) as conscien- tiously opposed to accepting any insurance benefits, including Medicare and Social Security.

Taxpayers who are granted a coverage exemption from the Marketplace will receive exemption certificate numbers (ECNs) from the Marketplace.

Affordable Care Act

3-5

If taxpayers think they qualify for a coverage exemption, how do they obtain it?

How taxpayers can receive a coverage exemption depends upon the type of exemption for which they are eligible. Some exemptions are granted only by the Marketplace and others are claimed on the tax return.

by the Marketplace and others are claimed on the tax return. Some Marketplace exemptions based on

Some Marketplace exemptions based on hardship may be retroactive.

Taxpayers whose gross income is below their filing threshold are exempt from the individual shared respon- sibility provision and are not required to file a federal income tax return to claim the coverage exemption. However, if the taxpayer files a return anyway (for example, to claim a refund), he or she can claim a cover- age exemption with his or her tax return.

Coverage exemptions are claimed on Form 8965, Health Care Coverage Exemptions.

How are health care coverage exemptions reported?

Enter ECNs for taxpayers who were granted a coverage exemption from the Marketplace in Part I (Marketplace-Granted Coverage Exemptions for Individuals) of Form 8965, column c. Taxpayers will use Part II (Coverage Exemptions for Your Household Claimed on Your Return) of Form 8965 to claim a coverage exemption based on household or gross income below the filing threshold. All other coverage exemptions may be claimed in Part III (Coverage Exemptions for Individuals Claimed on Your Return) of Form 8965.

for Individuals Claimed on Your Return) of Form 8965. If the Marketplace has not processed an

If the Marketplace has not processed an individual application for a coverage exemption before the tax return is filed, enter “pending” as the ECN in the software. Refer to the Volunteer Resource Guide, Tab H, for more information.

What is the unaffordability exemption?

Coverage is “Unaffordable” when the taxpayer’s contribution toward premiums is more than 8.16 percent of household income. The premium that is measured depends on the taxpayer’s circumstances. Household income also has a unique definition for this exemption.

During the taxpayer interview, determine whether each household member for each month:

• Had coverage

• Had an exemption (other than for unaffordable coverage), or had no coverage or exemption

If the taxpayer or a dependent on the tax return had no coverage and no other exemption, try the exemp- tion for unaffordable coverage. Use one of the following three tests to determine if the exemption applies. If circumstances change during the year, you may need to use a different test that matches the circumstances in the different time period. In all cases, compare the premium to the “affordability threshold,” which is 8.16 percent of household income. Note your findings on the Intake/Interview & Quality Review sheet.

What are the three tests for the unaffordability exemption?

1. Did the uninsured person have an offer of coverage from his or her own employer? If no, move to the next test. If yes, compare the employee’s annual premium for the lowest-cost plan for only themselves (self-only coverage) to the affordability threshold of 8.16 percent of household income. This test is done employee by employee. (If both the taxpayer and spouse have offers from their respective employers, for example, measure the affordability of each offer separately.) The required contribution is the amount that the employee would pay (either pre-tax or after-tax) for the coverage. Compare the annual cost of coverage to the annual income, even if the employee only had the offer of coverage for a full month.

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Affordable Care Act

example Assume no one in Damon’s family has coverage or another exemption. Damon is offered
example
Assume no one in Damon’s family has coverage or another exemption. Damon is offered coverage
from his employer for himself that would cost 8.7 percent of his household income. Because the cover-
age costs more than 8.16 percent of income, it is unaffordable and Damon can claim the exemption for
himself for all months for which he had this employer offer. No other test is needed. If the coverage had
been affordable, Damon would not be eligible for the unaffordable coverage exemption. He would not
proceed to the other affordability tests.

2. Did the uninsured person have an offer of employer coverage as a member of an employee’s family? If no, move to the next test. If yes, compare the employee’s annual premium for family coverage to the affordability threshold of 8.16 percent of household income. Use the lowest-cost offer that covers everyone:

(1) whose personal exemption is claimed on the return, (2) who is eligible for coverage under the terms of the policy, and (3) who doesn’t qualify for another coverage exemption. If a family member is excluded (not offered family coverage), that uninsured person would proceed to the third test.

example (continued) Damon is also offered family coverage that would cover himself, his spouse, and
example (continued)
Damon is also offered family coverage that would cover himself, his spouse, and his children. He would
have to pay a total of 9.3 percent of his household income for the family policy. The coverage is unaf-
fordable and his children and his wife can claim the exemption. If the coverage had been affordable,
Damon’s spouse and children would not be eligible for the unaffordable coverage exemption. They would
not proceed to the other affordability test.
Although the family offer includes coverage for Damon, his exemption eligibility is based on the afford-
ability of his employer’s self-only offer (#1 above), not on the cost of family coverage.

3. The uninsured person did not have an offer of employer coverage. If the person did not have an offer of coverage from an employer, the affordability of a plan in the Marketplace is measured. Using the Marketplace coverage affordability worksheet (from Form 8965), calculate the premium for the lowest cost bronze plan (LCBP), reduced by the premium tax credit a person would have been eligible for, if any.

For Line 1 of the Marketplace coverage affordability (MCA) worksheet, find the LCBP for any person on the tax return who is not offered employer-sponsored insurance and does not qualify for another exemption. Include individuals who are eligible for government-sponsored coverage, such as Medicare or Medicaid. If more than one person in the tax household is seeking an exemption based on Marketplace affordability, test them together. Find the LCBP for the tax year at www.healthcare.gov or at the taxpayer’s state-based Marketplace.

example (continued) Damon has a daughter, age 28, who qualifies as his dependent but did
example (continued)
Damon has a daughter, age 28, who qualifies as his dependent but did not qualify for her own employer
coverage or for his (because of her age). He would test the cost of covering his daughter with a market-
place policy using the MCA worksheet. On Line 1 of the MCA worksheet, he would use the lowest cost
bronze plan for his daughter only – Damon, his spouse, and his younger children are not included on
Line 1 because they have an employer offer of coverage.

For Line 10 of the worksheet, the second lowest cost silver plan (SLCSP) is needed. Look up the plan cost for anyone whose personal exemption is included on the return, who is not eligible for other coverage (other than individual market coverage), and who does not qualify for another exemption. Do not include the premium cost of someone who is eligible for employer coverage, Medicaid or Medicare, for example.

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3-7

example (continued) Damon’s older daughter is not eligible for coverage from Damon’s employer or government-sponsored
example (continued)
Damon’s older daughter is not eligible for coverage from Damon’s employer or government-sponsored
coverage. Damon would look up the SLCSP of his daughter. Again, all other household members are left
out because they have an employer offer.
Damon would complete the MCA worksheet calculations and compare the final cost of coverage to his
affordability threshold (8.16 percent of income) to determine whether his daughter’s coverage was
affordable.

How is the affordability threshold computed for the unaffordability exemption?

The affordability threshold is the MAGI (not including untaxed Social Security income) of the taxpayer plus the MAGI of each dependent who is required to file a return plus the cost of any premium that is paid through a salary reduction arrangement (pre-tax medical). The taxpayer can usually find their pre-tax premium amount on their last paycheck stub of the tax year.

What about the cost of other coverage?

Each of the three tests above operate independently of each other and independently of other cover- age costs. For example, if the taxpayer pays a premium to enroll her child in a children’s health insurance program (CHIP, a form of government-sponsored coverage), that amount is not included.

What are common mistakes with the Marketplace coverage affordability worksheet?

It is important to note the difference between the individuals included in Line 1 and those included in Line

10. For example, if a household member has coverage and does not need an exemption while other

household members lack coverage, the covered person is included in Line 1 if they have government-spon- sored coverage (Medicare, Medicaid, etc.) or an individual policy. They are excluded from Line 1 if they are eligible for employer-sponsored coverage (either self-only or family) or qualify for another exemption.

Line 10 of the worksheet is used to determine whether the LCBP (Line 1) would have been reduced by a PTC, for the purpose of the unaffordability exemption calculation. If a household member is not eligible for PTC, do not include them in the SLCSP quote. For example, a member eligible for government-sponsored coverage is not eligible for PTC and is not included in the SLCSP quote. Or, if the taxpayer is ineligible for the PTC because her household income is over 400 percent FPL or because she is Married Filing Separately, enter zero on Line 10 (SLCSP).

example (continued) If, instead, Damon’s daughter had been eligible for Medicaid, the bronze cost (Line
example (continued)
If, instead, Damon’s daughter had been eligible for Medicaid, the bronze cost (Line 1) would be the
same, but the SLCSP on Line 10 would be zero because the daughter was eligible for coverage outside
the individual market, namely government-sponsored Medicaid.

For more information on the unaffordability exemption, refer to Form 8965 and its instructions.

EXERCISES (continued) Question 7: Randy was covered by Medicaid until February 23rd. He started a
EXERCISES (continued)
Question 7: Randy was covered by Medicaid until February 23rd. He started a new job and his
employer-sponsored health coverage started on May 1st. Does an exemption apply?
¨ Yes
¨ No

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Affordable Care Act

What is the shared responsibility payment (SRP)?

If a taxpayer (or anyone the taxpayer can claim as a dependent) doesn’t have MEC and doesn’t qualify for a coverage exemption, they will need to make an SRP when filing their tax return.

The software will compute the SRP based on the entries you make. The payment computation, to put it as simply as possible, is the greater of a percentage of income or a flat dollar amount, but no more than the national average premium for bronze level coverage.

The percentage of income amount is the percentage of the excess portion of household income over the federal income tax filing threshold for the primary tax filer (or joint filers) in the family. The percentage is 2.5 percent for 2017. In future years, a cost-of-living adjustment will apply.

The “flat dollar amount” is $695 for tax year 2017. A cost-of-living adjustment will apply to the flat dollar amount each year. These figures are halved if the individual without coverage is under age 18 as of the beginning of the month.

The maximum flat dollar amount for a family cannot exceed 300 percent of the amount for one adult no matter how many dependents are in the family. For 2017, it’s $2,085 per household or $695 x 3.

Compare the flat dollar amount and the income percentage amount and use the greater of the two amounts. The resulting amount is capped at the National Average Bronze Plan Premium.

The individual shared responsibility payment is the greater of the flat dollar amount or the percentage of income amount, but never more than the national average premium for the bronze level plan.

This ensures that the payment amount is never more than the approximate cost of basic coverage for a year.

In the example below, determine the SRP due for 2017. These amounts will be indexed for inflation for years after 2017.

example Single individual with $40,000 income: Jim, an unmarried 30-year-old with no dependents, did not
example
Single individual with $40,000 income:
Jim, an unmarried 30-year-old with no dependents, did not have MEC for any month during 2017 and
does not qualify for a coverage exemption. For 2017, Jim’s household income was $40,000 and his filing
threshold is $10,400.
• To determine his monthly payment amount using the income formula, subtract $10,400 (filing thresh -
old) from $40,000 (2017 household income). The result is $29,600. Two and a half percent of $29,600
equals $740.
• Jim’s flat dollar amount is $695.
Because $740 is greater than $695, Jim’s payment amount for each month is $61.67, or 1/12 of the $740
amount. For Jim, the sum of all monthly payment amounts is $740.
Because this amount is less than the sum of the monthly national average bronze plan premiums, Jim’s
SRP for 2017 is $740, the lesser of the sum of the monthly payment amounts or the sum of the monthly
national average bronze plan premiums. Jim will make his SRP for the months without MEC when he
files his 2017 income tax return.

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Who is allowed a premium tax credit (PTC)?

Who is allowed a premium tax credit (PTC)?

The premium tax credit (PTC) helps eligible taxpayers pay for health insurance. When enrolling in health coverage through the Marketplace, the Marketplace estimates the amount of the PTC that eligible taxpayers may claim on their federal tax return. Based on that estimate, eligible taxpayers choose to have advance payments of the premium tax credit (APTC) made on their behalf to their insurance company, or to forego APTC and get all of the benefit of the PTC when they claim the credit on their federal tax return. Those who choose to get the benefit of APTC must file a federal tax return for the year the payments are made even if they have gross income for the year that is below the income tax filing threshold.

In general, taxpayers are allowed a PTC if they meet all of the following:

The taxpayer, spouse (if filing a joint return), or dependents were enrolled in a qualified health plan offered through the Marketplace for one or more months in which the enrolled individual was not eligible for MEC, other than coverage in the individual market.

• The premiums for the plan or plans in which the taxpayer and his or her family members enroll is paid by the due date of the taxpayer’s return (not including extensions).

• The taxpayer is an applicable taxpayer. A taxpayer is an applicable taxpayer if he or she meets the following three requirements:

– The taxpayer’s income is at least 100 percent but not more than 400 percent of the federal poverty line for the taxpayer’s family size. The following exceptions allow a taxpayer with household income below 100 percent of the federal poverty line to be an applicable taxpayer, provided the taxpayer meets the other applicable taxpayer requirements:

- The taxpayer, the taxpayer’s spouse, or a dependent who enrolled in a qualified health plan is not a U.S. citizen, but is lawfully present in the U.S. and not eligible for Medicaid because of immigra- tion status.

- The taxpayer was determined eligible for APTC by the Marketplace and received the benefit of APTC for one or more months of coverage of a family member.

If married, the taxpayer files a joint return with his or her spouse (unless the taxpayer is considered unmarried for Head of Household filing status, or meets the criteria which allows certain victims of domestic abuse or spousal abandonment to claim the PTC using the Married Filing Separately filing status). See the instructions for Form 8962, Premium Tax Credit, for more details about these exceptions.

– The taxpayer cannot be claimed as a dependent by another person.

Federal Poverty Line (FPL)

The federal poverty line (FPL) is an income amount adjusted for family size that is considered poverty level for the year. The U.S. Department of Health and Human Services (HHS) determines the FPL amounts annually and publishes a table reflecting these amounts at the beginning of each calendar year. You can also find this information on the HHS website at www.hhs.gov.

HHS provides three sets of federal poverty guidelines:

• one for residents of the 48 contiguous states and D.C.,

• one for Alaska residents, and

• one for Hawaii residents.

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Affordable Care Act

If the taxpayer moved at all during the tax year and lived in Alaska and/or Hawaii, or is filing jointly and his or her spouse lived in a different state, use the table with the higher dollar amounts for the family size.

For purposes of the PTC, eligibility for a certain year is based on the most recently published set of federal poverty guidelines as of the first day of the annual open enrollment period. As a result, the PTC for the current tax year is based on the prior year guidelines (for example, the guidelines used for 2017 APTC and PTC are the guidelines published in January 2016, which are the most recently published guidelines at the time of the open season for 2017 enrollments). The FPL tables are in the Volunteer Resource Guide, Tab H.

What is household income and what are its limits?

A taxpayer’s household income is the total of the modified adjusted gross income (MAGI) of the taxpayer

(and spouse, if married and filing jointly) and the MAGI of all dependents required to file a federal income tax return because his or her income meets the filing threshold.

example David and Melinda are Married Filing Jointly taxpayers. They have one child, Philip, age
example
David and Melinda are Married Filing Jointly taxpayers. They have one child, Philip, age 17, whom they
claim as a dependent. Philip works part time and has a filing requirement. David and Melinda’s house-
hold income calculation would include their MAGI, as well as Philip’s MAGI.

MAGI, for the purpose of the PTC, is the adjusted gross income on the federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest. It does not include Supplemental Security Income (SSI).

EXERCISES (continued) Question 8: Jocelyn and Larry file jointly and claim their child, Hank. Hank
EXERCISES (continued)
Question 8: Jocelyn and Larry file jointly and claim their child, Hank. Hank has a part-time job and
earns $5,000. Hank will file a return to get a refund of the tax that was withheld from his paychecks.
Will Jocelyn and Larry include Hank’s $5,000 as part of their Household Income for ACA purposes?
¨ Yes
¨ No
Question 9: (Continuing from Question 8) If Hank earned $7,000, would Jocelyn and Larry include
Hank’s income as part of their Household Income for ACA purposes?
¨ Yes
¨ No

In general, only taxpayers and families whose household income for the year is between 100 percent and 400 percent of the FPL for their family size may be eligible for the PTC. A taxpayer who meets these income requirements must also meet the other eligibility criteria to claim PTC.

must also meet the other eligibility criteria to claim PTC. Please see the Volunteer Resource Guide,

Please see the Volunteer Resource Guide, Tab H, for the current year Poverty Guidelines.

Are taxpayers allowed a PTC for all enrolled family members?

A taxpayer is allowed a PTC only for months that a member of the taxpayer’s tax family is (1) enrolled in

a policy offered through the Marketplace and (2) not eligible for minimum essential health coverage (other than individual market coverage) for one or more months of enrollment. Also, the taxpayer is not allowed

a PTC for a month unless the portion of the enrollment premiums for which the taxpayer is responsible

has been paid by the unextended due date of the taxpayer’s return. The taxpayer’s tax family consists of the taxpayer, the taxpayer’s spouse if filing jointly, and all other individuals for whom the taxpayer claims a personal exemption deduction. The tax family members who meet the above two requirements (enrolled in coverage through the Marketplace and not eligible for other MEC) are the taxpayer’s “coverage family.” The importance of the tax family and coverage family in computing the PTC is explained later.

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Are taxpayers allowed a PTC if offered coverage from an employer?

Generally, a person enrolled in Marketplace coverage for months he or she is eligible for employer- sponsored coverage is not eligible for a PTC for those months, even if the person turns down the employer’s coverage. This includes the employee or a family member of the employee who is eligible to

enroll in the employer coverage as a result of a relationship to the employee. A person may be eligible for

a PTC despite an offer of employer coverage if the employer’s coverage is unaffordable or fails to meet

a minimum value standard (employers will provide employees with information concerning whether the minimum value standard is met).

In general, for individuals requesting the APTC, the Marketplace determines whether the employer cover- age is affordable by comparing the employee’s cost of the employer coverage for self-only coverage to household income. If for 2017, the employee’s cost for the employer coverage is more than 9.69 percent of projected household income for 2017, the Marketplace will conclude that the employer coverage is unafford- able. The affordability test used by the Marketplace for family members of an employee who are eligible for coverage from the employer is the same as the test for the employee (compare the cost of the employee’s self-only coverage to household income). If a Marketplace determines that, based on projected household income, the employer coverage would be unaffordable, the employer coverage is considered unaffordable for the employer’s plan year even if it turns out to cost 9.69 percent or less of the actual household income reported on the tax return. This is referred to as the employee safe harbor.

If a household member actually enrolls in the employer plan, he or she is ineligible for a PTC for the months of enrollment, regardless of the affordability or minimum value of the plan. That means that a PTC is not allowed for this individual’s coverage for the months the individual is enrolled in employer coverage.

example Cedric is single and has no dependents. When enrolling through the Marketplace during open
example
Cedric is single and has no dependents. When enrolling through the Marketplace during open enroll-
ment, Cedric was not eligible for employer-sponsored coverage.
In August of the tax year, Cedric began a new job and became eligible for employer-sponsored coverage
that is affordable and provides minimum value on September 1st. Since Cedric became eligible for
employer-sponsored coverage on September 1st and the coverage was affordable and provides minimum
value, he may be able to claim a PTC only for the months January through August.
example Maria is single and has no dependents. Her employer offers health insurance, but she
example
Maria is single and has no dependents. Her employer offers health insurance, but she didn’t enroll
because she felt it was too expensive. The Marketplace determined that the employer offer was not
affordable, and Maria enrolled in Marketplace coverage and received the benefit of APTC. At the end of
the year, she received both a Form 1095-A from the Marketplace and a Form 1095-C from her employer
indicating that the employer coverage was affordable. Because of the employee safe harbor rule, Maria
is not considered eligible for the employer coverage because in good faith she provided the Marketplace
information about her employer offer and the Marketplace determined that the coverage was unaffordable.

What is a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)?

New rules enacted under the 21st Century Cures Act of 2016 allow eligible employers to offer a qualified small employer health reimbursement arrangement (QSEHRA) to their eligible employees. Under a QSEHRA, an eligible employer can reimburse eligible employees for health care costs, including premiums for Marketplace health insurance. If taxpayers were covered under a QSEHRA, their employer should have reported the annual permitted benefit in box 12 of Form W-2 with code FF. If the QSEHRA is affordable for a month, no PTC is allowed for the month. If the QSEHRA is unaffordable for a month, taxpayers must reduce the monthly PTC (but not below -0-) by the monthly permitted benefit amount.

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Are taxpayers allowed the PTC if they are eligible for coverage through a government- sponsored program?

An individual eligible for coverage through a government-sponsored program such as Medicaid, Medicare, CHIP or TRICARE, is not a member of the coverage family for the months in which the individual is eligible for government-sponsored coverage. Therefore, a PTC is not allowed for this individual’s coverage for the months the individual is eligible for the government-sponsored coverage. However, an individual is treated as not eligible for Medicaid, CHIP, or a similar program for a period of coverage under a qualified health plan if, when the individual enrolls in the qualified health plan, the Marketplace determines or considers the individual to be not eligible for Medicaid or CHIP.

the individual to be not eligible for Medicaid or CHIP. Regarding Medicaid and CHIP, taxpayers are

Regarding Medicaid and CHIP, taxpayers are generally considered eligible for a government- sponsored program for a month if they met the eligibility criteria for that month, even if they did not enroll. However, if a Marketplace made a determination that the taxpayer or a family member was ineligible for Medicaid or CHIP and eligible for APTC when the individual enrolls in a qualified health plan, the individ- ual is treated as not eligible for Medicaid or CHIP for purposes of the premium tax credit for the duration of the period of coverage under the qualified health plan (generally, the rest of the plan year), even if the taxpayer’s actual income for the tax year suggests that the individual may have been eligible for Medicaid or CHIP.

Accordingly, if a taxpayer was enrolled in both Medicaid coverage and in a qualified health plan for which APTC was paid for one or more months of the year for which a Marketplace determined that he or she was ineligible for Medicaid, the taxpayer can claim the PTC for these months, if otherwise eligible. The Marketplace may periodically check state Medicaid data to identify consumers who may be dual-enrolled, and direct them to return to the Marketplace to discontinue their APTC. If you believe that the taxpayer may currently be enrolled in both Medicaid and a qualified health plan with advance credit payments, you should advise the taxpayer to contact the Marketplace immediately.

Taxpayers may have a limited time to obtain Medicare, during which time they remain eligible for PTC. See Publication 974 for details.

If APTC is being paid for coverage in a qualified health plan and the taxpayers become eligible for govern- ment coverage that is effective retroactively (such as Medicaid or CHIP), they will not be considered eligible for the government coverage until the month after the date of approval. Taxpayers can get the PTC for Marketplace coverage until the first day of the calendar month after they are approved for the government coverage.

month after they are approved for the government coverage. A person is considered eligible for other

A person is considered eligible for other MEC only if the person is eligible for MEC for every day of that month. For example, if a person becomes eligible for employer- or government-sponsored coverage on the 5th day of a month, he or she is considered not eligible for the other MEC for the month and may be allowed a PTC for the month. The person should alert the Marketplace to the change and discontinue any APTC being paid for the Marketplace coverage.

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example Adele is single with no dependents. She works part-time and has no offer of
example
Adele is single with no dependents. She works part-time and has no offer of employer-sponsored health
coverage. She projects her income to be $17,500 for the year (roughly 150 percent of FPL), based on
her earnings at the same job in the prior year. She enrolls in a qualified health plan in the Marketplace
and is determined eligible for APTC.
Adele’s place of employment was closed for two weeks, unexpectedly lowering the number of hours she
worked. Her employer also didn’t pay an end-of-year bonus that she anticipated. Adele’s actual house-
hold income for the year was $16,000. This income would make her eligible for Medicaid under her
state’s eligibility rules. However, based on Adele’s projection of income when she enrolled in Marketplace
coverage the Marketplace determined that she was not eligible for Medicaid. Therefore, Adele is treated
as not eligible for Medicaid for the year and may be eligible for the PTC.

How does the taxpayer get the APTC?

During enrollment, the taxpayer projects household income and family composition. The Marketplace veri- fies this information through various data sources, including prior year tax information, Social Security Administration data, and state-level wage data. Using all of this information, the Marketplace estimates the amount of PTC a taxpayer will be able to claim. The estimated PTC is the maximum amount of APTC for which the taxpayer is eligible.

Taxpayers may choose to:

• Have some or all of the APTC paid to the insurance company to lower what is paid for monthly premiums; or

Pay all the premiums and get all the benefit of the PTC when they file their tax return

The amount of APTC will appear on Form 1095-A, Health Insurance Marketplace Statement.

How is the amount of PTC determined?

The law bases the amount of the PTC on a sliding scale. A taxpayer with household income at 200 percent of the FPL for the taxpayer’s family size will generally get a larger credit to help cover the cost of insurance than a taxpayer with the same family size who has household income at 300 percent of the FPL. In other words, the higher the household income, the lower the amount of the credit. As explained earlier, FPL is based on household income and tax family size.

The PTC is the sum of the credit amount for each month. The credit amount for a month is the lesser of two amounts: (1) the monthly premium for the plan or plans in which the taxpayer’s family enrolled (enrollment premiums) and (2) the monthly premium for the taxpayer’s applicable second lowest cost silver plan (SLCSP) minus the taxpayer’s monthly contribution amount. This calculation is done on Form 8962. The applicable SLCSP premium is the premium for the second lowest cost silver plan that applies to the coverage family discussed earlier (the members of the taxpayer’s tax family enrolled and not eligible for other minimum essential coverage). If the SLCSP premium amount does not appear on Form 1095-A, or the SLCSP premium amount reported on Form 1095-A is incorrect because of a change in circumstances the Marketplace did not know about, the taxpayer must find the correct applicable SLCSP premium on either www.healthcare.gov (for taxpayers who enroll in coverage through a federally facilitated Marketplace), the website for the taxpayer’s state-based Marketplace, or by calling the Marketplace customer service. If the taxpayer must do a shared policy allocation to determine the correct SLCSP premium (because members of more than one tax family are enrolled in a single policy), the return is out of scope for the VITA/TCE programs.

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Affordable Care Act

A taxpayer’s contribution amount is a percentage of the taxpayer’s household income determined by multi- plying the taxpayer’s household income by the applicable figure (from the table in the instructions for Form 8962). The applicable figure is based on the FPL; the higher the FPL, the higher the percentage of house- hold income that is used to compute the contribution amount. The contribution amount is an annual amount because it is a percentage of household income, which is an annual amount.

The monthly contribution amount is the contribution amount divided by 12. Taxpayers with no changes in enrollment premiums and applicable SLCSP premiums for all 12 months can do a single, annual calculation to compute their PTC. See the Volunteer Resource Guide, Tab H, for instructions on completing Form 8962.

Taxpayers who have a Form 1095-A showing changes in monthly amounts must do a monthly calcula- tion to determine their PTC in Part II of Form 8962. Taxpayers who have changes in monthly amounts not shown on Form 1095-A must also do a monthly calculation to determine their PTC (for example, a taxpayer enrolled in a qualified health plan who became eligible for employer coverage during the year, but did not notify the Marketplace).

If taxpayers received the benefit of advance credit payments, they will reconcile the APTC with the amount of the actual PTC that is calculated on the tax return (more information on reconciliation is provided under How is the PTC claimed on the return, later).

The PTC is a refundable tax credit. If the amount of a taxpayer’s net PTC (the excess of PTC over APTC) is more than the amount of a taxpayer’s tax liability on the return, the taxpayer will receive the difference as a refund. If a taxpayer has no tax liability, all of the net PTC is paid to the taxpayer as a refund.

What happens if income or family size changed during the year?

Part of the PTC calculation is the contribution amount, which will be higher at a higher household income level (and lowers the amount of the credit). The FPL is based on state of residency and family size. Therefore, a taxpayer’s PTC for the year will differ from the APTC payment amount estimated by the Marketplace if the taxpayer’s family size or household income as estimated at the time of enrollment is different from the family size or household income reported on the return. The more the family size or household income differs from the initial projections used to compute the APTC payments, the more signifi- cant the difference will be between the advance credit payments and the actual credit.

Taxpayers should notify the Marketplace about changes in circumstances when they happen, which allows the Marketplace to update the information used to determine the expected amount of the PTC and adjust the APTC payment amount. This adjustment decreases the likelihood of a significant difference between the advance credit payments and the actual PTC. Changes in circumstances that can affect the amount of the actual PTC include:

• Increases or decreases in household income

• Marriage

• Divorce

• Birth or adoption of a child

• Other changes in household composition

• Gaining or losing eligibility for government-sponsored or employer-sponsored health care coverage

• Change of address

health care coverage • Change of address If the taxpayer is currently enrolled in Marketplace

If the taxpayer is currently enrolled in Marketplace coverage and has a 2017 repayment, they should contact the Marketplace to adjust their 2018 APTC now to avoid similar repayments for the 2018 tax year.

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What documentation will taxpayers receive to claim the PTC?

By January 31 of the year following the year of coverage, the Marketplace will send Form 1095-A to taxpayers who purchased insurance through the Marketplace. The information statement includes the monthly premium for the applicable SLCSP used to compute the credit, the total monthly enrollment premiums (the premiums for the plan or plans the taxpayer and his or her family members enrolled in), the amount of the APTC payments, the SSN and names for all covered individuals, and all other required information. The Marketplace also reports this information to the IRS.

Use the information on Form 1095-A to compute the taxpayers’ PTC on their tax returns and to reconcile the advance credit payments made on their behalf with the amount of the actual PTC on Form 8962. If Form 1095-A was lost or never received, the taxpayer must contact the Marketplace. These forms can be down- loaded by taxpayers through their Marketplace account. Volunteers cannot prepare a return without this information.

How is the PTC claimed on the tax return?

Taxpayers claim the PTC on the tax return. Taxpayers who received the benefit of APTC payments must file a tax return even if they otherwise are not required to file. Remember, the PTC is only available to taxpayers who purchased health coverage through the Marketplace for themselves or a tax family member.

A taxpayer computes the amount of PTC on Form 8962 and reconciles it with the APTC payments for the year. If the PTC computed on the return is more than the APTC payments made on the taxpayer’s behalf during the year, the difference will increase the refund or lower the amount of tax owed. This will be reported in the Payments section of Form 1040, 1040A, or 1040NR. If the APTC payments are more than the PTC (excess APTC), some or all of the difference will increase the taxpayer’s tax liability and result in either a smaller refund or a balance due. This will be entered in the Tax and Credits section of the return. Taxpayers with household income below 400 percent of the FPL for their family size may be allowed a limitation on their excess APTC repayment. The limitation is based on the taxpayer’s household income as provided in the repayment limitation table, below.

Repayment Limitation Table

Household Income Percentage of Federal Poverty Line

Limitation Amount for Single

Limitation Amount for all other filing statuses

Less than 200%

$300

$600

At least 200%, but less than 300%

$750

$1,500

At least 300%, but less than 400%

$1,275

$2,550

400% or more

No limit

No limit

For taxpayers who use the Married Filing Separately filing status, the repayment limitation above applies to the spouses separately based on the household income reported on each return. There are situations where the cap does not apply, such as an individual who is taking the health coverage tax credit (out of scope) and APTC granted to an individual not lawfully in the U.S. Refer to Instructions for Form 8962 for additional information.

Taxpayers who chose to forego the full amount of advance credit payments will get all of the benefit of their

PTC on their tax return. This will either increase their refund or lower the balance due.

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example Brandon is single with no dependents. When he enrolled through the Marketplace, Brandon was
example
Brandon is single with no dependents. When he enrolled through the Marketplace, Brandon was
approved for advance credit payments based on his projected household income. Brandon’s Form
1095-A shows advance credit payments of $1,486. Brandon’s actual modified AGI is more than 400
percent of the FPL for a family of 1 (see the Volunteer Resource Guide, Tab H). Since Brandon’s house-
hold income is above 400 percent of the FPL, he may not claim any PTC. In addition, Brandon is not
allowed a repayment limitation. Brandon must increase his tax liability by the amount of his advance
credit payments. He will complete Form 8962 and enter $1,486 on the excess advance premium tax
credit repayment line on his tax return.
premium tax credit repayment line on his tax return. EXERCISES (continued) Question 10: Pedro is retired

EXERCISES (continued)

Question 10: Pedro is retired and covered by Medicare. His wife Camilla is too young for Medicare. Both are U.S. citizens. Even though Pedro is on Medicare, can Camilla get a PTC if she enrolls in

coverage through the Marketplace (and is otherwise eligible for a PTC)?

Question 11: You are completing the return for Antonio, who purchased health coverage through the Marketplace and received the benefit of APTC. In completing Form 8962, you note that Antonio’s MAGI is 401 percent of the FPL and the calculation shows that he has to repay the entire APTC. Assuming

that Antonio would be entitled to an IRA deduction if he made an IRA contribution, can Antonio reduce his

2017 MAGI for the PTC calculation even though it is now 2018 and his 2017 tax year has ended? ¨ No

Question 12: Piper’s income is 300 percent of the FPL for her family size. She purchased health insur-

ance through her employer. Is Piper eligible to take the PTC for her coverage?

Question 13: Harry purchased insurance through the Marketplace. What form will he receive from the Marketplace to prepare his tax return?

A. Form 8962

B. Form 1095-A

C. Form 8965

D. Form W-2

Question 14: Roger’s APTC payments are $2,500. He is single with no dependents, and lives in Mississippi. On Form 8962, he calculates an actual PTC of $1,000. His household income is over 300 percent of the FPL but under 400 percent of the FPL for a family size of one. How much of the excess APTC will be included as an additional income tax liability on his tax return?

A. $0

B. $1,275

C. $1,500

D. $2,550

Question 15: Judy is single with no dependents. In December, Judy enrolled through the Marketplace in a qualified health plan for the following year. On July 14, Judy enlisted in the Army and was immedi- ately eligible for government sponsored minimum essential coverage. For what period is Judy able to claim a PTC (if she meets all of the eligibility criteria)?

A. The entire tax year

B. January through June

C. January through July

D. Judy is not eligible for the PTC

¨ Yes

¨ No

¨ Yes

¨ Yes

¨ No

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What about unusual situations?

This lesson does not cover all the situations you may encounter. For situations listed below, consult the instructions for Form 8962 and Publication 974.

What if taxpayers receive more than one Form 1095-A?

There is only one PTC calculation on Form 8962. Refer to the Volunteer Resource Guide, Tab H, for instruc- tions on how to enter multiple Forms 1095-A in the software.

What if taxpayers have a shared policy purchased through the Marketplace?

If a taxpayer is enrolled, or has a family member who is enrolled, in a policy with a person not in the taxpayer’s tax family (a shared policy), the taxpayer may have to allocate the items on Form 1095-A (the enrollment premiums, the premium for the applicable SLCSP, and the advance credit payments) with another taxpayer (a shared policy allocation). The following taxpayers may have to do a shared policy allocation:

• Taxpayers who got divorced or legally separated during the tax year

• A taxpayer who claims a personal exemption deduction for an individual enrolled in a policy with a member of another tax family

• A taxpayer who receives a Form 1095-A that includes an individual claimed as a personal exemption by another tax family

A taxpayer who files a separate return from his or her spouse

Taxpayers complete the shared policy allocation on Form 8962, Part IV. This is out of scope for the VITA/ TCE programs.

What about an individual the taxpayer enrolled for whom no taxpayer will claim a personal exemption?

If the taxpayer indicated to the Marketplace at enrollment that he or she would claim the personal exemp-

tion for an individual (including him- or herself) but no taxpayer claims a personal exemption for the indi- vidual, the taxpayer must report any APTC paid for that individual’s coverage. See the instructions for Form 8962 and Publication 974 for more information.

What if taxpayers get married during the year?

If taxpayers got married during the tax year and one or both spouses received the benefit of APTC payments for the year, the spouses may be eligible to use an alternative calculation to determine their excess advance credit payments. The alternative calculation can be used to reduce excess APTC, but not to increase net PTC. See the instructions for Form 8962 for eligibility. If eligible, taxpayers will complete Form 8962, Part V, Alternative Calculation of Year of Marriage. This is out of scope for the VITA/TCE programs. If the taxpayers do not have excess APTC, they cannot use the alternative calculation and the return remains in scope.

What about individuals not lawfully present?

A PTC is not allowed for the coverage of an individual who is not lawfully present in the United States. All

APTC paid for an individual not lawfully present who enrolls in a qualified health plan must be repaid. If a member of the family is not lawfully present and is enrolled in a qualified health plan with family members who are lawfully present for one or more months of the year, use the instructions in Publication 974 to find out how much APTC, if any, must be repaid. If all family members enrolled in a qualified health plan are not lawfully present, all APTC must be repaid. There is no repayment limitation on excess APTC attributable to the coverage of an individual not lawfully present in the United States. Complete Form 8962 as directed in

Publication 974.

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Summary

Summary

The Affordable Care Act addresses health insurance coverage and financial assistance options for individuals and families, including the PTC. It also includes the individual shared responsibility provision and coverage exemptions from that provision.

In general, individuals must have MEC for each month, qualify for a coverage exemption, or make a payment when filing his or her federal income tax return. Some coverage exemptions are granted only by the Marketplace, and some exemptions can be claimed only on a tax return.

Only taxpayers who purchase MEC through the Marketplace for themselves, their spouse, or their depen- dents are allowed a PTC. Eligible taxpayers may choose to get the benefit of advance credit payments, the amount of which is based on their estimated PTC, to reduce the cost of monthly premiums. Taxpayers who chose to forgo advance credit payments get all of the benefit of the PTC when they claim it on the tax return. The PTC is calculated and the advance credit payments are reconciled on Form 8962. Taxpayers will receive Form 1095-A from the Marketplace, which will contain the information necessary to complete Form 8962.

Taxpayers who have MEC all year will indicate this on Form 1040 by checking the box in the Other Taxes section. The PTC is claimed in the Payments section of Form 1040. Any excess APTC that must be repaid is entered in the Tax and Credits section of the Form 1040.

Coverage exemptions are claimed on Form 8965.

Any SRP is entered on Form 1040, in the Other Taxes section. Taxpayers can use the Shared Responsibility Payment Worksheet in the instructions to Form 8965 to figure the amount of the SRP due or allow the software to make the calculation.

What situations are out of scope for the VITA/TCE programs?

The following are out of scope for this lesson. While this list may not be all inclusive, it is provided for your awareness only.

• Self-employed health coverage deductions

Form 8962 Part IV, Allocation of Policy Amounts, and Part V, Alternative Calculation for Year of Marriage

• Individuals eligible for the health coverage tax credit

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EXERCISE ANSWERS Answer 1: Yes. Employer-sponsored coverage is generally minimum essential coverage. If an employee
EXERCISE ANSWERS
Answer 1: Yes. Employer-sponsored coverage is generally minimum essential coverage. If an
employee enrolls in employer-sponsored coverage that provides minimum value for himself and his
family, the employee and all of the covered family members have minimum essential coverage.
Answer 2: No. They do not have to be covered under the same policy or plan. However, they must all
have minimum essential coverage or qualify for a coverage exemption, or Keith and Kathy will owe an
SRP when they file a return.
Answer 3: Yes. Retiree health plans are generally minimum essential coverage.
Answer 4: Yes. Employer-sponsored coverage is minimum essential coverage regardless of whether
the employer is a governmental, nonprofit, or for-profit entity.
Answer 5: Yes. Because Jessie will claim her own exemption, she is responsible for her own coverage.
Answer 6: Yes. Jessie’s parents would be entitled to claim Jessie if she does not provide more than
half of her own support and would therefore be responsible for her coverage.
Answer 7: Yes. Randy is eligible for the short coverage gap exemption because he was without cover-
age for less than three months.
Answer 8: No. Hank’s gross income is below the filing threshold for a dependent with earned income
so his parents will not include his MAGI in the Household Income for ACA purposes.
Answer 9: Yes. Hank’s income is now above the filing threshold for a dependent with earned income,
so his parents will include his MAGI in the Household Income for ACA purposes.
Answer 10: Yes. Camilla is eligible for a PTC if she enrolls in coverage through the Marketplace (and is
otherwise eligible).
Answer 11: Yes, Antonio can make a deductible IRA contribution up until April 17, 2018.
Answer 12: No, the coverage must have been purchased through the Marketplace.
Answer 13: B. Form 1095-A.
Answer 14: B. $1,275. Roger received a $1,500 overpayment of APTC. However, his repayment is
limited to $1,275.
Answer 15: C. Judy is eligible for the PTC from January through July.

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Affordable Care Act

Terms You May Need to Know

Applicable taxpayer (for purpose of premium tax credit) – A taxpayer must be an applicable taxpayer to claim the premium tax credit (PTC). Generally, an applicable taxpayer is one who has household income at least 100 percent but not more than 400 percent of the federal poverty line (FPL) for the family size, and cannot be claimed as a dependent. If the taxpayer is married at the end of the year, the taxpayer must file a joint return to be an applicable taxpayer unless an exception is met.

See also: Exception for household income below 100 percent of FPL and Exception for alien lawfully present in the United States.