AARP FOUNDATION TAX-AIDE

CALIFORNIA

COUNSELOR REFERENCE MANUAL

(CRM)

For TaxWise Online

TAX YEAR 2015

Prepared by the AARP Foundation Tax-Aide CA Training Committee The paper CRM can be ordered from the Franchise Tax Board The electronic CRM can be found at Tax-Aide for CA-2: aarpca2.org/forum Corrections? Comments? Suggestions? Send email to jebroughton (at) gmail.com

Table of Contents

January 27, 2016 i

TABLE OF CONTENTS TABLE OF CONTENTS .................................................................................................. I RESOURCES ..................................................................................................................... 1 WHAT TAX-AIDE CAN AND CANNOT DO - SCOPE .............................................. 2 ONLINE PROCEDURES ................................................................................................. 3

START OF SHIFT ...............................................................................................................3 ENTERING DATA ..............................................................................................................3 SHORTCUT KEYS ..............................................................................................................4 TOOLBAR ICONS ...............................................................................................................5 ROLES AND PRIVILEGES ...................................................................................................6 SCREEN LAYOUT ..............................................................................................................6 ADDITIONAL FORMS ........................................................................................................7 HELP ................................................................................................................................7 CONFUSING SITUATIONS ..................................................................................................7

RESEARCH A TOPIC ...................................................................................................... 8 INITIAL STEPS FOR A TAX RETURN ........................................................................ 9

INTERVIEWING THE CLIENT ..............................................................................................9 DETERMINING IF A RETURN IS REQUIRED ........................................................................9 ORGANIZING YOUR WORK .............................................................................................10 CREATING A NEW RETURN ............................................................................................10 DATA CARRY FORWARD ................................................................................................11 EDITING A PREVIOUSLY CREATED, UNFINISHED RETURN ..............................................12

MAIN INFO FORM ........................................................................................................ 12 RETURN NOTES ............................................................................................................ 18

MAIN INFO FORM ...........................................................................................................18 PREPARER USE FORM .....................................................................................................18 TAXPAYER DIARY ..........................................................................................................18 PREPARER NOTES ...........................................................................................................18 SUMMARY FORM ............................................................................................................19

INCOME ........................................................................................................................... 19 LINE 7 WAGES, SALARIES, AND TIPS ...........................................................................19 LINE 8 TAXABLE INTEREST .........................................................................................24 LINE 9 DIVIDENDS ......................................................................................................27 LINE 48 FOREIGN TAXES PAID ON INTEREST OR DIVIDENDS .......................................29 LINE 10 TAXABLE STATE INCOME TAX REFUND ..........................................................30 LINE 11 ALIMONY RECEIVED ......................................................................................30 LINE 12 BUSINESS INCOME .........................................................................................30 LINE 13 CAPITAL GAIN OR LOSS .................................................................................33 LINE 14 OTHER GAINS OR LOSSES (OUT-OF-SCOPE) ....................................................37 LINE 15/16 PENSIONS AND ANNUITY INCOME & IRA DISTRIBUTIONS .....................37 LINE 17 RENTAL REAL ESTATE, ROYALTIES, TRUSTS (LIMITED) ..................................42 LINE 18 FARM INCOME (OUT-OF-SCOPE) .....................................................................43 LINE 19 UNEMPLOYMENT COMPENSATION .................................................................43 LINE 20 SOCIAL SECURITY AND RAILROAD RETIREMENT BENEFITS ...........................44 LINE 21 OTHER INCOME .............................................................................................45 LINE 22 TAXWISE EARNED INCOME ...........................................................................49

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ADJUSTMENTS TO INCOME ..................................................................................... 49 LINE 23 EDUCATOR EXPENSES ....................................................................................49 LINE 24 CERTAIN BUSINESS EXPENSES (OUT-OF-SCOPE) .............................................49 LINE 25 HEALTH SAVINGS ACCOUNT ..........................................................................49 LINE 26 MOVING EXPENSES (OUT-OF-SCOPE) .............................................................50 LINE 27 DEDUCTIBLE PART OF SELF EMPLOYMENT TAX .............................................50 LINE 28 SELF EMPLOYED SEP, SIMPLE PLANS (OUT-OF-SCOPE) ...............................50 LINE 29 SELF-EMPLOYED HEALTH INSURANCE (OUT-OF-SCOPE) ................................50 LINE 30 PENALTY ON EARLY WITHDRAWAL OF SAVINGS .............................................50 LINE 31 ALIMONY PAID ..............................................................................................50 LINE 32 IRA DEDUCTION ............................................................................................50 LINE 33 STUDENT LOAN INTEREST DEDUCTION .........................................................51 LINE 34 TUITION AND FEES DEDUCTION .....................................................................51 LINE 35 DOMESTIC PRODUCTION ACTIVITIES (OUT-OF-SCOPE) ...................................51 LINE 35 OTHER ...........................................................................................................51

TAXABLE INCOME CALCULATION ....................................................................... 51 LINE 40 DEDUCTIONS .................................................................................................51

TAX ................................................................................................................................... 56 LINE 45 ALTERNATIVE MINIMUM TAX (OUT-OF SCOPE) ..............................................56 LINE 46 EXCESS ADVANCE PREMIUM TAX CREDIT REPAYMENT .................................56

CREDITS .......................................................................................................................... 58 LINE 48 FOREIGN TAX CREDIT ....................................................................................58 LINE 49 CREDIT FOR CHILD & DEPENDENT CARE EXPENSES ......................................58 LINE 50 EDUCATION CREDITS .....................................................................................59 LINE 51 RETIREMENT SAVINGS CONTRIBUTION CREDIT .............................................61 LINE 52 CHILD TAX CREDIT ........................................................................................61 LINE 53 RESIDENTIAL ENERGY CREDITS, ....................................................................61 LINE 54 OTHER CREDITS ............................................................................................62

OTHER TAXES ............................................................................................................... 62 LINE 57 SELF EMPLOYMENT TAX ................................................................................62 LINE 58 UNREPORTED SOCIAL SECURITY AND MEDICARE TAX ...................................62 LINE 59 ADDITIONAL TAX ON IRA, OTHER QUALIFIED PLANS ...................................62 LINE 60A · HOUSEHOLD EMPLOYMENT TAXES (OUT-OF-SCOPE) .....................................63 LINE 60B · FIRST-TIME HOMEBUYER CREDIT REPAYMENT, FORM 5405 .........................63 LINE 61 HEALTH CARE: INDIVIDUAL RESPONSIBILITY ................................................64 LINE 62 OTHER TAXES ................................................................................................65

PAYMENTS AND REFUNDABLE CREDITS ............................................................ 65 LINE 64 FEDERAL INCOME TAX WITHHELD ................................................................65 LINE 65 AND CA 540 LINE 72 - 2015 ESTIMATED TAX PAYMENTS ..................................65 LINE 66 EARNED INCOME CREDIT...............................................................................66 LINE 67 ADDITIONAL CHILD TAX CREDIT ...................................................................66 LINE 68 AMERICAN OPPORTUNITY CREDIT .................................................................66 LINE 69 NET PREMIUM TAX CREDIT ...........................................................................66 LINE 70 AMOUNT PAID WITH REQUEST FOR EXTENSION TO FILE ................................66 LINE 71 EXCESS SOCIAL SECURITY .............................................................................67 LINE 72 FEDERAL TAX ON FUELS, FORM 4136 (OUT-OF-SCOPE) ..................................67 LINE 73 CREDITS 2439 (OUT-OF-SCOPE) .....................................................................67

CA ADJUSTMENTS & DIFFERENCES ..................................................................... 67

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FILING STATUS ...............................................................................................................67 INCOME EXCLUDIBLE FOR CA .......................................................................................67 INCOME INCLUDIBLE FOR CA .........................................................................................68 DEDUCTIONS ALLOWED BY CA .....................................................................................69 DEDUCTIONS NOT ALLOWED BY CA .............................................................................69 HEALTH SAVINGS ACCOUNTS IN CA..............................................................................69 CA-ONLY CREDITS ........................................................................................................69 STATE TAX WITHHELD ..................................................................................................71 STATE ESTIMATED TAX PAYMENTS ...............................................................................71 CA USE TAX ..................................................................................................................72 CA-ONLY VOLUNTARY CONTRIBUTIONS ......................................................................72

REFUND OR BALANCE DUE ...................................................................................... 72 UNDERPAYMENT PENALTIES ...........................................................................................72 INJURED SPOUSE CLAIM .................................................................................................72 DIRECT DEPOSIT ............................................................................................................73 DIRECT DEBIT ................................................................................................................74 DIRECT PAY ....................................................................................................................74

ESTIMATED TAX PAYMENTS FOR NEXT YEAR ................................................ 75 FEDERAL ESTIMATED TAX PAYMENTS ...........................................................................75 CA ESTIMATED TAX PAYMENTS (CA 540ES WKT) ........................................................76 PRINTING BLANK ESTIMATE FORMS ..............................................................................76

FINAL STEPS IN TAX RETURN PREPARATION .................................................. 76 COMPLETE THE PREP USE FORM ....................................................................................76 CLEAR ALL WARNINGS ON THE FORMS TREE .................................................................76 RUN DIAGNOSTICS .........................................................................................................77 CREATE E-FILES .............................................................................................................77 PRE-QUALITY REVIEW ...................................................................................................78 RETURN STAGES.............................................................................................................78 QUALITY REVIEW...........................................................................................................78 REVIEW RETURNS WITH CLIENT ....................................................................................78 PRINTING RETURNS ........................................................................................................79 E-FILING: SIGNATURES AND ATTACHMENTS ..................................................................80 PAPER RETURNS .............................................................................................................82 EXITING A RETURN BEFORE COMPLETION .....................................................................82 SUBMITTING E-FILES .....................................................................................................83

UNABLE TO PAY/LATE FILING ............................................................................... 83 OTHER RETURNS ......................................................................................................... 84

PRIOR YEAR RETURNS ...................................................................................................84 AMENDED RETURNS.......................................................................................................85

REQUEST FOR EXTENSION OF TIME TO FILE ................................................... 86 END-OF-SHIFT ............................................................................................................... 87 SITE LOGS ...................................................................................................................... 88 INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER (ITIN) ......................... 88 GLOSSARY ..................................................................................................................... 90 INDEX ............................................................................................................................... 91 EDUCATION BENEFITS WORKSHEET ................................................................... 96 CALIFORNIA INCOME TAX INTERVIEW WORKSHEET ................................... 97

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Where to Mail Returns and Payments What Internal Revenue Service CA Franchise Tax Board Electronic filing with balance due (mail the payment and payment voucher ONLY)

Internal Revenue Service P.O. Box 7704 San Francisco, CA 94120-7704 (Form 1040-V)

Franchise Tax Board P.O. Box 942867 Sacramento, CA 94267-0008 (Form 3582)

Paper return with balance due (mail the signed return and the payment)

Internal Revenue Service P.O. Box 7704 San Francisco, CA 94120-7704 (1040 with 1040-V and payment)

Franchise Tax Board P.O. Box 942867 Sacramento, CA 94267-0001 (CA 540 with payment)

Paper return with nothing due or refund (mail the signed return)

Department of the Treasury Internal Revenue Service Fresno, CA 93888-0002 (1040)

Franchise Tax Board P.O. Box 942840 Sacramento, CA 94240-0001 (CA 540)

Amended return with balance due (paper filing; mail the signed return and payment) [If in response to a letter from the IRS or FTB, see below]

Department of the Treasury Internal Revenue Service Fresno, CA 93888-0422 (1040X with 1040-V and payment)

Franchise Tax Board P.O. Box 942867 Sacramento, CA 94267-0001 (CA 540X with payment)

Amended return with nothing due or refund (paper filing; mail the signed return) [If in response to a letter from the IRS or FTB, see below]

Department of the Treasury Internal Revenue Service Fresno, CA 93888-0422 (1040X)

Franchise Tax Board P.O. Box 942840 Sacramento, CA 94240-0001 (CA 540X)

Estimated payments (mail the payment and voucher)

Internal Revenue Service P.O. Box 510000 San Francisco, CA 94151-5100 (Form 1040ES)

Franchise Tax Board P.O. Box 942867 Sacramento, CA 94267-0008 (Form CA 540ES)

Automatic six month extension – no payment (mail the form)

Department of the Treasury Internal Revenue Service Fresno, CA 93888-0045 (Form 4868)

Nothing to file

Automatic six month extension – with payment (mail the form and payment)

Internal Revenue Service P.O. Box 7122 San Francisco, CA 94120-7122 (Form 4868 with payment)

Franchise Tax Board P.O. Box 942867 Sacramento, CA 94267-0008 (Form CA 3519 with payment)

Response to CP2000 letter from IRS, or letter from FTB

Mail to address specified in letter with 1040X if needed, any needed documentation, and payment as needed (if possible)

Mail to address specified in letter with 540X if needed, any needed documentation, and payment as needed (if possible)

Resources

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RESOURCES Internal Revenue Service and Franchise Tax Board

• IRS website – Publications (“Pubs”), forms, and answers to tax questions: irs.gov/ • Franchise Tax Board (State of California) website – Publications, forms, and answers to questions:

ftb.ca.gov/ • myFTB – Information on estimated tax payments made, balance due, CA wage and withholding

information: ftb.ca.gov/online/myacct/index.asp (requires prior year’s state tax information to register for an account; PIN will be sent via mail, after registration, and is required to log in)

**Do not share Volunteer Hotline numbers, below, with clients**

IRS PHONE NUMBERS M-F 6am to 5:30pm, Sat 6am to 2pm, PST

FTB PHONE NUMBERS M-F 8am to 4pm PST

Volunteer Hotline 800-829-8482 Volunteer Hotline 800-522-5665 Tax Information 800-829-1040 Volunteer Coordinator 916-845-6237 Automated Refund Info 800-829-1954 General Number 800-852-5711 Tax Forms and Pubs 800-829-3676 Automated Service 800-338-0505 ID Protection Specialized Unit 800-908-4490 ID Theft Resolution Coordinator* 916-845-3669

* CA Note: In ID theft cases, paper file the California return. The FTB will contact the taxpayer regarding discrepancies. The CA ID Theft Resolution Coordinator shoulfd be contacted only after a federal ID theft case has been set up.

TaxWise • TaxWise has a Knowledgebase (“Knowledge Library”) that can be consulted for answers to commonly asked

questions: cchsfs-taxwise.custhelp.com/ (or via TWO: click the “Help” icon on the toolbar, then enter a search term in the box at the top, the one labeled “Search Knowledge Base”, and click “Go”)

• TaxWise (CCH) has a support phone number: 1-800-411-6391. It’s open M-F 4:30am to 9pm PST, Sat 5:30 to 3pm, and Sun 10am-1pm

ACA - Covered California • Website: coveredca.com, Tel 1-800-300-1506 (TTY: 1-888-889-4500) • For determining the Second Lowest Cost Silver Plan (SLCSP) and the least expensive plan, another resource is

www.valuepenguin.com/ppaca/exchanges/ca

California (sub)State Websites • CA1: http://taxaidenorthca.org/ • CA2: http://aarpca2.org/

Reporting Lost or Stolen Equipment If the laptop computer in your custody is lost or stolen, you must report the loss/theft to your Local Coordinator AND to the AARP National Office, 800-424-2277, ext. 6021 or 6027

AARP Volunteer Information • AARP Foundation Tax-Aide counselors should NOT act on information contained in “IRS Quality Alerts.”

Tax-Aide will redistribute relevant alerts as CyberTax messages, which are automatically sent to all Tax-Aide volunteers with an email address in the Tax-Aide program database

• CyberTax messages are also at the OneSupport Help Center (go to “Communication”, then “CyberTax”) ο The OneSupport Help Center is on the Volunteer Portal (volunteers.aarp.org); for those without a login,

this is accessible at aarpfoundationtaxaide.zendesk.com/access/normal (your LC should be able to give you the generic login, which is an email address, and the password for that login)

• Volunteering with AARP Foundation Tax-Aide: direct interested persons to www.aarp.org/tavolunteer, 888-687-2277, or put them in contact with your District Coordinator or Local Coordinator

• Those interested in other AARP programs, such as Reverse Mortgages, Senior Community Service, and Money Management, should be directed to www.aarp.org; they can also call 202-434-2044

What Tax-Aide Can and Cannot Do - Scope

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• Donations: Tax-Aide volunteers cannot accept money, nor are they allowed to bring up the subject of donations with a client. ο Clients who ask about donations may send a check payable to the “AARP Foundation Tax-Aide”, to the

AARP Foundation Tax-Aide Program, 601 E Street, NW, Washington DC 20049. Ask them to write your sub-state - “CA1”, “CA2”, “CA3”, “CA4”, or “CA5” - on the memo line of the check.

WHAT TAX-AIDE CAN AND CANNOT DO - SCOPE In general • The AARP Foundation Tax-Aide Program is limited in scope. Our mission is to provide high-quality free

income tax assistance and tax form preparation to low and moderate-income individual taxpayers, with special attention to those ages 60 and older.

• The National Tax Training Committee (NTTC) of the AARP Foundation publishes a comprehensive list of which federal tax forms are in-scope and which are out-of-scope. The list can be downloaded from the Volunteer Portal (volunteers.aarp.org; login required) > OneSupport Help Center > Tax Training > Scope, or from the CA2 website. Each site should have a printed or electronic version of this document for reference. ο Note: Pub 4012 also has a “Scope of Service” section (pages 8 through 10. Do not use this; it differs

slightly from the NTTC (AARP) list. (Where the two differ, this manual will specifically state that the NTTC-defined scope should be followed.)

• “Out-of-scope” can have one of two consequences: ο If the issue involves something that is optional – for example, claiming moving expenses (Line 26 of the

1040), then the client has a choice: Don’t take that option (almost always this will be claiming a credit or a deduction), and have Tax-Aide

prepare the return, for free. If the client chooses this option, document the decision at the bottom of the Summary form

Use a paid tax preparer, or pay for tax preparation software, in order to take the option that is out-of-scope for Tax-Aide, presumably because the dollar benefit to the client (significantly) exceeds the cost of a paid tax preparer or tax preparation software. Counselors must advise the client of this choice.

ο If the issue involves something that must be reported on a tax return, then the client must be advised that Tax-Aide cannot prepare the return.

Critical issues The Tax-Aide program only does individual tax returns (Form 1040), not tax returns for partnerships or corporations, or any other type of tax return. • Regardless of training and/or certification, if a counselor is not confident in their knowledge of forms or issues

relating to a client’s return, the return will not be prepared or reviewed by that counselor. • When volunteers are not certain that a complete and accurate return can be prepared, clients will be referred to

another counselor or to another site, or to a paid preparer; alternatively, clients might purchase tax preparation software

• Federal or California returns that require income-splitting will not be prepared. Specifically, these are: ο MFS returns (see limited exceptions, in Married Filing Separately or Head of Household for Legally

Married Individual, below, page 15) ο RDP returns ο Innocent spouse returns

California scope • For full-year residents of California, a CA tax return (Form 540) will always be done when a federal tax return

is done, unless the client has already filed using CalFile • CA Form 540NR, for part-year residents and for those not residing in California but having income sources in

the state, is out-of-scope. ο For a client who was a non-resident for the entire year, the federal return is in-scope. If the state where the

client resided does have a state income tax, the client must be advised of his/her responsibility to file a state income tax return for that state, if a return is required for that client. Document this discussion at the bottom of the Summary form

• A site may prepare only the Federal return in cases where a CA 540NR is required to be filed IF the State Coordinator sets policy to allow this; otherwise the federal return is out-of-scope as well.

Online Procedures

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State of California forms and schedules we can prepare (with associated worksheets) • 540 ................ CA Resident Income Tax Return • 540-ES ........... Estimated Tax for Individuals • 540X ............. Amended Individual Income Tax Return • Sch A ............. Adjusted Itemized Deductions • Sch C .............. Profit or Loss from Business • Sch CA ........... California Adjustments - Residents • Sch D ............. Capital Gain or Loss Adjustment • Sch P .............. Alternative Minimum Tax and Credit Limitations (Page 2, Section B1 – certain credits, only) • Rent wksht ..... Non-Refundable Renters Qualification Record • 3506 ............... Child and Dependent Care Expenses Credit (non-refundable) • 3514 ............... Earned Income Tax Credit (new in 2015) • 3519 ............... Payment Voucher for Automatic Extension (only if payment is due) • 3532 ............... Head of Household Schedule (new in 2015) (replaces 4803e) • 3567 ............... Installment Agreement Request • 3582 ............... Voucher for E-filed Returns • 3805P ............ Additional Taxes on Qualified Plans and Other Tax-Favored Accounts (Part I only) • 593 ................. Real Estate Withholding Statement • 5805 ............... Underpayment of Estimated Tax (only to eliminate penalty) • 8453 ............... • 8879 ............... E-file Signature Authorization All other California tax forms are out-of-scope. • When the CA state return has a form or schedule that is out-of-scope, refer the client to a paid preparer for

BOTH the federal and state return; alternatively, the client might purchase tax preparation software. ο Exception: CA Schedule S, Other State Tax Credit, is out-of-scope; however, if the client decides to not to

claim credit for taxes paid to the other state(s), then Schedule S is not needed and Tax-Aide can prepare both the federal and state returns.

ONLINE PROCEDURES START OF SHIFT • Verify that you are connected to the Internet • Open TWO in your preferred browser, either Chrome [cannot be used for 2013 or 2012 tax returns] or Internet

Explorer (IE) ο Preferably this is done from a browser bookmark or from a shortcut on the computer’s desktop screen ο If necessary, type in the URL: twonline.taxwise.com

• Log in to TWO with your site’s ClientID (six digits) plus your username and password • Maximize the screen:

ο For IE, click the box at upper right, then press the F11 key. This will maximize the IE window by hiding the Windows toolbars. Pressing F11 again will toggle the toolbars back on

ο For Chrome, on a Mac, hold down the shift key and click the green “Maximize” button (upper left) Clicking again on the green “Maximize” button will toggle the toolbars back on

ENTERING DATA • TaxWise often has several ways to perform a given function; you need to decide which is most convenient for

you (for example, whether to use the mouse or a shortcut key) • Enter all dates in the format mmddyyyy (note, four digits for the year). TaxWise will insert the slashes. • Amounts can be entered with or without cents

ο If entering a dollar amount without cents, round up for 50 to 99 cents, round down for 1 to 49 cents.

Online Procedures

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If you add two or more figures to the amount to enter on a line (you should do this with a Scratch Pad), include cents when entering the figures; round only the total.

ο If you prefer, or are directed by your LC, enter the cents and let TaxWise do the rounding • Turn on Caps Lock on your keyboard so that all text is with CAPITAL LETTERS • Do not use any punctuation on TaxWise forms except where specifically noted as being required

ο Commas, ampersands, slashes, and periods are not allowed ο Double spaces are not allowed

• When a pick list of values is available for a field, highlight the field and click the drop down arrow to display the list and then click on the value you want ο Verify that result is as desired

• Linking is accomplished by using the F9 key or clicking on the icon to the right of the field, then clicking on the chain icon, then on the existing or new tab, as applicable, and on the form that is wanted

• Inserting or deleting rows is done by clicking in the row to be deleted/added and pressing CTRL+I or CTRL+R, respectively. (This is available in statements and worksheets only, not in IRS or FTB forms.)

• When you create a Scratch Pad, be sure to fill in the “Description” field at the top of the form. This is important because when the form is printed, it may be difficult to understand what it is related if there is no description.

• The cursor can be located by noting the darker shade of gray in the field • Understanding the colors of the fields in TaxWise is important. The colors are one of two schemes:

ο With High Contrast Color Scheme (in the TWO toolbar: Settings > Display > Use High Contrast Color Scheme):

Yellow – calculated entries or linked to another form Light gray – non-calculated entries Dark blue – overridden entries Orange with (double) red underline – required entry or validation Solid red – data entry error

ο Without High Contrast Color Scheme: Light gray with green underline – calculated entries or linked to another form Light gray with black underline – non-calculated entries Light gray with blue underline – overridden entries Light gray with red underline – required entry or validation Solid red – data entry error

• When a field or button has been designated as entry required or validation required, it may be necessary to remove the estimation (clear the red first), then enter the appropriate data ο Use F3 or CTRL+Spacebar to remove the red

SHORTCUT KEYS The following are shortcut keys used in TWO:

Moving within a form or between forms

Key(s) Action Ctrl+E Jumps to the next required (red) entry Enter or Tab Next entry Shift+Tab Previous entry Home or Ctrl+UpArrow First character in entry End or Ctrl+DnArrow Last character in entry Ctrl+PageDown Next form in the Forms Tree Ctrl+PageUp Previous form in the Forms Tree

Other shortcut keys

F1 Opens TWO Help in a new browser tab Shift+F1 Opens TWO Help in a new browser window F3 or Ctrl+Spacebar Toggles the red on and off in a field (required/not required)

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F8 or Ctrl+Enter Toggles Override * F9 Links a field to an associated form F11 Minimizes/maximizes the Internet Explorer window for TWO Ctrl+I Inserts a row Ctrl+R Removes a row on multi-line statement or worksheet

When not on a line, refreshes the page Alt+Lg“+” (to the right of the 10-key pad) When in a numeric input field, brings up calculator Ctrl+C For tax year 2015, copies a highlighted section of text. For

prior years, closes the active return Right-click, then “Copy” Copies a highlighted selection of text Ctrl+X (or right-click, then “Cut”) Cuts a highlighted selection of text Ctrl+V (or right-click, then “Paste”) Pastes the text selection at the mouse cursor point

* The Administrator for a site has the capability to prevent users from doing any overrides. • In most input fields, right clicking will bring up a menu of operations, such as cut, copy, and paste • Normally, moving around forms in TWO is with the Tab key, mouse pointer, or the Enter key

ο PgUp and PgDown keys scroll with a form ο The scroll bar on the right-hand side of the form can also be used to go up or down in the form

• Note that the link icon next to certain fields provides functionality based on the field that you are in. From left to right, the choices are: ο Link choices – provides list of Existing or New links that can be created for

the field ο Estimated – provides a toggle to make the field required/non-required ο Calculator – provides a calculator for the field ο ? – provides context sensitive help for the field

TOOLBAR ICONS • The toolbar icons that are visible depend on context. You see one set of icons if you are not in a return and

another set if you are in a return. Which icons are visible also dependent on the role(s) you are assigned (see next section).

• The screen shots below are from the TWO current year production site, which has a blue background. Prior year production sites will have other color backgrounds: burgundy, tan (brown), or purple.

• In many cases, the meaning of an icon is self-evident. Here’s information about other icons: ο Blog – opens the TaxWise Online blog ο Help – opens the Help Center page ο Hot Topics – takes you to the TaxWise Support Site ο Live Chat – lets you participate in a chat with a TaxWise support person, about software issues, not

questions related to a specific tax return. Do not use Live Chat unless you have first checked with your LC. (Available 6:00 a.m. to 3:00 p.m. PST Monday through Saturday during tax season.)

ο Return Query – A way to search for a specific tax return; unlike the “Search Returns” search box, you can specify a tax year other than the current year.

ο Return Summary – shows selected information about the current return, including the return stage. ο Settings – allows you to choose screen display settings ο Switch To Interview – not to be used for real returns, because it creates unused forms that can impede e-

filing. It may be used for training. ο Taxpayer Diary - a place for notes by the preparer, reviewer, or ERO, for the return that is currently open

• COUNSELOR NOT IN A RETURN

• COUNSELOR IN A RETURN

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ROLES AND PRIVILEGES • Counselors are normally assigned one of three roles in TWO, by the DC, TC, or LC: ReturnPreparer, Reviewer,

or SuperUser. In addition, all counselors should be assigned another roles [new in 2015]: ReturnPrinter. Most counselors will be assigned the ReturnPreparer role

• The toolbar choices available for these three roles are listed in the following table (for other roles, refer to the “User Roles” section of the TWO User Guide):

Tasks that can be done via toolbar icons ReturnPreparer Reviewer SuperUser

Start a new return Yes – all three roles Open an existing return Your own All All Submit e-files No No Yes View Acks 1 No Yes Yes Return Query – see list of returns Your own All All TWO Reports No Yes Yes Change Program Settings 2 Subset Subset Subset

1 Acks (acknowledgments), from the IRS and FTB, report whether returns were accepted or rejected. 2 Only the Administrator or counselor with Administrator privileges has full access to all Program Settings • All three roles can use the following icons: Live Chat (Tech Support), Help, Blog, Hot Topics, and Log Out

SCREEN LAYOUT When you’re in a return, the normal layout of your screen is a left and a right panel.

Left Panel • You can hide the left panel (which expands the work area) by clicking the double left-right arrowheads at the

top, between the left panel and the main working area • Refund Monitor – if activated, shows federal AGI and refunds or amounts owed on the current return

ο Make visible or not visible by clicking the double caret in the Refund Monitor title bar ο Clicking on the Check Return Status link will open a window with the Return Summary

• Functions at or just below the Loaded Forms title bar ο Left and right green arrows next to Loaded Forms –moves you up or down in the Forms Tree ο Add – opens the “Add a form” dialog, to add a form to the Forms Tree and put that form into the work area This is the same as clicking the Forms List icon on the toolbar

ο Print Form –lists all forms on the Forms Tree and allows you to print just one form ο Delete – lists all forms in the Forms Tree and allows you delete one

• Loaded forms (Forms Tree) ο Provides listing of forms that have been pre-loaded and added ο Highlights the form currently in the work area on the right side of the screen ο Identifies status of forms listed: Yellow exclamation mark and form name is red - form is incomplete Green check mark and form number is green - form is complete Blank - form available in the Forms Tree, but not necessarily required

• Use caution as not all forms will be visible; use the scroll bar to move down/up the Forms Tree • “+” and “×” next to a form

ο Clicking “+” adds another copy of the existing form to the Forms Tree ο Clicking “×” deletes the form (there will be a confirmation dialog box)

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Right Panel - TaxWise Work Area • Displays the current form (which is also highlighted in the Forms Tree) • Context sensitive help for a field is activated by clicking the arrowhead on the right of the field

ADDITIONAL FORMS

• All normally required forms have been preloaded on the Forms Tree – look there first if a form is needed

• Additional forms can be accessed in three ways: ο On the toolbar, clicking on the Forms List icon ο In the Forms Tree title bar, clicking on the Add icon ο By clicking on the “+” in the Forms Tree next to the form

you wish to add (if such a form is already on the Forms Tree)

• The first two methods open a search box that lets you enter part of the name of a form. You will then see a list of forms whose name contains the text that was typed. For instance, typing “1040” will display Form 1040, Form 1040A, Form 1040 worksheets, etc. (If you can’t find the form, it is probably already on the tree.) ο Or, you can click the “Show all forms” link to list all

available forms • As forms are added, they are included on the Forms Tree

ο If left unused, an added form will be deleted from the Forms Tree when the return is closed, and may need to be re-added

HELP • TaxWise Online has three help features:

ο Contextual help, for a specific field, can be accessed by clicking the arrowhead to the right of the field, then clicking on the help icon (a question mark within a circle).

ο The CCH TaxWise User Manual, with a table of contents, index, and search functionality, can be accessed by pressing F1 while in a tax return.

ο General help can be accessed by clicking the Help icon on the toolbar. This takes you to the Help Center, where you can access a variety of help resources, such as Program

Help, State Help, User Guide, IRS and State forms and publications, and business codes. • To get back to the return you were working on, from either the User Manual or Help Center, close the browser

tab or click on the browser tab for the tax return in TWO • CA Note: For help with the CA forms within TWO, click the Help icon, then State Help, then California

CONFUSING SITUATIONS If TWO “Hangs Up” • Usually, TWO will switch forms and update fields fairly rapidly • When Loading form is displayed for an extended time, the situation is commonly referred to as a Hang-Up • If this condition lasts for more than 15 seconds, the procedures to use to recover, in the order they should be

used: ο Press the F5 key to reload the form ο Press the Backspace key in Internet Explorer ο Close the return and then re-open it ο Log out of TWO and log back in ο Close Internet Explorer (or Chrome) and re-start it, then go TWO ο Close TWO and restart the computer

Linking from a yellow field that has a default form Some fields may be linked to another form by default (for example, line 1 of Sch C Pg 1 is linked to 1099 MISC by default). If you need to link to a Scratch Pad, you must link by clicking the arrowhead on the right

Research a Topic

January 27, 2016 8

side of the form and then selecting the Scratch Pad. It is not necessary to remove an existing link before adding a new one.

Field is yellow resulting from linking in error Follow the link to the form and delete it by clicking the “×” next to the form in the Forms Tree Close the return and re-open it to restore the field to its pre-error condition

Taxable Income is positive but there is nothing below line 43 on 1040 Pg 2 For taxpayers in the 10 and 15 percent tax brackets, capital gains and qualified dividends are taxed at a rate of zero. If the total of capital gains and qualified dividends is greater than the taxable income shown on line 43, all the entries below line 43 may have a zero value, with zeros not being printed. (Clue: on line 44, “Schedule D Tax Worksheet” is checked.)

Unintentional override If you make an entry in a field, and then link from that field, the field is automatically overridden and the original entry will remain - the link entries from the subordinate form will not show. As a ReturnPreparer, you will have to get help from a user with a role that allows them to un-override that entry, for example a SuperUser or a Reviewer. Your Local Coordinator can identify those counselors.

Linking When you link to a form, you may not see any forms to link to in the dialog box. That is because you are on the wrong tab – there is an Existing tab and a New tab. If the form you want hasn’t been preloaded, you will have to click the New tab. If you want to go to an existing form, click the Existing tab.

Saving Data • TWO automatically updates and saves the data as it is entered • TaxWise auto-refreshes the screen at each entry

ο If Classic Mode display is used, the auto-refresh feature is disabled (it refreshes when you go to another form or close the return); still, the input is saved on the central computer servers

• Any time the program freezes or “hangs up” (see above), you should go back over your last few entries, once the problem has been dealt with to make sure that the data was saved properly

Restoring Deleted Returns • Multiple returns can be restored using the “Restore Returns” feature • If the SSN for a deleted tax return is entered in the New Return dialog box, TaxWise will advise that there is a

deleted return and give the option of opening that deleted return

RESEARCH A TOPIC Recommended steps for researching a topic that you’re not familiar with • Question the client thoroughly to obtain all relevant facts, while reviewing their Intake/Interview form and the

related tax form(s) • Begin with Pub 4012 (you should have the 2015 paper version, three-hole punched), which provides

information for most common questions, including questions related to TaxWise, in an easy-to-use format. (updates are in the December 2015 version of 4491X)

• Review what this manual recommends (if you’re reading the paper version, remember that you can search the electronic version – the location is on the cover of this manual – as well as use the paper index at the end of this manual).

• Consult the instructions for the relevant form (Help Center [toolbar icon] > IRS Forms, or Help Center > State Tax Sites)

• For federal tax questions, consult Pub 17 – use a key word search in the electronic version or, in the paper version, start in the index looking under a main heading first and then a subheading.

• For California tax questions, consult one of these FTB Pubs: ο 1001, Supplemental Guidelines to California Adjustments ο 1005, Pension and Annuity Guidelines

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9 January 27, 2016

• For California aspects of TaxWise, the relevant FTB Pub is 5130, VITA/TCE California Volunteer Reference Manual

• Ask a more experienced counselor • Search the OneSupport Help Center, at the Volunteer Portal (volunteers.aarp.org); for those without a login,

this is accessible at aarpfoundationtaxaide.zendesk.com/access/normal (your LC should be able to give you the generic login, which is an email address, and the password for that login)

• Use one of the Volunteer Hotlines listed above, page 1

INITIAL STEPS FOR A TAX RETURN INTERVIEWING THE CLIENT Note: Some of this may have been done by a Client Facilitator (CF) • Verify the client’s identity (government-issued photo ID) and Social Security number • Review the client’s Intake/Interview form • Explain the tax preparation process, particularly responsibility of the client, and that a separate QR is done • Confirm information provided by the client on the Intake/Interview form

ο Complete the dependent information on page 1 as applicable ο Complete the health insurance information on page 3 (annotate answers for reviewer)

• Get client to provide any information that they might have missed on the Intake/Interview form ο Write that down on the form, preferably in a different color

• Review all supporting documentation, such as SSA-1099 forms, Form W-2s, and Form 1099-Rs, and place these in the order they will be used

• Make sure that client isn’t expecting any additional documentation, such as a Form 1099-INT, a Form 1099-DIV, or a broker’s statement

• Review last year’s return, if available, to see if the supporting documents for the current year are consistent with the dollar amounts on the prior year’s return. If not, ask the client about the differences.

• Make sure that no item is out of scope

DETERMINING IF A RETURN IS REQUIRED • Tab A of Pub 4012 covers who must file

ο Form 9452, Filing Assistance Program (Do you have to file a Federal Income Tax Return?) is out-of-scope; do not prepare this for a client.

• Chart D of Tab A lists who should file, even though they have no requirement. The most common situations are: ο To get a refund of federal and/or state income taxes withheld (for example, on a Form W-2 of a dependent) ο The client qualifies for an income-based refundable credit: federal EIC, California EITC, American Opportunity

Credit, etc. • If the client is not required to file, and is agreeable to not filing, record the client as a Q&A on the daily Activity

Log. ο The IRS is no longer recommending that people file for the purpose of reducing identity theft; such filing

makes it more difficult to identify truly fraudulent returns. • If the client must file, and has a dependent who is old enough to work, ask about any earned income for that

dependent. The dependent may be required to file separately (see page A-2 of Pub 4012). • If the client must file, and has one or more dependents, ask about any unearned income

ο If a child under the age of 18 has more than $2,100 of unearned income, the child is subject to the “Kiddie Tax”. Both Form 8814, to pay this tax on the parent’s tax return, and Form 8615, to pay this tax on the child’s tax return, are out-of-scope; the client needs to use a paid tax preparer or purchase tax preparation software. Unearned income includes all taxable income other than earned income: taxable interest, pension and

annuity income, etc. For the purposes of determining whether the Kiddie Tax applies, “unearned income” also includes taxable scholarship and fellowship grants not reported on a Form W-2.

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January 27, 2016 10

ORGANIZING YOUR WORK • Putting documents in good order and keeping them that way through the entire process can reduce errors • While or after interviewing the client, sort all supporting documents by type, into the following sequence, if a

Client Facilitator has not already done this: Supporting Document or Form Entered in TWO Form

Last year’s tax return Main Info Social Security cards, ID cards Main Info Income W-2s – wages W2 Broker’s statement Follow rules for 1099-INT, 1099-DIV, 1099-B,

1099-OID. Also look for broker charges that could go on Sch A, line 23

1099-INT – interest Interest Stmt 1099-DIV – dividends – foreign tax paid

Dividend Stmt 1040 Pg 2, line 48

1099-B – sale of securities Cap Gn Wkt, Sch D - if all basis reported to IRS K-1 – interest or dividends – capital gain or loss – royalty income

Interest Stmt; Dividend Stmt; 1040 Pg 2, line 48 Sch D Pg 1, line 5 (short-term) or line 12 (long-term) Sch E Pg 1, line 4

1099-S Sale of home Cap Gn Wkt 1099-G – State Tax Refund (postcard) Link from 1040 Pg 1, line 10 to St Tax Refund, and

enter on that form, unless refund is not taxable Alimony received (if any documentation, which is not required) 1040, Pg 1, line 11 1099-MISC box 1 rent Link from Sch E Pg 1, line 3 to 1099 MISC 1099-MISC box 2 – royalties related to one’s own services – non-service related royalties

Link from Sch C Pg 1, line 1 to 1099 MISC Link from Sch E Pg 1, line 4 to 1099 MISC

1099-MISC boxes 3,7 – non-employee income (business income) – non-business income

Link from Sch C Pg 1, line 1 to 1099 MISC Link from 1040 Wkt7 line 2 to 1099 MISC

1099-R / RRB 1099-R (green form) 1099R 1099-G Unemployment benefits 1099G SSA-1099 Social Security 1040 Wkt1 RRB-1099 (blue form) Railroad Retirement tier 1 1040 Wkt1 W-2G Gambling Winnings W2G 1099-C Cancellation of Debt (only credit card debt is in-scope) Wkt7, first blank line 1099-LTC - Distribution 8853 Pg 2 1098-T Taxable Scholarship 1040 Wkt1 (after all other input) Affordable Care Act 1095-A Health Insurance Marketplace Statement 8962 Marketplace Exemption Certificate Number 8965 Adjustments Alimony paid - canceled checks 1040 Pg 1, line 31 IRA contribution IRA Wkt Lender Statement Student Loan Interest 1040 Wkt2 Itemized Deductions/Credits Property tax bill, car registration or registration payment Sch A 1098 Mortgage interest Sch A Medical costs (list), charitable donations (list), miles (number) A Detail 1098-T Tuition Statement 8863 Pg 2, 1040 Wkt1, 1040 Wkt2, Sch A - maybe,

Sch C - maybe Payments and miscellaneous Canceled checks for paid estimated taxes F/S Tax Pd

CREATING A NEW RETURN • Click the New Return icon on the toolbar • The Create New Return dialog box will appear. • Enter and confirm the primary SSN for the tax return

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11 January 27, 2016

ο Note: If the primary SSN is for a deceased taxpayer, and Carry Forward data is expected to exist, see the Deceased Spouse/Taxpayer section below regarding options for creating the return.

• If Carry Forward data exists for the Social Security number from last year’s return, a Create New Return dialog box will appear that notes that prior year data exists and gives the option to “Use Carry Forward” or “Create New Return”. You would normally select “Use Carry Forward”

• Enter or click the Go to Tax Forms button • The following are acceptable by Tax-Aide as Social Security number verification when used together with a

government-issued photo ID: ο Carry Forward data from a prior year [per the AARP Foundation Tax-Aide Client Service Provider Digest] ο Social Security card Note: The Social Security Administration (SSA) may issue a card with the notation “VALID FOR

WORK ONLY WITH DHS AUTHORIZATION” – this is a valid Social Security number ο Social Security Benefit Statement, Form 1099-SSA or RRB-1099 Note: SSA documents with a redacted SSN (for example, ***-**-1234) are acceptable for Social

Security number verification, if your SC so decides. ο A letter from the Social Security Administration showing name and Social Security number ο An IRS letter or card assigning an ITIN

• Interview mode option - do NOT use for real returns ο This option should never be used for real returns, because it creates unused forms that can impede e-filing.

It may be used for training. ο In this mode, you will be led through a series of questions, which when answered will populate the Main

Info form and other TaxWise forms. ο To use the Interview mode from the beginning of a return: In the Create New Return box, after entering the

SSN (twice), click on “Go to Interview” ο You can switch between Interview and Tax Forms mode by clicking the “Switch to ...” icon on the toolbar

DATA CARRY FORWARD • Carry Forward data should exist if last year’s tax return for the client was prepared by the local Tax-Aide site

ο If it does, when the taxpayer’s Social Security number is entered to start a new return, one option will be to use Carry Forward data from last year’s return.

• With Carry Forward data, data entry is simplified because the return will be populated with information such as names, dates of birth, telephone numbers, Form W-2 employers, Form 1099-R payers, and payers of interest and dividends, from last year’s return.

• When Carry Forward data is used to fill in the return, it is recommend that the Intake/Interview form be marked “Carry Forward data” ο If a spouse has been added, or has changed, or if a dependent has been added, or an ITIN changed to a

SSN, also make a notation so the reviewer knows to look for new or changed Social Security cards or other documentation

• Be sure to check for comments on the bottom of the Main Info form, the bottom of the Prep Use form, and in the Taxpayer Diary, if that exists ο Update or remove comments as needed ο Note: The Prep Use form may not be a Carry Forward form – this depends on how the site template has

been set up by the DC, the TC, or your LC. • Only a few dollar amounts, for items such as federal capital loss carryovers, prior year’s data on the Summary

form, and the 1099R Simplified Method, are carried forward. All other dollar amounts must be entered from current year tax documents.

• The key fields that are carried forward will be red-underlined, as a reminder to review the information, either on the current year tax form, or with the client. If the information is still correct, use F3 or Ctrl+Spacebar to remove the red. If it has changed, update it as needed.

• During the tax return process, you may find that some forms are no longer needed. For example, if the client didn’t work for a previous employer during the current tax year, delete the W2 for that previous employer. ο Do not delete a TaxWise form just because there is no equivalent paper form for the current year. Ask the

client to confirm that there in fact should be no current year form – for example, that the client did not have withdrawals from an IRA where there were withdrawals in the prior year.

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January 27, 2016 12

• In some cases, lines (rows) should be deleted from a schedule - for example, a dependent is no longer to be included in the return or interest was not received this year from a payer of the prior year.

• While Carry Forward of data makes completion of the return much faster and more accurate, you need to check the return carefully to ensure that any year-to-year changes have been reflected and that unused entries or forms are not included in the new return. Otherwise, the sequence of actions to complete the return is the same as doing the return without data Carry Forward.

• Note: On several TaxWise forms, the term “proforma” is used rather than “carried forward”, and previous versions of this manual have also used the term “pro-forma”

EDITING A PREVIOUSLY CREATED, UNFINISHED RETURN • Your LC or ERO may have to assign the return to your username if the return was started by someone else • You can open a previously created return in one of three ways:

ο On the left panel, click on Active Returns, then click on the SSN of the taxpayer ο On the left panel, in the Search Returns box, type the last name of the taxpayer, then click the Search button ο On the toolbar, click on Open Return, enter the SSN of the taxpayer, and click Go to Tax Forms

• Proceed as with any other return

MAIN INFO FORM • Pub 4012, starting on page K-6, describes in detail how the Main Info form should be completed • Complete the Main Info form based on the client-completed Form 13614-C, Intake/Interview and Quality

Review Sheet, plus last year’s return and/or the carry forward information. Information about the taxpayer(s) and any dependents then flows from the Main Info form to other forms in TaxWise.

• Only after completing the Main Info form should you begin work on other forms, using the paper tax forms and other information that the client provides you, by selecting relevant forms on the Forms Tree

Name Field • The salutation field (Mr, Ms, etc.) is optional; leaving this blank is recommended • Enter Taxpayer’s first name(s), initial and last name as shown on the Social Security card, prior year return,

Social Security statement, etc. ο For returns with Carry Forward data, use the name as entered and successfully filed last year, unless the

client has notified the Social Security Administration (SSA) of a change in name (for example, because of a marriage) If the SSA has been notified, use the new name, and note the old name at the bottom of the Main Info

form ο If the client has not notified the SSA about a name change, or is unsure, use the prior name, but note the

new name at the bottom of the Main Info form ο You can use a hyphen in the Last name field

• When the return is e-filed, the IRS checks the first four characters of the last name against their records ο When the Social Security card indicates multiple names, enter all but the last in the first name field, leaving

a space between each name (for example, SAM HUNTER ALBERT) ο For some Hispanic names, the last two names may constitute the legal last name, in which case they should

both be entered in the last name field ο It is good practice to enter questionable names as shown on the Social Security card or ITIN letter in the

free-form note field at the bottom of the Main Info form, for use by the ERO in case the name rejects ο Examples of how to determine the last name of a taxpayer are in Pub 4012, on page K-12 and page K-13

• For MFJ returns, entering the spouse’s last name is required only if it is different than the primary taxpayer’s last name

• Once the spouse’s name is entered, his/her SSN will become a required field ο See Creating a New Return, above, page 10, for acceptable means of SSN verification for a spouse ο See Pub 4012, page L-3, for a spouse who needs to apply for an ITIN

• For a Deceased Spouse/Taxpayer, see that section, below, page 14

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13 January 27, 2016

Mailing Address • Name line 2 – this is used ONLY if the address requires four lines or in the case of a deceased taxpayer (see

Deceased Spouse/Taxpayer, below, page 14) • Current mailing address – enter the client’s street address (fractions allowed) or post office box CA Note: Beginning with tax year 2014, the home address line on CA 540 Pg 1 is the same length as the address line on the Main Info form. An adjustment for long addresses is no longer required in TaxWise. • ZIP code – entering the ZIP code automatically fills the city and state, but you may need to change the city if

the ZIP code is shared by multiple cities ο If you get a popup box for a new ZIP code, make sure that you have typed a valid ZIP code

• Foreign addresses are entered in a separate section lower on this form

E-Mail Address If the client has provided an email address on the Intake/Interview form, enter it here. (District or site policy may be that emails are never used to contact a client; if so, no entry needs to be made here.)

Telephone Numbers • We need a telephone number to call the client in many of the cases where the return is rejected, or where we

discover, belatedly, that there is an error in the return • The Intake/Interview form for 2015 asks only for one phone number for the taxpayer and one for the spouse.

Enter these as Daytime phone numbers, and ignore the other telephone rows on the Main Info form. • If the client does not have a phone or is unwilling to provide a number, ask if they will give us the phone

number of a friend, relative, or neighbor, “just in case”.

Birth Date • This is required for each taxpayer to calculate eligibility for various credits, the federal standard deduction, etc. • If an age-dependent credit is claimed, the IRS will check this date against the IRS’s records. • TaxWise does not validate this for reasonableness • If the client is 69 to 71 years old, review RMD requirements if they have an IRA, 401k, or similar

Occupation(s) • Complete as appropriate – RETIRED, UNEMPLOYED, and STUDENT are acceptable • DECEASED is the appropriate entry if the Taxpayer or Spouse died during or after the tax year

Taxpayer Information • Special Processing, used by the military, is out-of-scope for Tax-Aide – refer the client to a military site • Exclusion of Puerto Rico Income is out-of-scope • Determine if the taxpayer and/or the spouse qualify as blind or totally disabled

ο If so check the appropriate boxes ο A letter from a physician or optometrist should be kept by the client if this is the first time they qualify as

blind or totally disabled • If the taxpayer or spouse is deceased, see Deceased Spouse/Taxpayer, below, page 14

Presidential Election Campaign • Check the appropriate boxes if the taxpayer and/or spouse have indicated on the Intake/Interview form (page 3)

that they want to direct an amount to the Presidential Election Campaign Fund. (This has no impact on the calculations for taxes owed or refunds due.)

Filing Status • Click to select the correct filing status • If you are unsure, Pub 4012, page B-1, has a decision tree for determining filing status. Pub 501, Exemptions,

Standard Deduction, and Filing Information, is the authoritative source. ο An alternative is the IRS “Interactive Tax Assistant”, at irs.gov/uac/Interactive-Tax-Assistant-(ITA)-1

(select “What is My filing Status”) • An individual is “married” if they are married under domestic or foreign law as of December 31

ο The IRS considers someone to be married unless there is a court decree for legal separation, including separate maintenance, or the marriage is permanently dissolved by divorce or death.

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January 27, 2016 14

ο This applies equally to common law marriages which were established in a state that recognizes this type of marriage. CA Note: A common law marriage cannot be created by consent or cohabitation within California’s

boundaries; California does not recognize such situations as creating a legal marriage. But it does recognize common law marriages created in other states.

ο It also applies if the spouse resides outside of the U.S. ο A married person must file as MFJ, MFS, or HoH; he/she is not eligible to file as Single

• In the event the spouse does not have a Social Security number or ITIN, the primary taxpayer is still considered married and must file MFJ, MFS (see the Married Filing Separately section, below, page 15), or HoH ο Note: If the spouse is a nonresident alien, an election can be made for the spouse to be treated as a resident,

in which case the spouse’s worldwide income must be included in the return. If the clients wish to make this election, the return is out-of-scope and they must be referred to a paid preparer; alternatively, they might purchase tax preparation software.

• Head of Household ο A married person can file as HoH if he/she meets all five tests shown on the right side of the decision tree

on page B-1 of Pub 4012. The decision tree is also the last page of AARP Foundation’s “Resource Tool for Tax Counselors”

(laminated tri-fold), available at the OneSupport Help Center (go to Tax Training, then Tools; click on 2015 Qualifying Child Flow Charts, then, in that document, click the first link)

ο Enter a name of a qualifying person only if they are not listed as a dependent in the Dependents/Nondependents section of the Main Info form

Deceased Spouse/Taxpayer • If filing MFJ and the primary taxpayer listed on the prior year’s return is deceased, there are two choices

ο (1) If Carry Forward information is expected to be available, open the return using the Social Security number of the deceased (primary taxpayer), and use Carry Forward of the information from the prior year. Then change names and Social Security numbers on the Main Info form: the survivor becomes the primary taxpayer (is listed first) and the deceased person is listed as the spouse. Be sure to make other changes as needed: all Taxpayer and Spouse boxes on forms must be changed, especially on the top of W2s and 1099s.

ο Or (2) Start a new return listing the survivor as the primary taxpayer • Enter date of death in the appropriate field

ο If this is a joint return (based on the filing status of MFJ), TaxWise will automatically show the return as being filed by the surviving spouse

ο The date of death is matched against the IRS’s database (obtained from the SSA) – a mismatch may cause the e-file to be rejected

• When there is a deceased taxpayer, the combined name fields must not exceed 35 characters ο For example, “Jonathan & Elizabeth Smith” would be 26 characters, counting all spaces ο If the combined name field exceeds 35 characters, delete one or both middle names, abbreviate one or both

first names, and/or truncate first names ο Do not add “DECD” in a name field; TaxWise adds this automatically.

• Enter name of surviving spouse OR the name and address of person handling the estate in the Name line 2 of the mailing address ο Enter “%[space]” before the name. Failure to do so will cause a federal e-file reject.

• CA Note: Go to CA 540 Pg 1, Deceased Taxpayer or Spouse Information ο The executor / guardian information must be entered If the surviving spouse is filing the return, enter the surviving spouse’s name/number If there is only a beneficiary (acting as an executor), enter the beneficiary’s name/number Failure to complete the executor/guardian information will cause an e-file reject

ο Complete the decedent representative information If filing as a surviving spouse, TaxWise completes Decedent Representative with the survivor’s name;

check the spouse box If the filing is by someone else, an override is needed to enter the decedent representative information

ο Note: It may be necessary to override the fields to enter the information • CA Note: Go to CA 8879

ο Complete the “ERO declaration” section with the name and representative type listed on CA 540 Pg 1

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15 January 27, 2016

• Occupation: DECEASED is the appropriate entry if the taxpayer or spouse died during or after the tax year • Deceased person-signature requirements

ο A Power of Attorney (POA) expires at time of death ο A surviving spouse will sign the return and add “as surviving spouse” after their name ο A personal representative or executor will sign their own name with their title

• Form 1310 refund due a deceased taxpayer will be required if the return is filed by other than a surviving spouse and there is a refund

• Advise the client that processing time by the IRS will be longer than normal for deceased taxpayer returns.

Married Filing Separately or Head of Household for Legally Married Individual • Before considering MFS, make sure the client does not qualify as HoH, which is more advantageous

ο To be qualified for the HoH status, the person must meet all five tests shown on the right side of the decision tree on page B-1 of Pub 4012 The decision tree is also the last page of AARP Foundation’s “Resource Tool for Tax Counselors”

(laminated tri-fold), available at the OneSupport Help Center (go to Tax Training, then Tools; click on 2015 Qualifying Child Flow Charts, then, in that document, click the first link)

• Determining whether or when the “community” has ended is a difficult legal determination. If the community exists for any portion of the year, the spouses must split their community income, which itself is another difficult legal determination. Preparing a return with MFS status or HoH status when the individual was legally married during any part of the tax year is therefore very limited for the Tax-Aide program.

• Tax-Aide can prepare the return ONLY WHEN the spouses are not communicating. Additionally, all four of the following conditions must be met: ο Couple has separated, lived apart the entire year AND there was no intention to reconcile throughout the

tax year AND there continues to be such intention ο No commingling of funds ο Name and Social Security number or ITIN of spouse available (or non-resident alien) ο Approved by the Local Coordinator

• Enter the spouse's name and Social Security number on the Main Info form ο For a non-resident alien without an ITIN, the return must be paper-filed. For the federal return, on the Main Info form, under Type of Return, check “Paper” CA Note: On CA 540 Pg 5, check “No” in response to the question (just below line 115) “Do you want

to electronically file this return?” Set the return stage to “Paper file” (or similar, depending on the return stages defined at your site)

• Check the Married filing separate box and answer the questions in that section • When “Are you a resident of this community property state?” is checked, TaxWise will add 8958 to the Forms

Tree; it will be red ο Go to 8958 ο Complete the Total Income column as needed ο The Total column and the first Allocated column should be the same The headings may be confusing, but they refer to spouse-1 and spouse-2 For in-scope returns, all income must be for the client (spouse-1) There should be no entries in the column for the non-client spouse (spouse-2) for the situations we

handle • On 1040 Pg 2, line 39b, F3 the MFS box if the client is eligible to claim the standard deduction

ο If the client’s spouse is itemizing, the client cannot claim the standard deduction • MFS returns can be e-filed, except as noted above

Exemptions • Verify if someone else can claim either the taxpayer or spouse (if there is a spouse) as a dependent • Check appropriate boxes

Dependents/Nondependents • Note: This section can include individuals who are supported but do not live at the Taxpayer’s home.

Specifically, a parent doesn’t need to live with a Taxpayer in order to be the Taxpayer’s dependent, and a Taxpayer can have a child whom the Taxpayer is supporting but who lives with the other parent.

• Do NOT enter the last name if it is the same as the Taxpayer’s

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January 27, 2016 16

• Enter the youngest dependent first so that the EIC forms use the most eligible children • If there are more than four dependents:

ο Enter the first four on the Main Info form ο Make sure that those who qualify for EIC are entered first ο Go to 1040 Pg 1 and link from a dependent line to Addl Deps – Form 1040 line 6c and add the dependents ο Note: If a change is made to any of the first four listed dependents on the Main Info form, you may need to

go to the Addl Deps form and make the same change (for example, spelling of a last name) • Birth Date – enter without any slashes • Social security number – enter without any dashes

ο See Pub 4012, page L-3, for a child who needs to apply for an ITIN ο See Pub 4012, page K-8, for a child who died before receiving a SSN or ITIN

• Relationship to client – choose from the pick-list ο If an in-law, use the relationship without the in-law. For example, son-in-law becomes son.

• Mo in Hm (home) – choose number of months the dependent lived in the home from the pick list ο Use 12 for dependents who were born or died during the tax year

• Code Field – enter the appropriate code from the dropdown list ο For a noncustodial parent claiming a child who did not live with them for more than 6 months, be sure to

enter Code 2 ο Use Code 3 for a grandchild or any other dependent that is not the client’s biological child, adopted child,

or eligible foster child ο For a custodial parent that has signed a Form 8332, Release/Revocation of Release of Claim to

Exemption for Child by Custodial Parent, or who otherwise is not claiming a child as a dependent, but can claim EIC and/or HoH for that child, enter code 0

ο Also use code 0 for a child that can be claimed for EIC purposes, even though the child cannot be claimed as a qualifying child dependent because the child provided more than ½ their own support

• DC = Dependent Care Credit. Check this ONLY if the client has paid dependent care expenses for the person (this adds 2441 to the Forms Tree)

• EIC = Earned Income Credit. Always check this box for dependent children so that TaxWise opens the necessary forms

• CTC = Child Tax Credit. This is a calculated field which TaxWise will complete based on the data entered • Resources for determining a qualifying child or qualifying relative:

ο Pub 4012, Tab C, starting on page C-3 ο AARP Foundation’s “Resource Tool for Tax Counselors” (laminated tri-fold), available at the OneSupport

Help Center (go to Tax Training, then Tools; click on 2015 Qualifying Child Flow Charts, then, in that document, click the first link)

ο The Dependent Qualification Calculator at cotaxaide.org/tools ο The IRS “Interactive Tax Assistant”, at irs.gov/uac/Interactive-Tax-Assistant-(ITA)-1 (select “Who Can I

Claim as a Dependent”)

Noncustodial Parents • For a noncustodial parent to claim a dependent along with the CTC, they must have a Form 8332,

Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, signed by the custodial parent relinquishing their right to claim the dependent, unless the divorce is pre-2009

• A custodial parent can NOT give away HoH status, EIC, or the dependent care credit • A custodial parent can revoke the Release of Claim to an Exemption by completing Part III of a new Form 8332

ο The revocation is effective in the year after notice is furnished to the noncustodial parent • Form 8332 (release or revocation) or the relevant pages from the divorce decree for a pre-2009 divorce for each

child and for each year must be transmitted to the IRS ο See Using 8453 or Scanning PDF Attachments, below, page 81, for details

State Information • The default is Full Year Resident - CA • If the client was not a full-year CA resident, see the section “California scope”, on page 2, above, to determine

if the federal return is in-scope ο Note: if the client was not a full-year CA resident, then the CA return is out-of-scope

Main Info Form

17 January 27, 2016

ο If the federal return is in-scope, check the box to the right of “If you are not preparing a state return, check here”, and delete the default “CA” that appears to the right of “Full year resident”. All CA forms should disappear from the Forms Tree. Also write a note at the bottom of the Main Info form or in the Taxpayer Diary, saying there is no CA

return for this client, and why And change your Activity Reporting log to show that there will be no CA return for the client

Type of Return • The default is e-file – there should be relatively few instances where a return cannot be e-filed; only in those

instances should a paper return be prepared • If “Paper” is checked in this section, also change the CA return:

ο On CA 540 Pg 5, check “No” in response to the question (just below line 115) “Do you want to electronically file this return?”

Select Your Bank, FeeCollect, Protection Plus These sections are not used by Tax-Aide and can be locked in the TWO template setup

Bank Account Information • Generally, this section is completed after all other entries are made, since it applies ONLY IF the client has a

refund OR wants to pay the amount owed using an ACH direct debit from their bank account • See Direct Deposit, below, page 73, for detailed instructions.

Self-Select and Practitioner Pin(s) • The ERO PIN has been entered as a default • The Taxpayer’s PIN (12345) should have been entered as a default • Enter the date for the Taypayer’s PIN (should be underlined in red) • It is not necessary to remove the default PIN for the spouse if there is no spouse • TaxWise will add 8879 IRS e-file Signature Authorization to the Forms Tree, if it is not already there

Identity Verification This section is for information which can be used to reduce identity theft in state e-filing. Putting driver license or state ID information into TaxWise is voluntary for the 2015 tax year, but may help process a tax return more efficiently.

Identity Protection PIN • If a taxpayer or spouse has experienced identity theft, and has previously worked with the IRS to fix this, the

IRS will issue a CP10 letter with a PIN for filing a return - enter the PIN here. (If not entered, the e-file will reject.) ο Note: IRS letters dated January 4, 2016, incorrectly state that the IP PINs in the letters are for tax year

2014. The PINs are for tax year 2015. • Page P-4 of Pub 4012 is the “Identity Theft Job Aid for Volunteers”; it includes information about the IRS

online process for retrieving an IP PIN when the taxpayer has not received, or his misplaced, such a PIN.

Third Party Designee • This is a very limited authorization, not a power of attorney, and the client must still sign the return or Form

8879 themselves • If we have an elderly client who is accompanied by their adult child and the client seems to depend on the child

for understanding interview questions, or if there are other issues, the client may be asked if they would like to designate someone for this limited purpose ο If they agree, they will have to provide a name, phone number, and PIN, which authorizes the named third

party (for example, their adult child) to discuss the return with the IRS CA Note: Put the same information on the CA return, at the bottom of CA 540 Pg 5 (PIN is not needed)

ο A Tax-Aide counselors may never be a third party designee

Information Lines The three lines at the bottom of the Main Info form are discussed in the next section.

Return Notes

January 27, 2016 18

RETURN NOTES MAIN INFO FORM • The three lines at the bottom of the Main Info form can be used for notes to the preparer, reviewer, or ERO. • Notes on the Main Info form carry forward to the next year’s return. So if the return you are working on has

Carry Forward data, check the bottom of the Main Info form to see if there are any notes from the prior year that are relevant.

• These three lines can be used to record pertinent information regarding completion of the current year’s return. ο If you have any doubts as to what the first, middle initial, and last name are for anyone listed on the return,

record that person’s name as shown on their Social Security card. If the tax return rejects due to a name/SSN mismatch, your ERO can use this information to fix the reject, avoiding calling the client

ο If the return is not completed, list information or actions necessary to complete the return. (Alternatively, put such information into the Taxpayer Diary.)

ο Note: If three lines are not enough for the information you want to enter, put the overflow at the bottom of the Prep Use form.

• Because the Main Info form will not be accessible after the CCH contract for TaxWise ends, in 2016, do not use this form for information intended for the 2017 tax season. Use the Summary form instead.

PREPARER USE FORM • At the top of the Prep Use form are 25 numbered rows for questions and answers (up to 15 characters). These

rows can be used by local sites as they wish, except: ο Rows 10, 11 and 12 are for entry of the answers to three statistical questions The answers to 11 and 12 can be determined from the Intake/Interview form (these answers can be left

blank - use F3 to remove the red - if the client prefers not to answer) ο Row 13 is for the preparer’s initials ο Row 14 is for the reviewer’s initials – this field is required for activity report tracking

• At the bottom of the form, in the Taxpayer Reminders section, are four lines where free-form text can be entered ο Use the three lines at the bottom of the Main Info form first. Use the four lines on the Prep Use form for

overflow – where information won’t fit onto the Main Info form. ο If there was information here in the prior year, it will be visible in the current year IF data Carry Forward

data is used (very likely), and IF the return template has been set up this way. (Many, if not most sites do not carry forward the Preparer Use form because that will carry forward the preparer and reviewer initials.)

TAXPAYER DIARY • The Taxpayer Diary is a place for notes by the preparer, reviewer, or ERO; such notes are typically focused on

what still has to be done to get the return completed, special circumstances (such as why paper filing was needed), and correcting e-file rejects (for example, information about contacting the taxpayer)

• When the Taxpayer Diary has been used for a return, an icon will be displayed next to the SSN of that return, on the list of returns, to alert you that a Taxpayer Diary exists for that return

• The Taxpayer Diary can be accessed from within a return by clicking on Taxpayer Diary icon on the Toolbar. • The Taxpayer Diary icon and the contents of the Taxpayer Diary are carried forward from the prior year; the

contents should be updated as needed ο While it is possible to empty the contents of the Taxpayer Diary (click to add a note, then delete

everything), it is not possible to remove a Taxpayer Diary icon from the list of returns after a Taxpayer Diary has been created.

ο An alternative to emptying the content of a Taxpayer Diary is to add the year (such as “2014:”) in front of prior year information.

• Because the Taxpayer Diary will not be accessible after the CCH contract for TaxWise ends, in 2016, do not use this for information intended for the 2017 tax season. Use the Summary form instead.

PREPARER NOTES • Prep Notes is a form that can be e-filed with the return. It is used to provide the IRS with additional information

related to the tax return, when desired.

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19 January 27, 2016

• Do not confuse this form with the Prep Use form nor with the return notes on the Main Info form. That information is not electronically submitted to the IRS.

SUMMARY FORM • At the bottom of the Summary form are four lines that can be used for notes to clients, and for notes for tax

preparers in the 2017 tax season. • Information on these four lines is printed when the Summary page is printed; that page is part of the set of

federal tax-related papers printed for clients. ο The standard print packet should be set up so that a Summary page is printed with every return.

• Information that would be useful for the 2017 tax season includes: ο Deaths or birth after the end of the tax year. ο Individuals and years for which the American Opportunity credit has been claimed

• Notes at the bottom of the Summary form are not carried forward to the next year’s tax return, so (for example) the form in the 2015 tax return will not have any notes from the 2014 tax preparation.

NOTE: The following sections often say “Go to …”, followed by the name of a form. Districts do set up their Forms Tree differently. If the specified form is on the Forms Tree, click on it; if the form is not in the Forms Tree, add the form by using the “Add” link at the top of the Forms Tree, or by using the “Forms List” icon on the toolbar.

INCOME LINE 7 ------- WAGES, SALARIES, AND TIPS Go to W2 • Pages D-6 through D-8 of Pub 4012 have information on how to enter Form W-2 information into TaxWise

W2 - Top Section • Select either Taxpayer or Spouse at the top of the form

ο Note: this is required only for MFJ; otherwise, this can be skipped • The “Check if W-2 is handwritten, altered, or appears not to be a true W-2” should be used ONLY IF the Form

W-2 is truly suspect • Check the appropriate box for address information

ο If the current address of the client is not the address shown on the paper Form W-2, use the “Check and make changes ... ” box to change the address field to match the address shown on the Form W-2

ο If no address is shown on the paper Form W-2, leave the default address here • Use the lower portion in this section for a foreign address • “Verify withholding” box lights up when withholding is greater than IRS expects - if verification finds no

problems, check the box to clear the red. ο The TaxWise parameters here are overly sensitive to potential problems – verification will rarely if ever

find a real problem. Still, always compare the numbers in boxes 2, 4, and 6 of the W2 against those boxes on the paper Form W-2.

• Do not check the box labeled “Check to take calculations off lines 3, 4, 5, and 6” at the upper left until the entire Form W-2 has been completed and it is clear that it is necessary to manually enter the values in one or more of these lines.

• If state wages in box 16 are different than federal wages in box 1, see the W2 - State Section, below, page 21

Employee SSN When Filing Using an ITIN • If the employee on the Form W-2 (taxpayer or spouse) is filing using an ITIN, the SSN on the paper Form W-2

will not be valid for the employee ο TaxWise will automatically put a check box on the last line of the top section of the W2 ο Type in the employee’s ID number exactly as shown on the paper Form W-2

Employee SSN is Incorrect • If the taxpayer has a SSN and the SSN is incorrect on the Form W-2 document, then the employee must request

a corrected Form W-2 from their employer

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January 27, 2016 20

• If a corrected Form W-2 cannot be obtained, do not change the correct SSN on the TaxWise W2 form to match the incorrect SSN on the paper Form W-2 ο The return will need to be paper-filed and an explanation provided about the erroneous SSN

• Note: A Form W-2 with a blank in the SSN box is invalid. If the client has such a Form W-2 and cannot get it corrected, the return is out-of-scope

W2 - Employer’s ID, Name, and Address • Do NOT enter anything in the Control number field • Check the Corrected W-2 (W-2C) box if it is checked on the paper Form W-2 • If the employer's (tax) identification number (EIN) is missing, the tax return cannot be e-filed

ο Do not create a bogus number or enter a Social Security number as the return will be rejected ο The taxpayer must contact the employer to get a valid EIN number If the employer is no longer in business, or the taxpayer is otherwise unable to get a valid EIN, then the

return must be paper filed: For the federal return, on the Main Info form, under Type of Return, check “Paper” CA Note: On CA 540 Pg 5, check “No” in response to the question (just below line 115) “Do you

want to electronically file this return?” Set the return stage to “Paper file” (or similar, depending on the return stages defined at your site)

• If the computer has encountered this EIN on another return during the current tax season, the name and address information will be filled in by TaxWise ο Make any changes necessary so that the information on W2 matches the taxpayer’s copy (some employers

use the same EIN for W-2s with different employer addresses) • Make sure that the employer’s name and ID match the Form W-2 exactly, because the e-file may reject if these

do not match IRS records ο Ampersands (&), hyphens (–), and slashes (/) are allowed in the employer name field

• CA Note: Form W-2s issued by California In-Home Supportive Services (EIN 94-2985244) will show the name of the person being cared for (often a relative) as the employer and a CA tax ID assigned to that person ο If the employer and employee (taxpayer) reside in the same home, see Medicaid Waiver Payments, below,

page 48; for the 2015 tax year, this income must be treated as excludible • TaxWise will calculate the four-character Name code field

W2 - Dollar Value Boxes • The entries in this section must be an exact match (rounded) of the paper Form W-2 • Complete all other W2 data entry (skipping boxes 3 to 6), then check to see if the amounts in boxes 3, 4, 5 and

6 match the paper Form W-2 ο If they are different: check the box labeled “Check to take calculations off lines 3, 4, 5, and 6”, in the top

section, and enter the correct data in those boxes • Box 7: Social Security Tips are reported here. TaxWise will automatically adjust box 3 • Box 10: Dependent Care Benefits are reported here. These are rare, but it is VERY important that they are

entered accurately as they directly affect other benefit calculations • Box 12: The codes listed below can also be found in TaxWise - F1 for Program Help > Index > W-2, box 12

Codes Box 12 Code Description

A, B, M, N

Uncollected amounts, including Social Security or Medicare taxes, which TaxWise will correctly carry to 1040 Pg 2, line 62

C Taxable cost for group term life insurance. Quite common, does not change anything as it is already included in box 1 wages

D, E, F, G, H, S

Elective deferrals that can make the return eligible for the Retirement Savings Contribution Credit (Line 51 of the 1040, below); will change calculated values in boxes 3, 4, 5, and/or 6. If code G, then box 13, Retirement plan, must be be checked on the W2, even if unchecked on the paper Form W-2

J Non-taxable Sick Pay K 20% Excise tax on excess golden parachute payments L Substantiated employee business expense reimbursements. Not taxable, but if Form 2106 (out-of-

scope except those with Military certification) is filed, the amount would go on line 7

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21 January 27, 2016

Box 12 Code Description

P Excludable moving expenses. If taxpayer’s deductible moving expenses are not greater than this amount, Form 3903 (out-of-scope except for those with Military certification) does not need to be filed

Q Non-taxable combat pay. Optionally used to calculate Earned Income Tax Credit - TaxWise will pick the correct option. Out-of-scope except for those with Military certification

R Employer contributions to an Archer Medical Savings Account (MSA) – out-of-scope T Adoption benefits – out-of-scope V Income from the exercise of nonstatutory stock options (informational – income is included in box 1) W Employer contributions to an employee’s Health Savings Account (HSA). An entry here will put 8889

on the Forms Tree – out-of-scope except for those with HSA certification. Requires CA adjustment. Y An elective deferral that is NOT eligible for Retirement Savings Credit Z Income under section 409A on a nonqualified deferred compensation plan

AA, BB, EE Designated Roth contributions under a section 401(k), 403(b), or 457(b) plan. If code EE, then box 13, Retirement plan, must be be checked on the W2, even if unchecked on the paper Form W-2

DD Cost of employer-sponsored health coverage – For 2014 and 2015, any employer coverage is MEC for the ACA (but still need to determine which individuals were covered and the months of coverage)

• If there are more box 12 entries than TaxWise W2 allows, use box 14 for those that do not directly impact the calculations in the tax return, such as code DD

• Returns with Code W, HSA Employer Contribution, must be prepared and reviewed by counselors who have HSA certification ο Employer contributions to an HSA are not federally taxable. TaxWise handles code W properly ο CA Note: CA does not recognize HSAs – see Health Savings Accounts in CA, below, page 69

• Box 13: Check the applicable boxes to match what is on the paper Form W-2 ο The retirement plan box determines IRA eligibility rules Warning: Some employers fail to check this box when they should. If you see “G” or “EE” in box 12

of the Form W-2, then check the retirement box on the W2. ο Statutory employee income should be reported on Schedule C Check the statutory employee boxes in the lower section of the W2 input form (in addition to checking

the statutory employee box in box 13) Input the statutory employee income on a separate Sch C (line 1) and enter expenses related to it on that

same Sch C Also check the box on Sch C after the second sentence on line 1 Note: Schedule SE is not required as Social Security and Medicare taxes have already been withheld

and TaxWise handles this correctly if the appropriate boxes are checked • Box 14: Enter the code(s) and dollar amount(s) shown on the paper Form W-2

ο These entries will not affect the tax return. However if there is an entry for a retirement contribution in this box (for example, RET TS), this might be an elective contribution. Ask the client if this is the case. If so, then check the box that generates Form 8880, and fill out 8880 accordingly

ο Do not enter CASDI or SDI in box 14– see two sections below • RR fields: complete to match the paper Form W-2.

W2 - State Section • Box 15 Enter the State ID number without dashes or spaces (TaxWise truncates the carry forward for the

following year after 9 digits) ο The State ID number is NOT the same as the federal ID number ο The State ID is required, whether or not state tax was withheld If the State ID is blank on the paper W-2, enter six nines (999999) in TaxWise

• Box 16: State wages may be different than federal, in which case check box labeled “Check to take calculations off line 16, state wages”, near the top of the W2, and then enter the correct amount in box 16 ο CA Note: TaxWise does not carry the state wages difference to CA 540 Manually enter the adjustment amount on CA CA as an addition or subtraction Go to CA CA Pg 1, line 7, Subtractions or Additions column, as appropriate, and link to a Scratch Pad

to make the adjustment

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January 27, 2016 22

• Box 19 (local tax)/Box 20 (local name): do not use for CASDI, SDI, VPDI, VP, or VI (see next section)

Instructions For W2 – California W2s Only (At Bottom Of W2) • At the bottom of the W2, enter SDI or other permitted entries, and the dollar amount. TaxWise will calculate the

amount to be carried to Schedule A as an income tax deduction. ο Permitted entries are SDI, CASDI, VD, VPDI, or VI only ο Note: VD, VPDI, or VI are included in determining excess SDI contributions, but are never carried to

Schedule A, because none is considered a tax - TaxWise handles this correctly • The maximum amount subject to SDI for 2015 is $104,378, for a maximum of $939 of withholding. (The 2015

rate is 0.9%, compared to 1.0% for 2014.) ο If the maximum is exceeded, TaxWise properly computes the allowable credit, which goes on the CA return

(CA 540 Pg 3, line 74)

Multiple W-2s – CA Extra Attention Needed • TaxWise does not automatically add additional CA W2 forms to match the federal W2 forms • For e-file returns with more than one W-2 form, click “+” on CA W2 in the Forms Tree (no hyphen between

“W” and “2”) to add more CA W2 forms as needed • TaxWise will give a diagnostic if there are insufficient CA W2 forms • For paper returns, instead of attaching the original paper W-2 forms, TaxWise uses CA W-2 summary forms

ο Note: CA W2 becomes inactive and CA W-2 is added to the Forms Tree as active when the return is marked for paper filing

ο If the return has more than two W-2 forms, click “+” on CA W-2 (with a hyphen) in the Forms Tree (summary schedule with two W-2s per page) to add more CA W-2 forms as needed

ο Assign sequential numbers 1, 3, 5, etc. (numbering relates to the sequence of W-2 forms, not the page number of the summary schedule)

ο Caution: TaxWise does NOT give a diagnostic for paper returns if there are not enough CA W-2 forms

Sick Pay • If a Form W-2 reports Nontaxable Sick Pay in box 12 with a code J and the Form W-2 has no other entries, it is

not necessary to enter the Form W-2 in TaxWise • If there are any other entries on the Form W-2, enter $1 in box 1 to enable e-filing (TaxWise considers a W2

with zero dollars to be an error)

Substitute W-2 • If the client has not received a Form W-2 by February 15th and has attempted to get a copy from their employer

and failed, they can contact the IRS for possible assistance • If no IRS assistance is possible, a substitute Form W-2 can be used • A substitute Form W-2 requires a pay stub for the last pay period for which pay was received in the tax year,

showing cumulative pay and withholding for the year ο Open a W2 and place the cursor in the Employer’s name field ο Link, in the New tab, to “4852 - Substitute W2 or 1099-R” ο Complete the form

• If a substitute W-2 form is completed, a paper return must be filed ο For the federal return, on the Main Info form, under Type of Return, check “Paper” ο CA Note: On CA 540 Pg 5, check “No” in response to the question (just below line 115) “Do you want to

electronically file this return?” ο Set the return stage to “Paper file” (or similar, depending on the return stages defined at your site)

• Form 4852 prints with the return and must be signed and attached to the return along with any other Form W-2s

Scholarships, Fellowships & Grants – Form W-2 or Form 1098-T • Reportable on the return of the person receiving the scholarship, even if they are the dependent of another

taxpayer ο See page A-2 of Pub 4012 for filing requirements for dependents ο If a child under the age of 18 has more than $2,100 of unearned income, the child is subject to the “Kiddie

Tax”. Both Form 8814, to pay this tax on the parent’s tax return, and Form 8615, to pay this tax on the child’s tax return, are out-of-scope; refer the client to a paid tax preparer, or suggest that they purchase tax preparation software

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23 January 27, 2016

• If a Form W-2 was received (usually for pay as a Teaching Assistant), then the entire amount is taxable and cannot be reduced by expenses

• For any scholarship, the client must determine if the scholarship/grant amount on the 1098-T was greater than qualified educational expenses that can be used to reduce the taxable amount of the scholarship. ο If the total scholarship amount exceeds offsetting expenses, use the top section of 1040 Wkt1 to report the

net (taxable) scholarship amount. Expenses used to reduce the taxable amount of a scholarship cannot also be used to claim a credit, or

as deductible expense. Remember that the taxable scholarship amount is reported on the return of the person receiving the

scholarship, even though educational expenses (if not used as an offset to the scholarship amount) can be reported on the return of a parent.

ο The taxable scholarship amount MUST be reduced for tuition, fees, books and equipment if the scholarship is awarded specifically to cover these expenses

ο The taxable scholarship amount MAY be reduced for qualified educational expenses if the scholarship is not specific; the exact amount is a client decision (based on what is the best tax result)

ο Form 1098-T shows only tuition and school-billed fees. Normally the amount spent for books and equipment must be determined by the client

ο Caution is needed as expenses may be billed in one year but paid in another; the year of payment determines when the expenses can be claimed on a tax return The student should be able to access their student financial account records online, if they did not bring

written records. Box 2, “Amounts billed”, on the form, cannot be used as proof of expenses. (The form is being

changed as of tax year 2016 to report only payments received.) • Worksheet 1-1 on page J-1 of Pub 4012 can be used to determine the taxable portion, which requires asking

the client to determine how the scholarship money was used ο Also see the Education Benefits Worksheet below, on page 96 ο Reminder: An education credit or deduction cannot be claimed for any expense used to reduce the taxable

scholarship amount. • Note: Student loans are never income. Expenses paid with borrowed funds, such as student loans, are eligible

for credit or deduction, if the regular requirements are met – see Line 50 --- Education Credits, below, page 59 ο Also note that borrowed money, when spent, is a type of support, and affects the determination of whether a

person can be claimed as a dependent. (The person liable for repaying a loan is considered to the person providing support.)

Indian Tribal Income • Tribe members often work on tribal land – for example, at a casino, and receive a Form W-2 for that work • Tribal income is always taxable on the federal return • CA Note: Indian tribal income is exempt from CA taxes ONLY WHEN the recipient is (a) an enrolled member

of a federally-recognized Indian tribe; (b) living on that tribe’s land; and (c) the income was earned or derived from sources within that tribe’s land ο If income is exempt from CA taxes, make the adjustment on CA CA Pg 1, line 7, using a Scratch Pad

• Note: If there is any question to the definition of “living on” tribal land, see FTB Legal Ruling 2015-01

Tip Income • Employers can include tips reported by employees (“reported tips”) in taxable wages, in box 1 of Form W-2.

Social Security tax and Medicare tax is withheld for these tips. • Alternatively, employers may put the tips reported by employees into box 7 (“Social Security tips”), which

when added to box 3 should equal box 1, Wages. • Social Security taxes withheld (box 4 on the Form W-2) is calculated by the employer based on the total of

boxes 3 and 7. • Employers may report “allocated tips”; these tip amounts are calculated by the employer, based on sales or on

pooled tips or information other than the tips reported as received by the employee. Allocated tips are reported in box 8; tips reported by employees, if any, are subtracted by the employer when calculating the box 8 amount. ο When information is put into box 8 on W2, TaxWise automatically adds form 4137 TP (for the taxpayer) or

4137 SP (for a spouse) to the Forms Tree, and computes the Social Security and Medicare tax due.

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January 27, 2016 24

• When the paper Form W-2 has an amount in box 8, allocated tips: ο If the employee keeps a detailed tip log, the employee may report to us the actual amount of tips, which

may be more or less than the allocated tip amount Go to 4137 and link from line 4 to a Scratch Pad to adjust the actual amount of tips received; the

Scratch Pad amount can be negative (may need to use F8 to override the line 4 amount) ο Tips of less than $20 per month are deemed included in the allocated tip for income tax purposes but are

not subject to Social Security or Medicare tax. If, on the employee tip log, there are any months where tip income was less than $20, total the amounts for these amounts. Enter the total amount on 4137 line 5

• If box 8 of the paper Form W-2, Allocated tips, is zero, then any tips received by the employee but not reported to the employer (“unreported tips”) must be added to income: ο Go to 4137 ο Enter unreported tips into box 4 ο If unreported tips were less than $20 in one or more months, enter the total of those amounts in line 5

(TaxWise will then back this amount out of the Social Security or Medicare tax calculation)

Household Employee Income • A household employee who did not receive a Form W-2 because the employer paid that person less than $1,900

for the entire year must report the income on 1040 Wkt1 • Multiple employers can be listed as long as each paid less than $1,900 • The amount is carried to 1040 Pg 1, line 7 with a HSH notation • Note: Household worker income is reported on Schedule C ONLY WHEN the taxpayer has an independent

business

Work Release or Penal Income • Income earned while an inmate (even if on work release with a private employer) is not considered earned

income for the purposes of EIC, Additional Child Tax Credit, or Dependent Care Credit • Go to Sch EIC Wkt, “Figure your credit” section, at the bottom of the form, and enter the nonqualified income

on line 1a • Go to 8812 Pg 1, Part II, and enter the nonqualified income on the second field of line 4a

LINE 8 ------- TAXABLE INTEREST Foreign Accounts or Assets • When the client appears to have foreign accounts or foreign financial assets, further information is needed

ο Confirm with the client that the accounts are foreign, not U.S. payers (look for an Employer Id No) ο Ask the client what was the highest value during the year or at year end

• On Sch B, the questions at the bottom need to be answered by the client • Additional filing requirements may apply

ο Form 8938 for specified foreign financial assets is out-of-scope This form must be filed with the return – so if this form is required, the return is out-of-scope The form is required is the account value was more than $50,000 ($100,000 MFJ) at the end of the

year, or if the value was more than $75,000 ($150,000 MFJ) at any time during the year ο Filing, by Tax-Aide, of FinCen 114 (old TD 90-22.1) for foreign accounts is out-of-scope This form must be filed separately from the 1040, by the client Generally required if the account value was more than $10,000 at any time during the year

ο Filing, by Tax-Aide, of Form 3520 for foreign trusts / receipt of foreign gifts or bequests is out-of-scope This form must be filed separately from the 1040, by the client Involves transactions with or ownership of foreign trusts, or certain large gifts or bequests from foreign

persons Note: There are substantial penalties for not filing a required form

Seller-Financed Mortgages (Sch B, Line 1a) Go to Sch B

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25 January 27, 2016

If the taxpayer (seller) is using an installment sale plan to report capital gains on a sale over a period of time, the return is out-of-scope. The seller is not using an installment plan if the tax return for the year of the sale included the entire sales price when calculating the capital gain or loss on the sale. (Further information: Pub 537, Installment Sales) • Seller-financed mortgages occur when the client sells a property and helps the buyer finance the purchase by

providing a loan for some or all of the sale price. The payments that the client (seller) then receives will, in most cases, consist of both interest and principal. Only interest income should be reported on Sch B.

• On Sch B, line 1a, fill in the required information about the payer, and the amount of interest paid for the year • If the client has interest income from more than one payer, the first payer is listed on Sch B, and the others are

listed on a supporting worksheet ο On Sch B, link from the far right (unlabeled) field of line 1a to the Seller List - Schedule B Seller Financed

Mortgages (on the Forms Tree, this will then show as Seller List) ο Complete the required information for each payer

Interest Income Go to Interest Stmt - tab to the first field, or to the amount field if the payer is already listed RULE: Interest entries MUST be made using the Interest Statement; NOT directly on Schedule B (except for seller-financed mortgage interest) • Interest income information may come from a Form 1099-INT or -OID, or from a substitute Form 1099-INT or

-OID, or from a brokerage statement. Hereafter, all are referred to as a “Form 1099-INT”) Note: Beginning in 2015, Form 1099-INT includes box 10 for “Market discount”, box 11 for “Bond premium”, and a “FATCA filing requirement” checkbox to the left of box 12. If there is an entry in box 10, and/or box 11, and/or the FATCA checkbox is checked, then the return is out-of-scope. • Do not leave blank lines between entries

ο Use Ctrl+I to insert a row or Ctrl+R to delete a row (the page refresh may hesitate – give a few seconds) • Only ONE Interest Stmt is allowed per return

ο Always return to the same one when adding additional entries • If there are entries in both Boxes 1 and 3 (for U.S. Government Bond Interest) of a Form 1099-INT enter each

on a separate line on the Interest Stmt – do not combine the amounts ο Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989, is out-of-

scope for Tax-Aide; do not follow Pubs 4012 and 4491 with regard to this form. ο CA Note: Interest income from U.S. Savings Bonds, Treasury Bonds and other direct obligations backed by

the U.S. Government are not taxed by California and include federal Land Banks and Federal Home Loan Banks. They do not include Fannie Mae and Freddie Mac. Enter a “-” in the “State Adjust +/-” column in the Interest Stmt and enter the adjustment amount

• Tax-Exempt interest on state or local bonds must be included on the Interest Stmt ο Enter E and the amount in the NAEOB column (a detailed description of this and the other codes is on page

D-9 of Pub 4012) ο If an account has regular and tax-exempt interest, enter each on a separate line on the Interest Stmt – do not

combine the amounts ο CA Note: State and municipal bond interest from states other than CA, which is identified as federally tax

exempt, is taxable for CA Enter a “+” in the State Adjust column on the Interest Stmt and enter the adjustment amount

• CA Note: CA does not recognize HSAs – interest income earned in the trust is currently taxable for CA following the normal CA rules - see Health Savings Accounts in CA, below, page 69

• If either the State adjust Amount field or the NAEOB Amount field is red and there should not be an entry, remove the entry in the field to the left of the red “Amount” field

• Completing the Interest Stmt: ο Payer – payer name, may be abbreviated ο Box 1 or 3 Amount – amount entered will be reflected on both the federal and the CA returns ο For federally tax-exempt interest, do not enter an amount in the first (Box 1 or 3) column ο “TSJ” – leave blank, it is not used in CA returns prepared in Tax-Aide ο Complete the NAEOB information before entering any state adjustment. ONLY code E is in-scope Enter the exempt interest amount

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January 27, 2016 26

HINT: Complete the Interest Stmt as if there is only a federal return. Then ask the question “is the interest treated differently by CA” to determine the needed state adjustment, if any • State adjustment entries are used for differences between federal and state tax law (for example, where the

amount is not taxable on a federal return but is taxable by CA, or vice versa – see examples C and E below); enter “+” or “–” to indicate whether the amount is or is not subject to state tax and the amount

• If there are entries for box 9-AMT PAB (Alternative Minimum Tax-Private Activity Bonds) enter them and then make sure there is no Alternative Minimum Tax 1040 Pg 2, line 45, which would make the return out-of-scope

• Early penalty – any early withdrawal penalty as shown in box 2 on the Form 1099-INT ο This is carried to 1040 Pg 1, line 30

• Federal Withholding - enter any federal withholding shown in box 4 on Form 1099-INT • CA Note: CA withholding, Boxes 11-13 on Form 1099-INT, should be entered on CA 540 Pg 3, line 71 (last

entry field) as “1099” and the amount should be linked to a Scratch Pad that details the payer’s name and state I.D. number (that helps the FTB match the withholding) ο If there is already an entry on line 71, the CA return must be paper-filed. Write down, then delete the

description and amount on line 71, then link from the amount field to a Scratch Pad, and use the Scratch Pad to record the multiple forms involved, and to calculate the total

ο If the taxpayer is itemizing, use a Scratch Pad to add the amount to Sch A, line 5a.

Examples of Interest Income Payer Box 1 or 3

Amount

TSJ State Adjust NAE

OB NAEOB Amount

AMT PAB

Early penalty

Federal withheld +/- Amount

A CHASE BANK 2000 0 0 0 0

B BANK OF AMERICA 100 0 0 40 0

C US GOVERNMENT BONDS 666 – 666 0 0 0

D CA STATE BOND 0 0 E 111 0 0

E OTHER STATE BOND 0 + 333 E 333 0 0

• Example A: $2,000 ordinary interest from Chase Bank, reported on Form 1099-INT, box 1, substitute 1099-INT, or brokerage statement ο Taxable on both the federal and CA returns ο Enter 2000 in the box 1 or 3 Amount column

• Example B: $100 interest from Bank of America box 1 with early withdrawal penalty of $40 in box 2 reported on Form 1099-INT, substitute 1099-INT, or brokerage statement ο Taxable on both the federal and CA returns ο Enter 100 in the box 1 or 3 Amount column and 40 in the Early Penalty column

• Example C: $666 interest from a bond issued by the United States Government, reported on a Form 1099-INT box 3, substitute 1099-INT, a statement from the U.S. Bureau of Debt, Treasury Direct, or brokerage statement ο Taxable on the federal return, exempt on the CA return ο Enter 666 in the “Box 1 or 3 Amount” column ο Enter “–”in the +/– column and 666 in the State Adjustment Amount column

• Example D: $111 interest from a CA municipal bond, reported on a statement issued by the state/municipality or a brokerage statement ο Not taxable on either the federal or CA returns – no state Adjustment required ο Do not enter anything in the box 1 or 3 Amount columns ο Enter an E in the column headed NAEOB and 111 in NAEOB amount column

• Example E: $333 interest from a state OTHER THAN CA municipal bond, reported on a statement issued by that state or a brokerage statement ο Not taxable on the federal Return, taxable on the CA return ο Do not enter anything in the box 1 or 3 Amount columns ο Enter an E in the column headed NAEOB and 333 in NAEOB amount column ο Enter “+” in the +/– column and 333 in State Adjustment Amount column

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27 January 27, 2016

• Note: Mutual funds now report distributions as dividends, even if they originate from interest earned on the fund’s portfolio – see below, below, page 27

OID Interest • OID interest income is regular interest • OID adjustments are out-of-scope, as are boxes 5 (Market discoutn) , 6 (Acquisition premium), and if the

FATCA filing requirement box (to the left of box 9) is checked. • Enter the total OID interest received in the box 1 or 3 amount column • CA Note: If Form 1099-OID shows an amount in box 8, Original issue discount on U.S. Treasury obligations,

enter a “-“ state adjustment to make it nontaxable for CA

Simple Form K-1s and Prepaid Funeral Plans • Income reported on a K-1 is from partnerships, S-corporations, trusts, and estates

ο These are out-of-scope unless income consists only of interest, dividends, royalties, capital gains/losses, and associated foreign tax credits

ο Pre-paid funeral/burial plans that report using Form K-1 will be in-scope, because of their limited income categories

• Because of TaxWise peculiarities, it is strongly recommended to NOT use the TaxWise K1 form; instead, make entries into TaxWise as shown on the table below ο It is advisable to input all items from a given Form K-1 at one time so that none is overlooked

• On TaxWise forms, list the payer as “[name of payer] K-1” Note: Line numbers vary by form (1041 K-1, 1065 K-1 or 1120S K-1) – go by the line description

This Entry on K-1 Enter on Form In This Place Interest

Interest Stmt (see page 25, above)

Box 1 or 3 Amount

If tax exempt (both Fed and CA) Interest Stmt E in NAEOB, amount in NAEOB amt

If tax exempt (Fed only) Interest Stmt In state adjust columns, + and amount (same line)

Total Ordinary Dividends Dividend Stmt (see below) Total Dividends

Qualified Dividends Dividend Stmt Qualified Dividends

Net Short-term Capital Gain/Loss Sch D Pg 1 Line 5

Net Long-term Capital Gain/Loss Sch D Pg 1 Line 12

CA: Net capital gain/loss Note: Fed does not carry to CA; CA amount from CA K-1 may differ

CA D Pg 1 Line 2, Net Gain or Loss, as applicable

Royalty Sch E Pg 1 Line 4. Also, on line 1, enter address and Type 6

Foreign tax credit 1040 Pg 2 (see page 29, below) Line 48

All other amounts on the Form K-1 are out-of-scope

LINE 9 ------- DIVIDENDS Go to Dividend Stmt - tab to first field or amount column if payer is already shown RULE: All dividend entries MUST be made on the Dividend Stmt, NOT directly on Sch B • This information may come from a Form 1099-DIV, substitute 1099-DIV, a brokerage statement, or a Form K-1 • Do not leave blank lines between entries • Use Ctrl+I to insert a row or Ctrl+R to delete a row (the screen refresh may take a second or two) • Only ONE Dividend Stmt is allowed per return

ο Always return to the same one when adding additional transactions

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January 27, 2016 28

Foreign Account or Assets • See additional reporting requirements at the start of Line 8 ---Taxable Interest, above on page 24

Completing the Dividend Statement: • Payer – payer name, abbreviated if necessary

ο Enter name of brokerage or processor issuing the Form 1099, not the individual stock or fund names ο The company that issues the stock or its transfer agent will be the processor if the client holds the stock

directly • Ordinary dividends – enter the dividends shown on the Form 1099-DIV • Qualified dividends – enter the qualified dividends shown on the Form 1099-DIV • TSJ – CA does not require this field, leave it blank • State Adjustment - used for differences between federal and state taxable amounts

ο Refer to the California exemption rule below for fund dividends ο CA does not recognize HSA trusts, dividend income earned in the trust is currently taxable for CA

following the normal CA rules - see Health Savings Accounts in CA, below, page 69 • N – Nominee – not used by Tax-Aide – out-of-scope • Capital Gain – enter capital gains distributions shown on the Form 1099-DIV • 1250 Gain – the 1250 Gain cannot exceed the capital gain amount; however TaxWise does not check for this

situation and therefore will not prevent an error from being made; make sure box 2a of the Form 1099-DIV is entered corrrectly ο Note: box 2b on the Form 1099-DIV, “Unrecap. Sec. 1250 gain”, is in scope; ignore the statement to the

contrary in Pub 4491. • Section 1202 gain, in box 2c of Form 1099-DIV, is out-of-scope • 28% Gain – the 28% Gain cannot exceed the capital gain amount; however TaxWise does not check for this

situation and therefore will not prevent an error from being made • Federal With – enter any federal withholding shown on Form 1099-DIV • Exempt int. div. – if entering amounts here, do not include the amount in the Ordinary Dividend column. This

amount will appear on 1040 Pg 1, line 8b as Tax Exempt Interest ο CA Note: Enter an adjustment for interest that is not exempt for CA in the State Adj columns

• AMT-PAB- Alternative Minimum Tax-Private Activity Bonds ο Make sure that no Alternative Minimum Tax is shown on 1040 Pg 2, line 45, which makes the return out-

of-scope • Non-Dividend Distributions are not taxable and should NOT be entered in TaxWise

ο Advise the client that non-dividend distributions are a return of investment (principal) and reduce the cost basis of the their investment

• Liquidation Dividends, in boxes 8 and 9 of Form 1099-DIV, are out-of-scope • CA Note: CA withholding, Boxes 12-14 on Form 1099-DIV, should be entered on CA 540 Pg 3, line 71 (last

entry field) as 1099 and the amount should be linked to a Scratch Pad that details the payer’s name and state I.D. number (this helps the FTB match the withholding) ο If there is already an entry on line 71, the CA return must be paper-filed. Write down, then delete the

description and amount on line 71, then link from the amount field to a Scratch Pad, and use the Scratch Pad to record the multiple forms involved, and to calculate the total withholdings.

ο If the taxpayer is itemizing, use a Scratch Pad to add the amount to Sch A, line 5a.

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29 January 27, 2016

Examples of Dividend Income Payer Ordinary

dividends Qualified dividends

TSJ State Adjust

N Capital gain

1250 gain

28% gain

Federal with.

Exempt int. div.

AMT PAB

+/- $ 1 GENERAL

MOTORS 1200 1200 0 0 0 0 0 0

2 EDWARD JONES 800 150 0 200 0 50 0 0 3 GOVT SECURED

FUND 1500 0 - 1425 0 0 0 0 0 0

4 MUNI FUND 0 0 + 250 0 0 0 0 250 50 5 CA MUNI FUND 0 0 0 0 0 0 325 75

• Example 1-- Ordinary and Qualified Dividends ο General Motors Corporation common stock with ordinary dividends of $1,200, all of which are qualified ο Dividends are taxable on both the federal and CA returns

• Example 2 – Various mutual funds and stocks ο Income from investments held at Edward Jones ο $800 ordinary dividends, of which $150 were qualified dividends ο $200 in capital gains, of which $50 is a 28% gain.

• Example 3 – State exempt interest dividends from direct Federal Government obligations Assume that the Government Secured Fund includes investments in federal government and agency bonds and that such bonds represent more than 50% of its assets. The fund reports that 95% of the dividend income is from federal bonds ο Manually calculate the amount based on information from the mutual fund/broker provided by the client

(95% x $1,500 = $1425) • Example 4 – General municipal fund exempt from federal tax; taxable to CA because <50% of the assets are

CA municipal obligations • Example 5 – A California municipal fund holding only CA municipal obligations is exempt for both federal

and California

California Exemption Rule • Generally the fund will indicate how much is exempt from state tax on a separate statement as a percentage of

the total fund distribution • The general rule is:

ο If less than 50% of the assets of the fund are federal and/or CA obligations, ALL is taxed by CA ο If 50% or more of the assets are federal or CA obligations, the income from those obligations only is

exempt from CA tax Manually calculate the amount based on information from the mutual fund/broker, provided by the

client

To Finish Schedule B • When Schedule B is required, you must ask, and enter the answers to, the questions at the bottom of Sch B, • If any answer is "yes," see Foreign Accounts or Assets, above, page 24 • Failure to answer the questions when Sch B is required will leave a red mark on the Forms Tree

LINE 48 ------ FOREIGN TAXES PAID ON INTEREST OR DIVIDENDS • Foreign taxes may appear on Form 1099-INT, Form 1099-DIV, Form K-1, or a substitute for any of these Foreign taxes shown on any other document, such as a royalty statement, are not eligible for the simplified election. A full Form 1116 is needed to claim a credit for such taxes, which is out-of-scope • If the total foreign tax amount that the client wants to be credited EXCEEDS $300 ($600 for a joint return), the

return is out-of-scope • Input the foreign tax amount on line 48 of 1040 Pg 2 (this is the Simplified Limitation Election as discussed on

1116 Pg 1) ο If there are multiple foreign tax payments, link from line 48 to a Scratch Pad ο Alternatively, go to 1116 Pg 1 and enter the amount at the top of the form (if multiple foreign tax payments,

link from the field at the top of the form to a Scratch Pad)

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January 27, 2016 30

On 1116 Pg 1, only the field at the top may be used. The remainder of Form 1116 is out-of-scope • The client may choose an itemized deduction (see below, page 54) for the foreign taxes instead of a foreign tax

credit. (If there is a tax liability, the credit will normally produce a better result.) • Note: If there are foreign tax credits greater than the amount of tax liability (1040 Pg 2, line 47), no carryback

or carryover of the unused foreign tax credits is allowed if the simplified limitation is elected ο If the client wants to preserve the carryback/over opportunity by filing a full Form 1116, making the return

out-of-scope, you must refer them to a paid preparer and/or recommend that they purchase tax preparation software.

LINE 10 ------ TAXABLE STATE INCOME TAX REFUND • California uses a postcard-sized document (Form 1099-G) to report prior year state income tax refunds • The amount reported is the CA refund that may be taxable in the year received

ο It is NOT taxable if there was no benefit to the income tax deduction in the prior year • If the client does not have a Form 1099-G, and (if available) the CA return for the prior year shows no state tax

refund (page 3, line 91), then check the “NO” box on 1040 Pg 1 above line 10; this completes the work required for line 10.

• If the client did not itemize in the prior year (no Schedule A), then check the “No” box to complete line 10 • If the client did itemize in the prior year (there was a Schedule A), but used general sales tax, line 5b, rather

than income taxes, line 5a, then check the “No” box to complete line 10 • If you have not yet checked the “No” box, then some or all of the refund could be taxable: check “Yes”

ο If the “No” box is RED and unchecked, it may be necessary to check Yes and then No and again Yes to remove the RED

• To accurately complete the worksheet, the client prior year’s tax return MUST be available – either the paper version, or the prior year in TaxWise. ο If the client has not brought the paper version of the prior year federal tax return, you can determine if the

prior year is available in TaxWise, at your site, by selecting Summary from the Forms Tree - look if the prior year column has numbers. (This presumes that you used Carry Forward data for the return, if that was available.)

• If the prior year’s return is NOT available, either on paper or electronically, and it is likely that there were itemized deductions, enter the entire refund amount directly on 1040 Pg 1, line 10 for Taxable Refunds. (Inform the client that you are doing this because you don’t have the information needed to do otherwise.) That concludes your work for line 10. ο Note: If this line has been linked to the State Tax Refund Worksheet, see “Field is yellow resulting from

linking in error” under “Confusing Situations in TaxWise”, above on page 8 • If the prior year’s return IS available, Go to St Tax Refund by linking from line 10 of the 1040 Pg 1 • To complete this form, the following must be filled in, by the preparer or TaxWise, using 2014 tax return

information: line 1, line 2 (first two rows), line 6, line 7, and line 8. TaxWise will then complete the rest of the form. ο If only the paper version of the prior year federal tax return is available, then the second entry for line 2,

general sales tax, must looked up online. The IRS calculator for this is at irs.gov/Individuals/Sales-Tax-Deduction-Calculator

• CA Note: State taxes are not deductible on the CA return. Therefore, refunds of any state taxes are not CA-taxable – TaxWise makes the adjustment on CA CA

LINE 11 ------ ALIMONY RECEIVED • See page E-3 of Pub 4012 for the tests to determine if payments are alimony

ο Child/Family support received is NOT alimony and is NOT taxable • Alimony received is entered directly on 1040 Pg 1, line 11 • TaxWise correctly handles these aspects of alimony:

ο Alimony is not considered earned income for EIC ο Alimony is considered compensation for IRA deduction purposes

LINE 12 ------ BUSINESS INCOME • AARP Foundation parameters specify that Tax-Aide will NOT prepare business returns (Form 1041)

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31 January 27, 2016

• An activity qualifies as a business (to be reported on Schedule C) only if the taxpayer’s primary purpose for engaging in the activity is for income or profit and s/he is involved in the activity with continuity and regularity. Activities that generate income (and offsetting expenses) but do not meet this criteria, such as a hobby (for example, coin collecting) are out-of-scope.

• Completion of Schedule C is in-scope, using C-EZ limitations, to report non-employee compensation (self –employment), with these differences: ο Total expenses on any single Sch C cannot exceed $25,000 (was previously $10,000) ο Multiple Sch Cs are allowed (use one for each business; do not combine businesses)

• The following are also out-of-scope: a net loss on Sch C (line 31), any business with inventory, or with depreciation deduction (including an immediate write-off election), or with office-in-the-home expenses (not even the simplified method is in-scope), or with accrual accounting, or with employees, or which made payments that required the business to file a Form 1099-MISC (or any other type of Form 1099)

• The National Tax Training Committee (NTTC) of the AARP Foundation publishes a “Schedule C – Profit or Loss from Business (Sole Proprietorship) Guidelines Summary”, which includes detailed guidance on what is scope for Schedule C, and how to handle a wide variety of expenses; examples are provided. A review of this document is highly recommended for any preparer who is preparing a Schedule C.

Go to Sch C Pg 1 • There is no income limit and all income must be reported • Sch C carries to the CA return as part of federal AGI • Use Sch C, not Sch CEZ

ο If a Sch CEZ carries forward, transfer the information to Sch C and delete Sch CEZ

Completion of Sch C • Check at the top to indicate whether the form is for the Taxpayer or Spouse • Complete the requested information for lines A through J

ο Business Code Question B – these can be found online, in the Form 1040 Schedule C instructions, or at cotaxaide.org/tools/ , or do the following: From Sch C, click F1 On the Help page, click Index in lower left panel Click Codes for Principal Business Activity link Find the most applicable code and copy it (Ctrl+C) Close the Help browser tab Paste the code into the applicable field on the Sch C (Ctrl+V) Note: If you cannot find an appropriate code, use 812990

ο Business name and EIN, lines C and D, will usually be blank. These are NEVER taken from the Form 1099 payer information

ο Business address, line E, is usually the client’s home address ο Accounting method, line F, must be “Cash”; otherwise the return is out-of-scope ο Material participation, line G, must be “Yes”; otherwise the return is out-of-scope ο Payments needing Form 1099 forms, line I, must be “No”; otherwise the return is out-of-scope An example is a Form 1099-MISC, for business-related services of $600 or more performed by a non-

employee • Enter all income on Sch C, line 1

ο Input all 1099-MISC forms and 1099-K forms on line 1 by linking to 1099 MISC or Scratch Pad Select 1099-MISC under Sch C on the Forms Tree and complete the form If client has more than one Form 1099-MISC, click the “+” next to 1099 MISC in the Forms Tree to

open another 1099 MISC On the Form 1099-K, box 1a is the total income to be entered into TaxWise; box 1b is for information

only – the amount there, if any, is included in the box 1a total Any adjustment to the amount reported in box 1a of the 1099-K is out-of-scope. Box 1a does not include adjustments for credits, discount amounts, fees, refunded amounts, or

similar. Commissions and fees are reported on line 10 of Sch C Pg 1. Refunded amounts are out-of-scope.

ο Add income not reported on 1099 forms to line 1 by linking to Scratch Pad

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January 27, 2016 32

Note: Always ask if there was any additional income, such as cash or check payments, not shown on Form 1099s

Do not enter such information on Sch C, line 6, Other Income ο Note: Amounts entered on 1099 MISC and Scratch Pad are cumulative – do not put the same income on

both forms • Part I, Income, lines 2, 4, and 6, must all be zero, or the return is out-of-scope • Part II, Expenses, must be listed by category on the individual lines provided

ο Line 9, Car and truck expense is limited to information carried from Part IV; otherwise the return is out-of-scope

ο Lines 12 (depletion), 13 (depreciation), 14 (employee benefits), 19 (pension and profit-sharing plans), 20 (if for a car rental or lease of over 30 days), 26 (wages), and 30 (business use of home) are all out-of-scope

ο For deductible travel and entertainment expenses (line 24), refer to Pub 4012, pages F-9 through F-13 ο Alternatively, allowable expenses within scope can be listed in Part V, except car and truck expense

• Part III, Cost of Goods Sold, is out-of-scope • Part IV, Information on Your Vehicle, is where business use of a vehicle is entered. This information carries to

line 9 in Part II ο For 2015, there was just one rate for the entire year, $0.575 per mile ο Page F-12 of Pub 4012 has a diagram explaining which transportation expenses are not deductible

(commute miles) and which are deductible. • Part V, Other Expenses, is used for expenses that are not specifically listed on Part II. The total for Part V

carries to line 27 of Part II ο The cost of basic local telephone service, including taxes, is considered 100 percent personal, so no portion

can be deducted on Sch C. Itemized long distance phone calls, however, can be, as can an additional phone line used only for business purposes.

ο The cost of a mobile (cell) phone is deductible only if the taxpayer has a land line; if not, then only itemized long-distance charges for business purposes are deductible. (A second mobile phone, used exclusively for business, is allowable as an “other expense”. )

ο A percentage of Internet and recurring computer-related expenses such as subscription software can be deducted, based on business use versus personal use

ο The purchase of equipment, such as a computer, printer, or video camera, is out-of-scope if the cost of the item is $500 or more; the return itself is in-scope if the client is willing to exclude such items from Schedule C. Beginning with tax year 2015, Tax-Aide clients may expense capital items with a cost of less than $500

(including sales tax and shipping costs) if a notice is included with the return that the client has elected to do so. • In TaxWise, go to Election (the Election Explanations form), and enter “Section 1.263(a)-1(f) de

minimis safe harbor election” in the first line. In the following lines, enter the taxpayer's name, address, and taxpayer identification number (SSN or ITIN). Finally, add a statement that the taxpayer is making the de minimis safe harbor election under §1.263(a)-1(f). [Yes, this is somewhat redundant.]

ο Casualty losses and amortization are both out-of-scope • Health insurance costs, including LTC costs, are allowable as an expense for those who are self-employed, but

go on line 29 of 1040 Pg 1, “Self-employed health insurance deduction”, which is out-of-scope. Alternatively, these costs can go on Sch A, and the return is in-scope. ο If the client doesn’t end up itemizing – that is, the standard deduction is larger than the calculated itemized

deduction for Sch A, and IF the client has a significant net profit on line 31 of Sch C, then there may be significant benefits to the client to use a paid preparer, or to purchase tax preparation software, in order to deduct health insurance costs on line 29.

• Chapter 11, Other Expenses, of Pub 535, Business Expenses, has more information on Part II and Part V allowable expenses

• Page F-13 of Pub 4012 has information on recordkeeping for travel, entertainment, gifts, and transportation expenses.

CA Note: • When the federal Sch C is used, TaxWise adds a red CA C on the Forms Tree

ο Open it and check the box at the top of the form if all is correct

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33 January 27, 2016

ο There should be no differences between federal and CA Sch Cs in the returns that we do • Note: If there is a second federal Sch C, add another CA C

ο Hover over the first CA C Pg1 and click the “+” to add the second Schedule C to the CA return • If CA C is not created to match each Sch C in the federal return, TaxWise will give a diagnostic message

Notary Fees • Notary fees are exempt from self-employment tax • Income from notary fees, and related expenses, are reported on Sch C in the normal manner • Then:

ο Go to Sch SE - enter the Exempt Notary Sch C net income amount on line 3 ο Go to 1040 Pg 2 - check the Exempt Notary box at line 56 - Self Employment Tax

LINE 13 ------ CAPITAL GAIN OR LOSS

Only stocks, mutual funds, certain bonds, and personal residences are in-scope Worthless debts or other types of securities or assets are out-of-scope

• Line 13 comes from information on Sch D Pg 1. TaxWise automatically completes Sch D Pg 2 using

information from other forms and schedules; there is no preparer involvement in Sch D Pg 2.

• CA Note: CA does not recognize HSA trusts – gains and losses incurred in the trust are currently reportable for CA - see Health Savings Accounts in CA, below, page 69

Form K-1s: If a Form K-1 shows capital gains or losses, enter those directly on Sch D Pg 1, line 5 (short-term) and line 12 (long-term) • Use a Scratch Pad if the client has more than one Form K-1

All Basis Reported to the IRS: If the client has Form 1099-Bs, and they have only Code A and/or Code D totals (no Code B and no Code E), then the total(s) can be entered directly onto Sch D Pg 1, line 1a (short-term, Code A) and/or 8a (long-term, Code D), and no further data entry is required for the Form 1099-B. • If the client has more than one 1099-B, entries on Sch D Pg 1 will probably require a Scratch Pad; if so, it’s

recommended that the preparer use the Cap Gn Wkt instead, in order to make it easier for the reviewer to match 1099-B’s to what was entered into TaxWise.

• For Code A and Code D transactions on Form 1099-Bs, enter only summary information into TaxWise, whether on Sch D Pg 1 or on the Cap Gn Wkt. ο Do not provide transaction detail to the IRS (do not use 8453 or PDF attachments) for Code A or Code D

transactions

Out-of-scope • Gains or losses requiring Forms 2439, 4797, 4884, 6252, 6781, or 8824 are out-of-scope • A tax return for, or involving a dependent child with more than $2,100 of investment income is out-of-scope RULE: Except for the limited direct entries on Sch D Pg 1 that are described above, make all capital gain entries (other than capital loss carryforwards) on the Cap Gn Wkt, NOT on Sch D Pg 1. And NEVER make entries directly on an 8949.

Capital Gn Wkt • Proceeds and basis for sales of securities may be reported on a separate Form 1099-B or on a brokerage

statement together with tax forms for dividends and/or interest • The Cap Gains Wkt permits entry of transactions in random order; TaxWise will separate short-term and long-

term transactions • Do not leave blank lines between entries - use Ctrl+I to insert a row or Ctrl+R to delete a row • Each Cap Gn Wkt can hold 50 transactions - add an extra form if needed

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January 27, 2016 34

Capital Gn Wkt – Grouped Transactions • If there are numerous transactions listed on a gain/loss statement (from a broker, program, or self-prepared) that

has ALL the required information, including basis information, data entry to TaxWise can be minimized. ο Go to Cap Gn Wkt - enter summary information

▪ Use dollar totals from the original document, for types A, B, D, and E (so, up to four totals, and up to four lines of information to be entered), for sales price and cost basis.

▪ Enter “XYZ stmt” (XYZ = broker name) for Description ▪ Enter A, B, D, or E in the 1099 column ▪ Use any sale date within a type as the sale date for the entire type ▪ For long term types (D and E), the date acquired is VA/RI/OUS ▪ For short term types (A and B), the date acquired is January 1 of the current tax year ▪ Put M in column (f), Code, to indicate this is a summary line ▪ Confirm that column (h), Gain or loss, matches the statement, and that the far right column correctly

shows a short-term gain (“S”) or a long-term gain (“L”) ο If any summary line (code M) is type B or E (cost basis not reported to the IRS), then determine whether

the supporting detail for type B and E summary lines will be sent to the IRS by paper (Form 8453) or by PDF (scanned document) ▪ If by paper, go to Sch D Pg 1, and check the first box ▪ See Using 8453 or Scanning PDF Attachments, below, page 78, for remaining steps

• Note: If basis is not on the Form 1099-B or broker’s statement, or if an adjustment to basis is needed, it is recommended that individual transactions be input on the Cap Gn Wkt ο An alternative that is not recommended: Modify the broker’s statement to include the correct information,

enter the summary information with Code M and any other applicable code in alphabetical order, the total amount of adjustment, and attach the statement with Form 8453 or as a scanned PDF

• If there are numerous transactions that are input and the number of transactions that flow to a single 8949 exceeds 17, the transactions will not be reflected in the return until additional 8949 pages have been added (remember there can be up to 6 flavors of 8949: A, B, C, D, E, and F) ο TaxWise will give a diagnostic message about the problem ο Add another one of that flavor and assign a sequential number to each, including the first one ο Rerun diagnostics and repeat until the error message is cleared

Cap Gn Wkt – Individual Transactions For code B and code E sale of securities, entering summary totals also requires sending an 8453 or PDF attachments to the IRS. If there are relatively few transactions, it is often more time-effective to enter them individually. • Description of property – the number of shares and the name or stock symbol (ticker) of the security,

abbreviated as required ο For the number of shares, round to a whole number (1, 2, etc.); enter “FS” if the transaction involves less

than half of a share • 1099 – Enter Code A through F in the 1099 column. TaxWise will flow to a proper 8949. • Date acquired

ο If the client has made several purchases of the same security or mutual fund over time, within a code type, then the transactions can be grouped For Code A or B (short-term), select one date from among the various dates of purchase (make sure the

date sold is less than one year following the date acquired) For Code D or E (long-term), use VA/RI/OUS for the date acquired, or use the most recent date for the

date acquired ο If the client inherited the security, IN/HE/RIT can be entered Sales of inherited securities are always long-term; these should be Code D or E transactions

• Date sold ο Enter the date from the Form 1099-B (for grouped transactions, see above) ο Worthless shares or bonds (including abandoned) are treated as though they were sold on the last day of the

tax year. This includes stocks, mutual fund shares, and bonds that become completely worthless during the year and those that are abandoned. Use WO/RT/HLSS as date sold and TaxWise will compute the long or short term correctly based on the date acquired

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35 January 27, 2016

DO NOT use for worthless debts, which are out-of-scope • Sales price - enter the Sales Price from the Form 1099-B or broker statement • Cost or other basis – required

ο If basis is not shown on the Form 1099-B, and a gain/loss statement or original purchase confirmation is not available, there are several options: The client can ask their broker to research and (hopefully) provide the cost basis If the client knows approximately when the security or mutual fund was purchased, they can use the

lowest value during the period when they think the purchase occurred. Historic stock values can be found online, at (for example) bigcharts.marketwatch.com/historical/ or finance.yahoo.com/market-overview/

If all else fails, enter zero as the basis and advise the client that the return can be amended when a basis is determined. (If the client is in the 10% or 15% tax bracket, then no amendment will be necessary, because capital gains will be taxed at zero percent. See the Summary form, line 33, to determine the marginal tax bracket.)

ο If a non-statutory qualified stock option is exercised and sold on the same day, the client's Form W-2 will show a code V and the compensation amount is included in box 1 wages The disposition of the stock acquired through the option is reported on a Form 1099-B Often there is a small loss reflecting the commissions

ο Inherited property The basis is the FMV at the death of the original owner; this dollar amount must come from client Estates of decedents dying in 2010 could have made an election for a carryover basis that would be

shown on a Form 8939 provided by the estate. If so, use the basis provided and the original purchase date The client may also provide the necessary information

CA Note: The basis for CA returns, in all cases, is FMV at the date of death. An adjustment will be needed on CA D if the Form 8939 does not use FMV

• Adjustments to gain or loss ο Two lists of adjustment codes, for in-scope and out-of-scope situations, are in Pub 4012, pages D-16 and

D-17 ο If a transaction was reported on a Form 1099-B with basis reported to IRS, BUT the basis is incorrect Enter an adjustment code and the amount of adjustment in the adjustment column

ο If an incorrect basis is shown in box 3 of the Form 1099-B, but the basis was NOT reported to IRS, enter the correct basis in the cost column, and in the adjustment column enter Code B and -0- amount

ο Wash sales reported on brokerage statements are in-scope – use code W The broker will adjust the basis of the re-acquired securities – no further adjustment will be needed Wash sales which are not fully reported on a Form 1099-B are out-of-scope

ο Note: Any adjustments recorded in TaxWise should also be made on the paper Form 1099-B, so that the two match.

Verification • After doing all input, review Sch D Pg 1 to make sure that amounts are on the proper lines and add up to the

same total as on the client's pages or brokers’ statements

Taxes Withheld • If federal tax has been withheld on a Form 1099-B or broker’s statement:

ο Go to 1040 Pg 2, line 64, federal income tax withheld, second field ο Link to a Scratch Pad ο Enter the Broker name and 1099-B in the description field ο Enter the amount withheld

• CA Note: CA withholding, Boxes 13-15 on Form 1099-B, should be entered on CA 540 Pg 3, line 71 (on the last row) as “1099-B” plus the amount. ο If there is already an entry on line 71, the CA return must be paper-filed; write down, then delete the

description and amount on line 71, then link from the amount field to a Scratch Pad, and use the Scratch Pad to record the multiple forms involved, and to calculate the total

ο If the taxpayer is itemizing, use a Scratch Pad to add the amount to Sch A, line 5a

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January 27, 2016 36

If there is a capital loss carryover for the next tax year, TaxWise will add Sch D Wkt 2 to the Forms Tree. Print this form, separately, when complete; it goes with the client’s copy of the tax return, to be used as a reference by the preparer of next year’s return

Capital Loss Carryover From Prior Year's Schedule D Go to Sch D Pg 1 • TaxWise will carry forward the capital loss carryovers if your site prepared the return last year

ο Otherwise, you need the prior year’s return or a copy of the appropriate worksheet to correctly report any loss carryover

• Capital loss carryovers are separated between short-term and long-term for federal • Enter (verify, if carried forward) the amounts from the prior year capital loss carryover Sch D Wkt 2

ο On Sch D Pg 1, line 6 for short term ο On Sch D Pg 1, line 14 for long term

• TaxWise will create a new carryover worksheet for any balance over the maximum allowable loss of $3,000 ($1,500 if MFS)

• For clients with incomes close to the standard deduction, the prior year Form 1040, page 1, Line 13, will show a capital loss (for example, $3,000), but the carryover will not be reduced by the full amount of that loss ο That is correct because in such cases no benefit was received from the loss deduction

• CA Note: Capital loss carryover amounts can vary between federal and state due to HSA or other rules ο TaxWise will not carry forward the CA amount in any event ο Manually enter the total capital loss carryover on the CA return ο Confirm that the capital gains and losses on the prior year’s returns are the same for federal and CA Go to CA D - enter the TOTAL of the federal short and long term carryover amounts on line 6 as a

positive number Verify that TaxWise form CA CA Pg 1 shows no subtractions/additions on line 7, Capital gain or loss

ο If the prior year’s CA gains/losses differ from the federal: Compute the CA capital loss carryover Enter the CA capital loss carryover on CA D line 6 as a positive number Verify that CA CA Pg 1 shows the correct adjustment on line 13

ο Note: If the client has an HSA and has invested the funds which produced a capital gain or loss, this situation can produce a difference between the federal capital loss carryover and the CA loss carryover

Sale of Main Home Note: Enter the sale information only if the client has received a Form 1099-S or gain is taxable in part or in full • To claim the exclusion on the sale of a main home, the client must meet the ownership and use tests

ο The client must have owned the property for a total of 24 months of the previous 60 months The ownership requirement can be satisfied by one of the two spouses filing a joint return

ο The client must have used it as their principal residence for a total of 24 months of the previous 60 months The use requirement must be satisfied by both spouses when filing a joint return to claim the maximum

$500,000 exclusion If only one spouse satisfies the use test, the exclusion is limited to $250,000

ο The ownership and the residence 24-month test periods do not have to be continuous nor overlapping • The client cannot have sold another property in the previous two years AND used the exclusion • See Pub 17, chapter 15, for more information • If any portion of the client's main home was ever rented out or used for business (home office) such that

depreciation would have been allowable (whether or not it was actually claimed), the return is out-of-scope • The lower portion of Sch D Wkt2 is a worksheet for the sale of a home, it is not required and does not carry to

Cap Gn Wkt, or to 8949, or to Sch D Pg 1 • Computing the basis of the home is complicated and may require a complete review of the transactions

regarding home purchases and sales since the acquisition of the first home ο The client needs to provide the basis information ο Calculation of this basis by a counselor is out-of-scope

• Cap Gn Wkt input ο When there is a gain and an exclusion is claimed, in addition to the date acquired and date sold Enter the proceeds and basis information

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37 January 27, 2016

Enter the allowable exclusion as a negative number in the adjustment column with Code H CA Note: CA conforms to the federal rules, including sale by a widow/widower within 2 years of the

date of death of her/his spouse ο If a loss is incurred (which is a nondeductible personal loss), in addition to the date acquired and date sold, Enter the proceeds and the basis information Enter the amount of nondeductible loss as a positive number in the adjustment column with Code L

• CA Note: If the client had CA tax withheld from the sale they will receive CA 593 ο Go to CA 540 Pg 3, line 73 – from there, link to CA 593. Enter the required information on that form.

• Note 5405 recapture: If the home was originally purchased after 2007 and the First-Time Homebuyer Credit was claimed, see First-Time Homebuyer Credit Repayment, below, page 63

LINE 14 ------ OTHER GAINS OR LOSSES (out-of-scope) LINE 15/16 -- PENSIONS AND ANNUITY INCOME & IRA DISTRIBUTIONS Go to 1099R • Form 1099-R is the usual source document for these payments • The Railroad Retirement Board and U.S. Government Office of Personnel Management (“OPM”) use

variations of the form • For MFJ returns, specify either Taxpayer or Spouse at the top of the form • The “Check if 1099-R is handwritten, altered, or appears not to be a true 1099-R” should be used ONLY IF the

Form 1099-R is truly suspect • Check the corrected box if the corrected box is checked on the original Form 1099-R • Check the appropriate box for address information

ο If the client’s current address is not the address shown on the paper Form 1099-R, use the “Check and make changes” box to change the address field on the 1099R form to agree with the address shown on the paper Form 1099-R

ο If no address is shown on the Form 1099-R, leave the default address on the 1099R form.

ITIN Returns • When the client has an ITIN and presents a Form 1099-R with a SSN, the return cannot be e-filed; a paper

return must be prepared ο For the federal return, on the Main Info form, under Type of Return, check “Paper” ο CA Note: On CA 540 Pg 5, check “No” in response to the question (just below line 115) “Do you want to

electronically file this return?” ο Set the return stage to “Paper file” (or similar, depending on the return stages defined at your site)

1099R Payer’s Name and Address • Payer's ID – enter the EIN.

ο If TaxWise has encountered that EIN on another return, the name and address information will be filled in by TaxWise

ο Compare to the paper Form 1099-R and make corrections as needed. Several companies use the same EIN for multiple addresses; an EIN match can generate the correct

company name but the wrong address. • Verify that the payer’s name and ID match the Form 1099-R exactly, because the e-file will reject if these do

not match IRS records • TaxWise will complete the four-character Name code field

1099R Dollar Value Boxes • The entries in this section must be an exact match of the Form 1099-R (with rounding) • Box 2:

ο If box 2 is blank, do not make an entry in 1099R, box 2 – the entire box 1 amount will be taxable unless The box 7 code makes it not taxable, or An amount is entered in the Exclusion Worksheet section of 1099R, or An amount is calculated in the Simplified Method section in the lower section of 1099R

ο If box 2 is a zero (not just blank), confirm that the distribution is not taxable and, if necessary after entering the box 7 code, use line 5 of the Exclusion Worksheet to make the distribution nontaxable

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January 27, 2016 38

• Box 3: Capital gain will be shown for a Charitable Gift Annuity (Code F) ο Ordinary income portion: The difference between the distribution shown in box 1 and the capital gain shown in box 3 is ordinary

income TaxWise carries this net amount to 1040 Pg 1, line 15b / 16b

ο Manually enter the capital gain portion – go to Cap Gn Wkt Describe as FROM 1099-R in column (a) The 1099 code is F (long-term) Sales price is the amount from Form 1099-R box 3 Use F3 to remove the red in columns (b) and (c) Go to the respective 8949 – use F3 to remove the red in columns (b) and (c)

• Box 5: If the payer has calculated the taxable amount of the pension in box 2, generally the difference between boxes 1 and 2 will appear in box 5 ο For Form CSA 1099-R from the Office of Personnel Management, see below, page 41 ο If there is an amount in Box 5, and “Taxable amount not determined” has been checked on the Form 1099-

R, then the Simplified Worksheet section must be completed. • Box 7: Take care to enter the code shown on the Form 1099-R

ο If multiple codes are shown (for example, “4G”), enter both codes ο A complete list of codes begins on page D-21 of Pub 4012, including codes that are out-of-scope Note: Per the AARP Foundation Tax-Aide Scope Manual, codes 6 and W are in fact in-scope; do not

follow Pub 4012 with regard to these two codes. Also, codes J and T are in-scope if the distribution is completely non-taxable.

In TaxWise, to see a list of all codes: F1 > Index > 1099-R Codes for box 7 • If there is code 3 in box 7, then the box “Check if disability and taxpayer is disabled” this entry on the 1099R,

below box 7 on that form, MUST be checked if the client is less than the normal retirement age for the company paying the pension or annuity ο If the box is checked, the pension amount will show up on 1040 Pg 1, line 7, as wages, making the taxpayer

eligible for EITC and other credits ο Minimum retirement ages for federal employees can be found in Pub 721; minimum retirement ages for

CALSTRS and CALPERS annuitants is available on their respective websites. ο For other employers, if the client does not know the normal retirement age, we generally cannot complete

the return. Ask the client to find out this information, and then return. • If the IRA/SEP box is checked:

ο Confirm with the client the type of IRA (traditional or Roth) and whether it is a Roth conversion ο A conversion from a traditional IRA to a Roth IRA requires completion of Part II of Form 8606, which is

out-of-scope ο A qualified distribution from a Roth is in-scope, even if coded “J” or “T” incorrectly (see line 5, excludable

amount, on the 1099R - Exclusion Worksheet, which is covered below, starting on page 39) ο Distribution from a converted Roth is out-of-scope if any portion of the distribution is or could be taxable Note that the 5-year rule applies to each conversion

• The “Check to Force Form 5329” box is used for exceptions to the early distribution surtax of 10% ο If there is an early distribution surtax - because the taxpayer is less than 59½ years old - the surtax will

show in the Other Taxes section of 1040 Pg 2, line 58 ο If there is an exception to the surtax (that is, the taxpayer should not pay it), check the box to put a 5329 on

the Forms Tree On 5329, the amount subject to the surtax is shown on line 1

ο To view the exception to surtax codes Use F1 to reach TWO Help Click Index in the lower left panel Click on Exception Codes for Additional Tax on Early Distributions Note: Qualified higher education expenses can include room and board. See IRS Pub 590-B,

Distributions from Individual Retirement Arrangements, for details on that and other exceptions. ο Enter the appropriate code on 5329, line 2, and the amount NOT subject to additional tax on line 3

• Box 9b is the total employee contributions to the plan

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39 January 27, 2016

ο The annual recovery of basis or “investment in the contract” may appear in box 5 Caution: you cannot always tell if box 5 is recovery of employee contributions or something else unless

it states so on the Form 1099-R or in an accompanying document If the amount in box 5 is equal to box 1 minus box 2, it confirms that the box 5 amount is the annual

recovery of the employees basis ο If an amount appears in Form 1099-R box 9b and a taxable amount is not shown in box 2, the taxable

amount on 1099R box 2 remains blank and red until you complete the 1099R Simplified Method section, described below, page 40 (this will also get the red out)

• If this is a Total Distribution (Form 1099-R box 2b), the remaining employee contribution may appear in box 5 ο If box 5 is greater than box 1, there may be a loss on the annuity which may be deducted if itemizing - see

below, starting on page 56 • Note: Survivor benefits attributable to service by a public safety officer who is killed in the line of duty before

1/1/1997 are excludible from federal income tax ο The client may receive a Form 1099-R form with -0- taxable in box 2 ο CA Note: CA does not conform to this provision and all benefits received are taxable Enter an adjustment on CA CA Pg 1, line 21f, and describe as 1099-R

1099R - State Section • If provided on the Form 1099-R, enter the state ID without dashes or spaces (TaxWise truncates the carry

forward information for the following year after 9 numbers) ο The state ID number is NOT the same as the federal ID number. ο If the State ID is blank on the paper Form 1099-R, enter six nines (999999) No entry is required if there is no CA tax withholding

• The payer may or may not complete the state section ο CA follows the federal rules for taxability for all CA residents for employer plan distributions See IRA Basis Difference, below, page 68, if the client made contributions that were not deductible

ο If the state distribution is blank, it is presumed the same as the federal gross distribution • IF AND ONLY IF the state amount on the Form 1099-R is different than the federal amount:

ο Override box 14 and enter CA distribution amount ο TaxWise does not take the difference to CA CA – a manual adjustment is needed Go to CA CA Pg 1 and enter the adjustment on line 15 or 16, as appropriate, using a Scratch Pad

1099R - Exclusion Worksheet • The exclusion worksheet is used to input the amount that will not be taxable or to place the distribution

information on 8606, Nondeductible IRAs, as necessary • Before starting, and when finished, check line 15 or line 16 on 1040 Pg 1 to make sure the entries produce the

correct result • A “transfer” is a DIRECT transfer of funds or securities from one qualified account to another. No money

passes through the hands of the client ο The client can do this as often as they wish, without limit ο Box 7 of the Form 1099-R should be coded “G” and the amount will show as non-taxable on line 15b or

16b ο No further entry in TaxWise is needed

• A “rollover” is a distribution from a qualified account followed by a deposit of some or all of the distribution to another qualified account WITHIN 60 DAYS ο A taxpayer is limited to one rollover from an IRA in any 12-month period (regardless of how many

accounts there are) Note: The IRS began enforcing the once-a-year limit as of 2015

ο A conversion of a traditional IRA to a Roth IRA is out-of-scope • Line 1 - Enter the amount that was rolled over (it may be less than the amount of the gross distribution)

ο Go to 1040 Pg1 line 15b or 16b to confirm that TaxWise has checked the “Check if rollover” box ο For an IRA rollover, click on the red box to the left of the line 15b amount field, press F9 to link to the 1040

IRA Rollover Explanation form, and explain the rollover (for example, “IRA rolled over from bank ABC to bank DEF”)

• Line 2 - Qualified Charitable Distributions (QCD)

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Note: Congress did extend the provision for QCD for the 2015 tax year.

ο Enter the qualified amount paid directly to a charity This makes the distribution non-taxable and the client does not get a charitable deduction

ο The client must have been at least 70½ when the donation was made; the maximum in any single year is $100,000

• Line 3 - amount rolled over to an HSA is out-of-scope • Line 4 - Retired Public Safety Officers (PSO) qualified health or LTC plan

ο A PSO includes a law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew

ο Confirm that the client was a PSO before retirement ο Enter the qualified amount (up to $3,000) for health and/or LTC insurance paid from the retirement plan ο The amount may be in box 5 of the Form 1099-R or in a letter from the plan Do not include this amount on A Detail as a medical deduction But, if the amount on the Form 1099-R exceeds $3,000, the excess may be included on A Detail

• Line 5 - Excludible amount ο If the taxable amount is determined (Form 1099-R box 2b is NOT checked) and is shown as zero (0) on the

Form 1099-R box 2, enter the entire amount of the distribution on line 5 ο If the distribution is from a Roth IRA and the payer has used code J or T in box 7, but the taxpayer has

satisfied all the requirements so that none of the distribution is taxable, enter the entire amount of the distribution on line 5. See Pub 4012, page D-25, to determine if the Roth IRA distribution is in-scope See page 32 of the January 2016 NTTC document for processes to follow

ο Do not enter an amount in any other circumstances as that would be out-of-scope • The box: “…ever made nondeductible IRA contributions” will add an incomplete 8606 (red)

ο Note: Do not manually add a 8606 Page 1 to the Forms Tree. You must use the check box to add the 8606, in order for TaxWise to proces the form correctly.

ο Only Part I (Page 1) of 8606 is in-scope. • The box: “…conversion from a traditional IRA to a Roth”, when checked, adds an incomplete 8606 Page 2

(red) to the Forms Tree ο If this box needs to be checked because part or all of the distribution was in fact converted to a Roth, the

return is out-of-scope

1099R Simplified Method (Lowest Part of Form) • Page D-23 of Pub 4012 has detailed information on the Simplified Method Worksheet • If the employee made after-tax contributions toward the retirement plan, a portion of the payment is not taxable • Note: If the starting date of the payments was prior to July 2, 1986 and there is no entry in Form 1099-R box 2,

the entire amount of the client’s contribution probably would have been recovered under the “Three Year Rule”; clear the red from box 2 with F3 ο The entire amount in box 1 will show as taxable on 1040 Pg 1

• If the annuity start date is after July 1, 1986, Form 1099-R box 2 is blank, and there is a total employee contribution amount in box 9b ο Enter the total amount of employee contributions from Form 1099-R, box 9b, on line 1 of the simplified

method worksheet ο Check the appropriate box for the primary annuitant’s age when the annuity payment started even if the

employee subsequently died (not his or her current age) If the employee died before starting the annuity and the surviving spouse is collecting the benefits, use

the surviving spouse’s age only • Depending on the annuity start date, you MAY have to check one of the two boxes relating to annuity starting

date ο Note: The second box is used ONLY if this is a joint or survivor annuity, in which case the combined ages

at the time the annuity started must also be checked ο Note: The joint or single determination is made when the annuity starts. Subsequent changes, such as death

or remarriage, are disregarded.

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41 January 27, 2016

ο Errors in checking these boxes WILL result in an incorrect tax-exempt amount ο For a Joint and survivor annuity, check the combined ages of both annuitants at the annuity starting date This is done even if an annuitant dies after the start of the annuity payments

• Line 4 – enter the number of months for which payments were received during the tax year, which will usually be 12 except for the year in which payments started or ended

• Line 5 – enter the amount recovered tax free in prior years ο This amount carries forward from the prior year ο If the amount does not carry forward, then either Look at last year’s tax return to determine this amount, or Calculate the amount using the monthly amount computed by TaxWise times the number of months

prior to the current tax year ο If the client has been receiving their pension for more than 17 years, this line must be completed , because

they may have used up all their basis ο Note: There is a small window for those whose benefits began 7/1/86 – 12/31/86 The computed annual exclusion can be taken as long as benefits are received This includes the survivor's benefits if the annuitant originally chose a joint and survivor annuity In this rare case, do not complete line 5 of the simplified worksheet and note this at the bottom of the

Summary form. ο Note: The Annuity Calculator at cotaxaide.org/tools can be used to verify the allowable exclusion for all

years of the annuity; the calculator shows the TWO entries needed in the Simplified Method section of 1099R

• After lines 1 through 5 are completed, TaxWise will calculate the non-taxable amount; the taxable amount will then flow to 1040 Pg 1, line 16b ο The taxable amount entered in box 2 of 1099R (the amount on the paper Form 1099-R box 2) will remain at

0 - this is okay • Note: Print the simplified method and attach to client’s copy of their return for future reference

ο Use PrtScn to capture the image and print it • CA Note: If the annuity start date was after 7/1/1986 and before 1/1/1987, the 3-year rule could have been used

for CA - even though it was not allowed for federal ο If so, make an adjustment on CA CA Pg 1, line 16, to increase the taxable retirement income for an amount

equal to the federal simplified method basis recovered (1099R simplified worksheet, line 6)

Office of Personnel Management (OPM) CSA 1099R • The OPM reports annuity payments using the CSA 1099R, which places information in a different sequence

• See Pub 721, Tax Guide to U.S. Civil Service Retirement Benefits, if additional information is needed • Box 2 – if the annuity starting date is after July 1, 1986, but before November 19, 1996, the taxable amount box

may show "unknown" ο In this case complete the simplified method worksheet as detailed above

• Box 5 on this form can be: ο The amount of the employee’s basis recovered this year (CSA 1099-R box 1 minus box 2), OR ο Health insurance premiums that are deductible as medical on A Detail; the amount will include only

premiums for FEHB/FEP and Medicare Part B and/or Part D

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January 27, 2016 42

ο If the retiree is having dental, vision, or LTC insurance premiums deducted, they will not be included in box 5

ο The only way to see these other premiums is to see the client’s Form RI 38-38, Notice of Annuity Adjustment. Codes are shown on the back of the form: 42 is Federal Dental Insurance 43 is Federal Vision insurance 45 is a catchall that includes LTC

• Voluntary Contributions - If the client is receiving additional payments resulting from voluntary contributions to the retirement fund, the additional portion of the annuity due to the voluntary contributions must be reported separately for tax purposes and is shown at the bottom of the Form 1099-R statement

RRB-1099-R – Green Form/“non-Social Security and Tier 2” • This is treated as a pension or annuity (per Pub 575, Pension and Annuity Income); it is not taxed by

California

Amounts on the RRB-1099-R Enter in TaxWise on a 1099R EIN = 36-3314600 Payer’s ID Box 3 Employee Contributions Box 9B and simplified method line 1 Box 4 Contributory Amount Paid Not entered Box 7 Total Gross Paid (sum of boxes 4, 5, and 6)

Box 1 Enter “7” in box 7

Disability box Check the box if the recipient is disabled and below normal retirement age Box 8 (repayment of benefits included in a prior year)

There may be a claim repayment deduction if itemizing - see Miscellaneous Deductions (both 2% and not 2%) below, page 56

Box 9 Federal Income Tax Withheld Box 4 Box 12 Medicare Premium Total Not on 1099R – put on A Detail CA Note: In the 1099R form, to the left of boxes 12 to 17, are a series of boxes. You MUST click Railroad Retirement as this exempts the payment from CA taxes

Foreign Government Pensions • Foreign government pensions are out-of-scope except for Canadian and German Social Security – see Social

Security below, page 45 • A Canadian RRSP (similar to an IRA) is out-of-scope

LINE 17 ------ RENTAL REAL ESTATE, ROYALTIES, TRUSTS (limited) • How rentals and royalties are handled, including whether they are in-scope or not, depends partly on how the

taxpayer receives this income. Unless otherwise indicated, such income is reported on Sch E Pg 1 • Form 1065 (Schedule K-1 form)

ο If this form has rental income or loss, the return is out-of-scope

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43 January 27, 2016

ο Royalties are in-scope, but where they are reported depends on whether or not they are related to the personal services of the client. If related, report the income on Sch C Pg 1; otherwise, put it on Sch E Pg 1

• Form 1099-MISC ο Amounts in box 1, Rents, are in-scope ο Amounts in box 2, Royalties, are in-scope IF these royalties do NOT relate to the personal services of the

taxpayer, AND there are no associated expenses. If the royalties relate to personal services – for example, the client is a self-employed writer, inventor,

or artist, then report royalty income (and expenses) on Sch C Pg 1 ο If the client wants to claim associated expenses on Part 1 of Schedule E, then the return is out-of-scope.

• Cash payments for rent for which there is no Form 1099-MISC may be in-scope; there cannot be any associated expenses ο Rental of land (for farming, camping, etc.) is in-scope Note: Farm rental income which is based on crops or livestock produced by the tenant (share-rent)

requires either Form 4835, Farm Rental Income and Expenses, or Schedule F; both are out-of-scope ο Rental income involving buildings is out-of-scope (but see notes 1 and 2, below) because such income

always involves the associated expense of depreciation, even if not claimed. (When depreciation is involved, the taxpayer is almost always better off using a paid preparer, or paying for tax preparation software, so they can claim depreciation expense.) Note 1: As described in Chapter 5 of Pub 527, Residential Rental Property, if a taxpayer’s home is

rented for less than 15 days during the tax year, such rental income can be totally excluded from their tax return.

Note 2: Rental income from sources such as a home is in-scope for military returns, with Military certification.

Note 3: Income from the sharing of housing through Airbnb and similar companies may or may not be rental income, and that determination is out-of-scope. Refer the client to a paid preparer and/or recommend that they purchase tax preparation software.

ο Income from rental of personal property should be reported on Schedule C, not Schedule E. • If the return is in-scope, go to Sch E Pg 1

ο The answer to Question A must be “no” or the return is out-of-scope ο For rentals, enter the property address, the type (anything but “5” is probably out-of-scope), and the rental

days in one of the blocks (A, B, or C) on line 1. ο For royalties, use the client’s home address as the property address in line 1, and enter type 6. ο Enter dollar amounts on line 3 or line 4 For income received on a Form 1099-MISC, link from a dollar amount field on line 3 to a 1099 MISC For rental income where there is no Form 1099-MISC, enter the cash amount directly on line 3 For a Schedule K-1 form with royalty income, enter the amount directly on line 4

• If there are more than three rental and royalty amounts to be entered, add another Sch E Pg 1 (in the Forms Tree, to the right of the form name, click on the “+” sign)

LINE 18 ------ FARM INCOME (out-of-scope) LINE 19 ------ UNEMPLOYMENT COMPENSATION • Go to 1099G • Unemployment compensation is fully taxable on the federal return • Check the appropriate box at the top to indicate whether the payment was made to the Taxpayer or the Spouse • Do not enter “CA” on line 6 (state tax withheld) unless there was some CA tax withheld • The California form has two parts: Unemployment and Family Leave

ο Both are reported on line 19 as unemployment ο If there are dollar amounts on both parts, add a new 1099G to enter the Family Leave

• Amounts repaid during the same year that benefits were received will reduce the taxable income for that year • Any amount repaid for a prior year must be deducted on Sch A, as a miscellaneous deduction (subject to 2%

floor if $3,000 or less) and cannot offset the amount received for the current year • CA Note: Unemployment or family leave payments are NOT taxable by CA

ο TaxWise makes the adjustment automatically

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January 27, 2016 44

LINE 20 ------ SOCIAL SECURITY AND RAILROAD RETIREMENT BENEFITS • Up to 85% of Social Security payments may be taxed on the federal return • Computationally, if AGI plus tax-exempt income plus one-half of Social Security payments is less than $25,000

($32,000 for MFJ), none of the Social Security payments is subject to tax. Nevertheless, all Social Security payments must be entered on 1040 Wkt1.

• Tax implications of less common U.S. Social Security payments: ο Social Security Disability Insurance (SSDI) payments are treated, for tax purposes, as regular Social

Security payments. A Form SSA-1099 is issued for SSDI. ο Benefits received by children of a deceased taxpayer are NOT taxable on a parent’s return ο Social Security death benefits (a maximum of $255) received by the spouse or children of a deceased

taxpayer are NOT taxable ο Supplemental Security Income (SSI) payments are NOT taxable and the client should not have received a

SSA-1099 for such payments • Complete the Social Security And Railroad Tier 1 Benefits section on 1040 Wkt1

ο Both taxpayer and spouse are reported on the same worksheet ο Enter amount from SSA-1099, box 5 as “Social Security received this year” If the amount is negative, the return is out-of-scope If there is more than one SSA-1099, combine amounts on all forms to see if the amount is positive or

negative. If positive, use the net positive number ο Enter amount from RRB-1099 (blue form) box 5 as “Railroad tier 1 received this year” ο Enter the total amount of Medicare B, C and D premiums in the box labeled “Medicare to Schedule A” Do this as a matter of routine so that it won’t be forgotten if the client itemizes deductions

ο Enter any federal tax withheld in the appropriate boxes ο The remainder of the worksheet will calculate automatically, and place the taxable amount, if any, on 1040

Pg 1, line 20 a/b • CA Note: U.S. Social Security or Railroad tier 1 (also tier 2) is NOT taxed by California

ο Verify adjustment on CA CA ο

RRB-1099 – Blue Form/“Tier 1 Social Security equivalent” Amounts on the RRB-1099 Enter in TaxWise on 1040 Wkt1

Box 5 Railroad Retirement (not Social Security) for taxpayer or spouse Box 10 Federal tax withheld for taxpayer or spouse Box 11 Medicare to Schedule A detail for taxpayer or spouse

• Note: This is equivalent to Social Security and it is not taxed by California; TaxWise makes the adjustment

Lump Sum Payments of Social Security • Enter total Social Security payments received in the normal manner

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45 January 27, 2016

• When payments are received in the current year that are attributable to prior years, there is an alternate calculation of the amount that can become taxable ο The amount computed as taxable is includible in the current year’s return (not the prior year) ο If including the entire amount received in the current year’s return does not make any of the Social Security

taxable, STOP – it is not necessary to complete the Lump Sum Wkt • If there is a lump sum payment for a prior year AND the prior year tax return is available, proceed as follows

ο Go to lump sum payments at the bottom of 1040 Wkt1 ο Enter the amount received attributable to 2015 only for taxpayer / spouse (the rest of the form is completed

by TaxWise from your entries on Lump Sum Wkt) ο Amounts taxable from previous years – link to Lump Sum Wkt and complete the form ο If there is another previous year, add another Lump Sum Wkt A separate worksheet is required for each prior year

Canadian or German Social Security • For U.S. taxpayers, Canadian or German Social Security are treated the same as U.S. Social Security

ο Canadian versions are named the Canada Pension Plan (CPP), the Quebec Pension Plan (QPP), and Old Age Security (OAS)

ο Take the amount reported in Canadian dollars, or in euros (Germany), and convert to dollars The IRS publishes “Yearly Average Currency Exchange Rates”:

irs.gov/businesses/small/international/article/0,,id=206089,00.html Other currency exchange rate sources are

• oanda.com/currency/historical-rates/ • xe.com/currencytables/ • X-rates.com (click on “Historic Lookup”)

ο Enter the converted dollar amount on 1040 Wkt1, as “Social security received this year” • CA Note: These foreign government pensions are taxable on the California return

ο TaxWise does not make the necessary adjustment Go to CA CA Pg 1, line 21f Enter a description and the converted dollar amount as an addition

LINE 21 ------ OTHER INCOME • Use line 21 to report any income not reported elsewhere in the return, such as gambling winnings, prizes,

awards, jury duty pay, Alaska Permanent Fund dividends, and recovery of itemized deduction ο Note: Hobby income and income from other activities not engaged in for profit is reportable on line 21, but

is out-of-scope (offsetting expenses are allowable on Schedule A, but are similarly out-of-scope.)

Gambling Winnings - Form W-2G • Link from 1040 Wkt7, line 1, to W2G, or add the W2G to the Forms Tree

ο Check the box for Taxpayer or Spouse at the top of the form ο The Payer’s federal ID number (EIN) is required ο TaxWise will fill in the Name code field ο Verify that the payer’s name and ID match the Form W-2G exactly ο Complete the money fields as applicable, matching the Form W-2G ο CA Note: Line 14 is not required, but if filled in, line 13 information is also needed to avoid a CA reject

• If there is more than one Form W-2G, add additional W2Gs to the Forms Tree as needed • CA Note: California Lottery winnings are not taxed by CA

ο The box on the lower left-hand side of this form should be checked ONLY when CA Lottery winnings are being reported

ο This check mark results in the proper adjustment on CA CA for the winnings and associated losses

• Gambling losses on Schedule A ο Gambling losses can be input at the bottom of a single W2G, if desired; losses do not have to match up with

the payer on the W2G.

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January 27, 2016 46

But put all CA Lottery losses, and only CA Lottery losses, on the CA Lottery winnings W2G ο The client is responsible for having written substantiation for the amount claimed for losses. ο Gambling losses on W2Gs are carried by TaxWise to Sch A, line 28, up to the total amount of reported

winnings on the W2Gs. ο TaxWise will limit aggregate losses to the maximum of reported winnings ο Note: Gambling losses reported on Schedule A only have value to the taxpayer to the extent that the

taxpayer itemizes. If the taxpayer takes the standard deduction, the reported losses have no value. • CA Note: Indian tribal winnings may require special treatment

ο Winnings reported on a Form W-2G from an Indian casino are except for CA IF (a) the individual is an enrolled member of the Indian tribe on whose land the casino is located, and (b) lived on that tribe’s land (note that the tribe may have land at several locations; it is not necessary to live where the casino is located) If exempt for CA, make a manual adjustment on CA CA Pg 1, line 21(f) Also make an adjustment on CA CA Pg 2, line 41, IF the individual itemized AND received benefit

from gambling losses on Sch A, line 28, to the extent that benefit was received • Gambling losses during the same session as winnings: If the client maintains copious records of their

gambling, they may use losses from the same session where they received a Form W-2G to reduce their income, up to the amount of reported income (but never below zero) ο Same-session losses should be entered on 1040 Wkt7, line 17 or below, as a negative number ο Losses from a different gambling session can only be claimed on Schedule A

• If the client has winnings not reported on a paper Form W-2G, enter the sum of these gambling winnings on line 17 or below of 1040 Wkt7 and describe appropriately ο Note: you may need to manually adjust the total losses on Schedule A ο For the federal return, enter additional gambling losses on Sch A, line 28, by linking to “Other Deducts –

Schedule A line 28 ...” worksheet. Warning: The total for gambling losses on line 28 cannot exceed the total of all reported income from gambling winnings

ο If you enter additional gambling losses this way, and they include any California Lottery losses, make an adjustment to remove those California Lottery losses Go to CA A, line 28, and link to a Scratch Pad. Enter the unallowable CA lottery losses as a negative amount

1099 MISC Income • Form 1099-MISC can represent several different types of income • Look at the Form 1099-MISC carefully to determine the type of income

ο Boxes 5, 6, and 8 through 15b are out-of-scope ο Hobby income and income from other activities not entered into for profit, if on a Form 1099-MISC, are

out-of-scope; because the 1099- MISC has been reported to the IRS, the entire return is therefore out-of-scope. Offsetting expenses – regardless of whether income was or was not reported on a 1099-MISC - are allowable on Schedule A, but are out-of-scope.

• Form 1099-MISC income for boxes 3 and sometimes 7 (if such income is not business income) is reported on 1040 Wkt7, line 2 – link from there to a 1099 MISC ο Use the 1099 MISC on the Forms Tree, located below Sch C Pg 2, ONLY for amounts reportable on

Sch C Pg 1, line 1, and see the section “LINE 12 - BUSINESS INCOME, on page 30, above, for further details.

• Input the information from the paper Form 1099-MISC to the TaxWise form 1099 MISC that you have linked from line 2

• Indian tribal income requires special treatment ο An amount in box 3 of a Form 1099-MISC represents a portion of the profit from a casino or other business

on tribal lands; this is always taxable on the federal return, but is not subject to self-employment tax and therefore does not go on Schedule C

ο CA Note: Indian Tribal Income is exempt for CA ONLY IF the recipient is (a) an enrolled member of the Indian tribe that issued the 1099-MISC (presumably yes); and (b) lived on that tribe’s land If exempt for CA, a manual adjustment on CA CA Pg 1, line 21(f) is required

Payments From Qualified Education Program-Form 1099-Q • This form reports gross distributions from a qualified tuition program (529 plan) or a Coverdell ESA

ο Coverdell ESA plans are out-of-scope

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47 January 27, 2016

• If these distributions were fully used for tuition and fees, they are not taxable ο Starting with tax year 2015, qualified expenses also include the student’s expenses for computer equipment,

software, and internet access • If the distribution exceeds the amount of qualified expenses, the return is out-of-scope

Distributions from LTC Plans-Form 1099-LTC • Go to 8853 Pg 2, by directly adding the form to the Forms Tree, or by linking from 1040 Wkt7, line 11 • Check the box for either Taxpayer or Spouse, based on the policyholder’s name on the Form 1099-LTC, not

the name of the insured • Complete line 14, the name and SSN of the insured • Answer the question on line 15

ο If the answer is “Yes”, then the return is out-of-scope: refer the client to a paid preparer and/or recommend that they purchase tax preparation software.

• Three types of LTC payments are reported on the Form 1099-LTC; these are handled differently on the 8853 Pg 2: ο (1) If “Reimbursed amount” is checked in box 3, enter the amount from box 1 into line 24. No further

entries are needed. ο (2) If “Per diem” is checked in box 3, and box 2 is blank or zero, enter the amount from box 1 into line 17,

and then: IF box 4 on Form 1099-LTC is checked, enter the same amount into line 18 Enter the number of days covered by the per diem, in line 21 IF line 26 is positive (that’s unlikely; it means that per-diem payments exceeded the tax-free threshold

of $330 per day), and IF the client’s actual costs exceeded $330 per day, then complete line 22 based on information from the client. Otherwise, leave line 22 blank.

ο (3) If there is an amount in box 2, Accelerated death benefits paid, on the Form 1099-LTC, its taxability depends on whether the insured was chronically ill or terminally ill when payments were received. Payments when the insured was terminally ill are not taxable. See Instructions for Form 8853 for how to complete Section C.

• TaxWise will carry the taxable amount, if any, to 1040 Wkt7 line 11 • Note: Unreimbursed medical expenses can be deducted on A Detail, if the client itemizes and has sufficient

medical expenses to exceed the 7.5% or 10% threshold.

HSA Distribution Note: HSA’s are out-of-scope unless the preparer and reviewer are certified in the area • If a distribution is received, Form 8889 and Form 1040 must be filed even if there is no other income • Go to 8889 Pg 1 • Enter the Form 1099-SA distribution is on line 14a • Get information from the client to complete line 14b and line 15

ο Unreimbursed expenses from a prior year (but after the HSA was set up) are qualified medical expenses, IF they were not used as a Schedule A deduction. If the client wants to count expenses from a prior year as qualified medical expenses, the client must have good records, to avoid double-counting.

• If all of the distribution was used for qualified medical expense, there is no taxable amount; if used for other than qualified medical expense, the taxable HSA distribution in line 16 carries to 1040 Wkt7, line 12 ο If line 16 is positive, there will also be a 20% additional tax on line 17b. TaxWise carries this amount to

1040 Pg 2, line 60 ο If line 16 is positive, determine if the box on line 17 can be checked. It should be checked if the distribution

was made after the beneficiary become disabled, became age 65, or died. • Note: Only unreimbursed medical expenses can be listed on A Detail, if itemizing. Expenses reimbursed by a

HSA distribution may not be included on A Detail. • CA Note: CA does not recognize HSA – see Health Savings Accounts in CA, below, page 69

Cancellation of Debt Note: Cancellation of Debt (COD) from non-business credit card debt is part of the advanced certification and is in-scope for Tax-Aide. Anything other than non-business credit card debt (for example, cancellation of student debt or mortgage debt) is out-of-scope in 2015.

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January 27, 2016 48

• Cancellation of credit card debt results in taxable income unless an exception applies – see Pub 4012, page D-33, and, if more information is needed, Pub 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments ο Note: On Form 1099-C, the code for bankruptcy, in box 6, is “A”.

• If the client elects to use an exception, such as the following, to make the COD amount non-taxable, then the return is out-of-scope: ο Insolvency at the time of the debt forgiveness ο Debt incurred for deductible items that have not been deducted or for which less than full tax benefit was

received • Enter the amount of credit card debt that was cancelled, as taxable income, on 1040 Wkt7, with an appropriate

description ο You should confirm with the client that the client agrees with the amount.

• Note: All income from cancellation of debt must be reported on the return, whether or not a Form 1099-C was received

Medicaid Waiver Payments • CA’s In-Home Supportive Services (IHSS) (EIN 94-2985244) pays for the in-home care of certain needy

individuals and reports the payments on Form W-2 (the W-2 payer’s address is in Roseville; the payer’s name is the person being cared for)

• In Notice 2014-7, the IRS clarified that IF such payments represent Medicaid Waiver Payments or difficulty of care payments, then payments must be excluded from income, and provided additional guidance in its February 23, 2015, Q&A. See the “Difficulty of Care” section of Pub 525, Taxable and Nontaxable Income, for more details ο To qualify for exclusion, the care provider and the care recipient must live at the same home ο For tax returns – of any year – prepared by Tax-Aide after January 1, 2016, such payments must be

excluded from income • If the client is required to exclude the income, then Home Support Services should have reported zero wages in

box 1 of the Form W-2. ο Note: If zero wages were reported, and federal and/or state taxes were withheld on the W-2, then the return

must be paper-filed; the IRS e-file system will not accept W2s that report zero wages. X For the federal return, on the Main Info form, under Type of Return, check “Paper” CA Note: On CA 540 Pg 5, check “No” in response to the question (just below line 115) “Do you want

to electronically file this return?” Set the return stage to “Paper file” (or similar, depending on the return stages defined at your site)

• If the client is required to exclude the income, but the Form W-2 does include that income in Box 1, then go to 1040 Wkt7 ο On line 16, “Medicaid waiver payments to a care provider incorrectly reported on Form W-2”, enter, as a

negative number, the wages reported in box 1 of the W2 form. ο Important: if the wages are for the spouse, you must put “S” in the “TSJ” column of line 16, to have the

return process correctly.

Note: The following applies only to prior tax years. Do not use the following procedure for the 2015 tax year. • Taxpayers may amend the three prior tax years (2014, 2013, and 2012) to exclude previously included

Medicaid Waiver Payments, if they want to ο It is all-or-nothing – the taxpayer may not exclude just a portion of the income

• The adjustments needed so that, on net, income on a W-2 is excluded, are as follows. The second, third, and fourth adjustments should be made after all other input is done for the federal return. ο Go to 1040 Wkt7 and on the first available blank line, enter the amount to be excluded, as a negative

amount, with the description “Notice 2014-7”. ο Go to 2441 Pg 1, Credit for Child and Dependent Care Expenses (if the form is not on the Forms Tree, or is

but is not used, no adjustment is needed) ▪ If line 11 is not zero, then link from line 4 to a Scratch Pad, and enter a negative dollar amount

ο Go to Sch EIC Wkt, “Figure your credit” section, at the bottom

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49 January 27, 2016

▪ If line 9 is not zero, then link from line 1 to a Scratch Pad, and enter a negative dollar amount on the Scratch Pad

ο Go to 8812 Pg 1, Child Tax Credit, Part II, if the form is on the Forms Tree (if it is not, no adjustment is needed) ▪ Link from line 4a to a Scratch Pad, and enter a negative dollar amount

ο Note: Use Scratch Pads, not overrides, to avoid affecting other calculations • Excluded income is not part of MAGI for ACA purposes (neither 8962 nor 8965) • Note: If the excluded income results in an AGI of zero (1040, line 37), change the return so it can be e-filed

ο Go to 1040 Wkt7, line 17 or below, and enter “TO ALLOW E-FILING” and $1 • CA Note: Check the nonrefundable dependent care credit on CA 3506 to make sure TaxWise has carried the

correct amount of earned income to this form

Other Income Without a Supporting IRS Form • This includes poll worker income, medical study income, jury duty pay, among others • Go to 1040 Wkt7 and use the first available “Describe” line, starting with line 17

LINE 22 ------ TAXWISE EARNED INCOME • TaxWise adds the amounts from 1040 Pg 1, line 7 (wages, etc.) and 1040 Pg 1, line 12 (from Schedule C), and

posts the total to a field labeled “Earned” • If the client can be claimed as the dependent of another person, the (reduced) standard deduction of $900 can be

increased by earned income, up to the regular standard deduction amount ο If there is an amount in line 21 and that amount is “earned” income, add a Scratch Pad entry to increase the

amount of earned income for the correct calculation of the standard deduction • Note: Earned income for EIC is limited to taxable 1040 Pg 1, line 7 (wages, etc.) and self-employment income

(Sch C) • Note: IRA deductions are limited to compensation – see Line 32 --- IRA Deduction, below, page 50

ADJUSTMENTS TO INCOME LINE 23 ------ EDUCATOR EXPENSES Note: Congress did extend the provision for educator expenses for the 2015 tax year. Go to 1040 Wkt2, Educator Expenses - Elementary and Secondary section • Refer to Pub 4012, page EXT-1, for rules • Expenses above the allowable amount ($250 per taxpayer who is an educator) can be included as a deduction in

Sch A (line 21 - unreimbursed employee expenses), but is subject to the 2% haircut • CA Note: The entire Line 23 adjustment is NOT recognized by CA

ο TaxWise adjusts the CA return so that it ignores the entry on 1040 Pg 1, line 23 ο An entry can be made on CA A to claim the amount on 1040 Pg 1, line 23, as an unreimbursed employee

expense for CA purposes ▪ Don’t make the entry if the 2% reduction (lines 26 and 27 of CA A) will zero it out ▪ Entry goes on CA A, line 21, if it will not be zeroed out ▪ Entry may require an override; if you can’t do this, see your LC

LINE 24 ------ CERTAIN BUSINESS EXPENSES (out-of-scope) The amount on this line comes from 2106. In general this line is out-of-scope; there is a limited exception for military returns, if counselors have Military certification

LINE 25 ------ HEALTH SAVINGS ACCOUNT Note: HSAs are out-of-scope unless the preparer and reviewer are both certified to do HSAs • Refer to Pub 4012, pages E-1 and E-2 • Enter the amount contributed to an HSA on 8889 Pg 1

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January 27, 2016 50

ο Amounts contributed by an employer are shown on the Form W-2 as code W in box 12. TaxWise carries these from W2 to 8889 Pg 1, Part I. (These are not deductible.)

ο The client may provide Form 5498-SA, which shows the amount of contributions during the tax year. If they do not have this form, the client’s word is sufficient.

• Contributions designated for 2015 may be made up to April 18, 2016. • Note: Any contribution in excess of the amount allowed as a deduction is subject to a 6% additional tax,

assessed on 5329 TP2 or 5329 SP 2, Part VII, which is out-of-scope • Taxpayers covered by Medicare are not eligible to contribute to a HSA. • CA Note: CA does not recognize HSAs – see Health Savings Accounts in CA, below, page 69

ο TaxWise automatically removes the HSA deduction from the CA return, on CA CA

LINE 26 ------ MOVING EXPENSES (out-of-scope) There is a limited exception for military returns, if counselors have Military certification

LINE 27 ------ DEDUCTIBLE PART OF SELF EMPLOYMENT TAX • This amount is carried from Sch SE by TaxWise and represents the employer’s part of the tax (7.65% of net

business income)

LINE 28 ------ SELF EMPLOYED SEP, SIMPLE PLANS (out-of-scope) LINE 29 ------ SELF-EMPLOYED HEALTH INSURANCE (out-of-scope) • Health insurance costs for someone who is self-employed are out-of-scope if claimed on line 29 of 1040 Pg 1. • Such costs can be claimed on Schedule A (specifically, on A Detail). However, in almost all cases, a client with

more than a few thousand dollars of self-employed health insurance would be better off using a paid tax preparer or tax preparation software. ο Schedule A would obviously be of little advantage if the taxpayer had few other amounts to itemize. And

even if the taxpayer is already using Schedule A, medical expenses are subject to a reduction of 7.5% or 10% of AGI.

LINE 30 ------ PENALTY ON EARLY WITHDRAWAL OF SAVINGS • Penalties on Form 1099-INT are entered on Interest Stmt, in the Early penalty column

LINE 31 ------ ALIMONY PAID • Refer to Pub 4012, page E-3, for rules • Alimony does NOT include child or family support, which are NOT deductible • Enter both the recipient’s Social Security number and the amount • If alimony was paid to more than one individual, highlight the SSN field and link to an Alimony Paid worksheet

ο Enter each recipients SSN(s) and amount(s) paid ο TaxWise brings the total forward to 1040 Pg 1, line 31

LINE 32 ------ IRA DEDUCTION • The taxpayer, and spouse if filing jointly, may each make IRA contributions, subject to age and total

compensation income limits, as shown on IRA Wkt • If covered by a retirement plan, they may be able to take an IRA deduction, subject to AGI limits • Go to IRA Wkt - enter contributions to a Traditional IRA on line 10 and to a Roth IRA on line 20 • TaxWise will check the contributions against the current year’s limits • Non-deductible contributions require completion of Part 1 of 8606

ο Enter the basis amount from the prior year’s Form 8606 on 8606, line 2 ο Complete line 4, if applicable

• Traditional or Roth IRA contributions in excess of the permissible amount (line 13 or line 21 will be non-zero) are subject to an annual additional tax as long as the excess continues (5329 Part III or Part IV), which is out-of-scope

• Taxpayers that contributed to a traditional IRA or a Roth IRA prior to completing their tax returns can recharacterize their contribution to the other type of IRA up until they file their return (or April 18, 2016, whichever comes first)

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51 January 27, 2016

ο Recharacterizing from a traditional IRA to a Roth IRA is valuable if the taxpayer did not get a benefit from the IRA contribution

ο Recharacterizing from a Roth IRA to a traditional IRA could be valuable if the taxpayer would benefit significantly from the additional deduction – for example, if the taxpayer had received APTC, and an additional deduction would bring the taxpayer’s MAGI below 400% of FPL.

ο The taxpayer must arrange a recharacterization through their IRA trustee, and this must be done before the return is completed and filed.

LINE 33 ------ STUDENT LOAN INTEREST DEDUCTION Go to 1040 Wkt2 • Refer to Pub 4012, page E-4, and Chapter 19, “Education-Related Adjustments”, of Pub 17, for rules • Enter interest paid on line 1 of the worksheet • TaxWise calculates the allowable adjustment amount

LINE 34 ------ TUITION AND FEES DEDUCTION Note: Congress did extend the provision for the deduction of tuition and fees, on Line 34, for the 2015 tax year. Go to 1040 Wkt2 • 8917 is added to the return after a Qualified expense is entered in the Tuition and Fees section of 1040 Wkt2 • The taxpayer must have paid the deductible amount. Amounts paid by others, such as grandparents, are NOT

deemed paid by the taxpayer • See instructions below, page 56, for entering education expenses for education credits • CA Note: This adjustment is NOT allowed by CA and TaxWise adjusts the CA return; if the education is

business-related, a CA deduction may be claimed on CA C or CA A (manual adjustment needed)

LINE 35 ------ DOMESTIC PRODUCTION ACTIVITIES (out-of-scope) LINE 35 ------ OTHER Jury Duty pay given to employer is input on this line, everything else on this line is out-of-scope

TAXABLE INCOME CALCULATION LINE 40 ------ DEDUCTIONS Standard Deduction • The Standard Deduction is the default • Persons not eligible:

ο MFS where the client’s spouse is itemizing ο Dual status alien or nonresident alien (details - Pub 519, U.S. Tax Guide for Aliens)

Standard Deduction Versus Itemized Deduction • If it is unclear as to whether or not it is advantageous to the client to itemize, complete Sch A.

ο Before itemizing, for the federal return, look at 1040 Pg 2, line 44, Tax, to see if this is zero. If it is zero, then there is no reason to itemize for federal purposes.

• CA Note: The CA standard deduction is significantly less than the federal standard deduction. ο In determining whether to enter information into Sch A, look at CA 540 Pg 3, line 64, Total tax. If some

tax is being assessed, then use the CA standard deduction (see CA 540 Pg 2, line 18) as the threshold for determining whether itemization is beneficial.

• If both 1040 Pg 2, line 44, Tax, and CA 540 Pg 3, line 64, Total tax, are zero, do not itemize: that would waste your time and the time of your client.

• TaxWise will make the correct calculations for both federal and state, and will select the better of the standard deduction or itemized deduction for each.

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January 27, 2016 52

Schedule A • Sch A and A Detail have boxes for TSJ (Taxpayer, Spouse, and Joint). Filling these boxes is unnecessary,

because CA is a community property state. • A Detail has fields for Taxpayer and Spouse mileage (medical, charitable). All mileage can be entered in the

Taxpayer field, if desired

Sch A - Line 1- Medical Expenses RULE: Medical expenses (deductions) are entered on the A Detail worksheet located in the Forms Tree below Sch A • The medical section of A Detail should be done after all other parts of Schedule A are done, because it often

takes significant time to review and enter the client’s information for this section, and because completing this section may be unnecessary. ο After doing all othe parts of Schedule A, look at 1040 Pg 2, line 44, Tax, to see if this is zero, and similarly

at CA 540 Pg 3, line 64, Total tax. If both are zero, then do not enter medical expenses; that will not benefit the taxpayer.

ο Do not enter medical expenses if it is obvious that they will total less than 7.5% of AGI, which is the nondeductible portion on the CA return for all taxpayers.

• Medical miles ο The number of medical miles driven is as an approximation for operating costs associated with a personal

vehicle; specific costs cannot be claimed. The 2015 reimbursement rate is $0.23 per mile. If the client has any costs for doctor visits, prescription medicines, or other things requiring travel, this

section normally should have number entered. One obvious exception is when the client doesn’t own a vehicle

It is unnecessary to separate taxpayer miles from spouse miles; the two can be combined if more convenient.

ο All other transportation costs (bus, parking, tolls, cab fare, airplane tickets, etc.) are entered under “Other medical expenses”

• Insurance Premiums ο Medicare premiums are entered in the second section of 1040 Wkt1 and automatically carry to A Detail –

they should not be entered again ο Include any other qualifying payments for health insurance premiums If the taxpayer was 65 years or older during the tax year, but did not receive Social Security, he/she

may be paying Medicare premiums directly. If a taxpayer was 65 years or older during the tax year, he/she may be paying for Medicare Supplement

Insurance (Medigap) policies. These payments never appear on a Form SSA-1099. ο If a federal retiree (Form CSA 1099R) is having dental, vision, or LTC insurance premiums deducted from

their annuity, they will not show on the CSA 1099R. The only way to see these other premiums is to see the client’s Form RI 38-38, Notice of Annuity Adjustment. Codes are shown on the back of the form: 42 is Federal Dental Insurance 43 is Federal Vision insurance 45 is a catchall that includes LTC

ο Amounts paid by clients for a Marketplace policy, as evidenced by a Form 1095-A, should be entered. However, when PTC is provided by the government to reduce the out-of-pocket cost of a Marketplace

policy (for most clients, this will be the case), then insurance deduction entered on Sch A should be net of the PTC: that is, what is on the A Detail should be actual paid per the 1095-A, less any additional PTC allowed, plus any APTC that must be repaid Look at line 46, Excess APTC Repayment, and line 69, Net PTC, to see if either are non-zero.

If so, use a Scratch Pad, linked from the Insurance Premiums line (either Taxpayer or Spouse) near the top of A Detail, to calculate the net amount paid by the client.

ο Long Term Care Insurance costs are deductible up to certain limits based on the age of the person at the end of the tax year Enter the total payment for each person TaxWise will calculate the allowable amount

ο Do not include medical premiums paid using pre-tax dollars – dollars that reduced taxable income.

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53 January 27, 2016

• Other unreimbursed medical expenses – it is not necessary to list each individual service provider; just list by category–doctors, dentist, prescriptions, hospital, etc., using summary data furnished by the client

• If additional space is required, link from “F9 for additional worksheets” to a NEW Addl A Wkt • TaxWise will calculate the 10% of AGI (7.5% if age 65 or older, through 2016) that is the nondeductible

portion. • CA Note: Medical expenses reimbursed by an HSA are not deductible for federal but are deductible for CA

ο When 8889 is properly completed, TaxWise carries HSA-reimbursed medical expenses to CA Sch A ο See Health Savings Accounts in CA, below, page 69

• CA Note: For taxpayers under age 65, the nondeductible portion of medical expenses remains 7.5% of AGI for CA; CA does not conform to the federal rate of 10%. TaxWise makes the correct calculation.

Sch A - Line 5- State and Local Taxes Paid • State and local income taxes flow to Sch A from W2, all 1099 series forms, F/S tax paid, and CASDI entered in

the California W-2 Only section of W2 • IF the client had any non-taxable income, or IF the client purchased a motor vehicle, aircraft, mobile home, or

building materials, go to Sales Tax (CA) [worksheet] ο In the upper portion of the worksheet, TaxWise computes lines 1, 2, and 4 On line 3, enter any non-taxable income, such as child support, gifts, and Supplemental Security

Income (SSI) ο In the lower portion of the worksheet, TaxWise, plus defaults, normally handles computations for lines 1

through 7 Line 1 should be defaulted to CA in the lower portion Line 2 of the lower section is defaulted to NO for CA Line 3 of the lower section should be defaulted to Yes (or No if there is no local sales tax) and the

client’s local rate should be entered. (If you’re not sure what the sales tax rate for the client’s city is, use the IRS Sales Tax Deduction Calculator at irs.gov/Individuals/Sales-Tax-Deduction-Calculator)

If line 3 is Yes, the CA blended general state sales tax rate of 7.5 should be on line 4 ο In the lower portion of the worksheet, complete Line 8 with any additional sales tax on a motor vehicle,

aircraft, mobile home, or building materials. • On Sch A, line 5, TaxWise will use the LARGER of income taxes or general sales tax

ο If the general sales tax is used, or if that amount is close to the amount of income taxes paid, then verify, on the Sales Tax (CA) form, that the correct local sales tax rate was used This rate is on line 3 of the lower portion of the worksheet.

ο If the income tax amount is used, and the client’s federal itemized deduction will be larger than the standard deduction, and the client will get a CA tax refund, then the preparer can help reduce next year’s work in determining how much of the state tax refund will be taxable by: Noting the general sales tax amount, at the bottom of the Summary form; and/or Handwriting the general sales tax amount on Schedule A of the client’s copy of the return, after that is

printed ο Taxpayers can elect to deduct the SMALLER of state income taxes OR state general sales taxes; this is

unusual, and probably will require an override to change the box that TaxWise has selected on line 5.

Sch A - Line 6- Real Estate Taxes • CA real estate taxes are generally paid in two installments, due in November and February, but not late until a

month later. The amount entered on line 6 should be the amount actually paid in the tax year for the taxes (some taxpayers pay both installments at once, in December or earlier).

• Real estate taxes on a principal residence are entered separately from such taxes on other properties. ο The real estate can be anywhere (U.S. or foreign) ο Most real estate tax information is now available online. One good starting place for real estate taxes paid

in other counties of California, as well as other states, is publicrecords.onlinesearches.com/ • CA has received IRS guidance that deductible real estate taxes do not have to be based on the value of the

property – this means that the whole amount paid will generally be put onto line 6 ο Two types of charges are not deductible: Fees for services provided to the property (for example, trash collection and sewer service)

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January 27, 2016 54

Direct assessments for improvements that tend to increase the value of the property, such as curbs and sidewalks, or city or state-financed energy improvements. (These direct assessments can be added to the basis of the property.)

Sch A - Line 7- Personal Property Taxes, Not Listed Above • The CA Vehicle License Fee (VLF) qualifies as a personal property tax • The total amount paid to DMV includes non-deductible registration fees and may even include unpaid parking

tickets – only the VLF amount is deductible. ο The VLF amount can be found on the DMV invoice sent to the client, if the client has brought that form ο The VLF amount may also be listed on the client’s vehicle registration card, near the bottom of the form,

coded as “Lxxxx” ο The VLF can be looked up online, IF the client has the vehicle’s license plate number and VIN (both are on

the vehicle registration card): go to dmv.ca.gov/FeeCalculatorWeb/vlfForm.do • If the client has a boat, an RV, or a vehicle trailer with a license plate, there are state registration fees for those,

and the VLF amount of the fees should also be included on line 7 of Sch A.

Sch A - Line 8 - Other Taxes • These include foreign income taxes, but only when not claiming a foreign tax credit on Line 48 --- Foreign Tax

Credit; see page 29 above. (Pub 514, Foreign Tax Credit for Individuals, is the definitive guidance.) • CA Note: No deduction is permitted for foreign income taxes. If foreign income taxes are deducted on Sch A,

line 8, an adjustment must be made on CA CA Pg 2, line 39, second row

Sch A - Line 10 - Interest Paid • Section 23, “Interest Expense”, of Pub 17 has detailed information on the interest deduction • Interest paid on a mortgage(s), and any points paid during the tax year in conjunction with the mortgage(s) up

to $1 million ($500,000 MFS) is deductible when the loan is used to buy or improve a main home • Interest paid on a new loan to refinance an old loan that was used to buy or improve a main home is deductible,

but points paid to refinance the mortgage must be spread over the life of the new mortgage (see next section) • Interest paid on mortgages to buy or improve a second home may also be deductible • Interest on a home equity loan may also be deducted for loan amounts up to $100,000 ($50,000 MFS) • Late payment charges are deductible as interest in situations where the interest is deductible • Motor homes and boats that provide basic living arrangements generally qualify as main or second homes • Interest paid is usually reported on Form 1098 • Total the interest and points paid and enter the total on the line labeled “Home mortgage interest and points

from Form 1098, not listed above” ο If there are multiple mortgages, link to a Scratch Pad to enter each interest item

• If home mortgage interest is paid to an individual, complete the information at line 11 • Note: mortgage insurance premiums are reported on line 13. Do not include them on line 10. • Note: Nothing is paid by a client who has a reverse mortgage, so there is no deduction

Sch A - Line 12 - Points Not Reported On Form 1098 (Refinance) • Points paid when a mortgage is refinanced can be amortized over the life of the loan; they cannot simply be

deducted on the return for the year when the loan was refinanced. ο Note: If some of the interest on the loan is not deductible, then a proportional amount of the points paid is

also not deductible • Divide the amount paid (for points) by the number of months of the loan (30 years =360 months) and multiply

by the number of months that the loan existed during the tax year. Enter the result directly on line 12. • When the loan is refinanced, and a different lender is used, or if the loan is paid off early, the remaining

deductible portion of the points from the loan can then be deducted

Sch A - Line 13 - Total Mortgage Insurance Premium Note: Congress did extend the provision for the deduction of mortgage insurance premiums for the 2015 tax year.

• Premiums (“PMI”) paid and/or accrued for qualified mortgage insurance (reported on the Form 1098) in

connection with home acquisition debt on a qualified home are deductible

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55 January 27, 2016

ο The home must have been purchased after 2006 ο Mortgage insurance provided by the Department of Veterans Affairs and the Rural Housing Service is

commonly known as a funding fee and guarantee fee, respectively – see 1040 Sch A instructions for deductibility

• Enter the total qualified mortgage insurance premiums; TaxWise will determine the allowed amount • CA Note: This deduction is not allowed on the CA return and is automatically adjusted by TaxWise

Sch A - Line 16- Contributions – Cash RULE: Charitable contributions are entered on the A Detail Worksheet. • Donations must be to a qualified charity

ο If there is any question about eligibility, check the IRS database: irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check

• Includes checks, money orders, and credit card payments. Cash contributions are not allowable unless documentation is provided by the charity.

• While we do not need to see any proof, the client should know that no deduction is allowable unless the client has either: ο Bank records (canceled check or bank/credit account statement) OR ο Written acknowledgment from the charity documenting the amount and date of payment to that charity

• Contributions of $250 or more must have both bank records AND written acknowledgement, which MUST state the value of any property or service received by the client in exchange for the contribution.

• The deductible contribution is the amount given less the value of any property or service received • Enter mileage driven by the client for unreimbursed volunteer work or other charitable use

ο TaxWise will calculate the allowable amount • In addition, unreimbursed travel expenses (parking, tolls, etc.) can be itemized • It is not necessary to list each contribution to the same qualifying organization; just indicate the total by

organization – Red Cross, Boy Scouts, United Way, etc. • If additional space is required:

ο If Addl A Wkt was NOT used for medical, link from the last line to a new Addl A Wkt – Medical and Contributions Worksheet, otherwise

ο Open the existing Addl A Wkt from the Forms Tree

Sch A - Line 17- Contributions – Other than Cash • Donations of vehicles, boats, and similar are out-of-scope • Non-cash contributions whose total exceeds $5,000 make the return out-of-scope • For any contribution which is claimed to be worth $250 or more, the client must have a written

acknowledgment from the charity of what was donated. A receipt filled in by the client is not acceptable documentation. (See IRS Pub 526, Charitable Contributions, if more information is needed)

• The amount of a contribution, for tax purposes, is the FMV of the item at the time of the donation ο Clothing and household items must be in good used condition, or better ο Donation value estimates can be found on the Salvation Army website: satruck.com/donation-value-

guide • Records of items and amount donated should be retained by the client • If the total of all non-cash donations is $500 or less, list non-cash contributions in the appropriate section of the

A Detail, by charity • If total non-cash contributions exceed $500, do not enter these contributions on the A detail; instead:

ο Go to 8283 Pg 1 to list all non-cash contributions ο Each donation date is listed separately (“Various” is not allowed) ο Note that columns d, e, and f should not be filled in if that donation is under $500 ο For column h, method used to determine FMV, “thrift shop value” usually applies ο 8283 Pg 2 is out-of-scope

Contributions – Carryover • There are limits on charitable donations deductions made to certain organizations during any one tax year; such

limits can result in a carryover

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January 27, 2016 56

• Taxpayers affected by the contributions limitation, either in the current year or the prior year, must be referred to a paid preparer, or purchase tax preparation software, because their returns are out-of-scope

Sch A - Line 20- Casualty and Theft Losses – out-of-scope Sch A - Lines 21-23- Miscellaneous Deductions Subject to 2%-of-AGI Reduction • Miscellaneous deductions can be deducted after a 2%-of-AGI haircut (portion not allowed); these include

ο Unreimbursed employee expenses: tools, uniforms, union dues, etc. TIP: The first $250 of an educator’s expenses, if allowable (must be K-12 education), should go on

1040 Pg 1, line 23, as an adjustment to gross income (see page 49, above), rather than on Sch A ο Tax preparation fees ο Investment expenses (see brokerage statements) ο Claim repayments of $3,000 or less ο Unrecovered investment in an annuity (if not eligible to be on line 28 of Sch A) If the client cashed in an annuity, they will have received a Form 1099-R with the amount they received If the investment (Box 5 or box 9b) is greater than the amount shown in box 1, the net loss can be

claimed as a miscellaneous itemized deduction • Unreimbursed Employee Business expenses can be reported on 2106EZ; link to 2106EZ from line 21 of Sch A

ο Refer to Pub 4012, pages F-9 through F-13, for details about business-related expenses for travel and entertainment, including recordkeeping requirements

ο If expenses were partially reimbursed by employer, then Form 2106-EZ cannot be used and the return is out-of-scope

ο Do not use 2106, which is out-of-scope; use 2106EZ. • Enter items on appropriate lines in the Miscellaneous section of Sch A • TaxWise will calculate the 2%-of-AGI nondeductible portion

Sch A - Line 28- Other Miscellaneous Deductions not Subject to 2%-of-AGI Reduction • If there is only one item to enter, and it does not come from a supporting form, enter the type and amount

directly • If there is a second item to enter that does not come from a supporting form, link from Sch A, line 28, to Other

Deduct-Sch A line 28, not to a Scratch Pad • TaxWise allows the following entries in the Type Field ONLY (see Pub 529, Miscellaneous Deductions):

ο Gambling Losses – see Gambling Winnings - Form W-2G, above, page 45 ο Impairment-Related Work Expenses (for a disabled person) ο Claim Repayments If the taxpayer had to repay more than $3,000 that they had included in income in an earlier year If $3,000 or less, the repayment is listed on line 23 and is subject to the 2%-of-AGI haircut

ο Unrecovered Pension Investments (includes annuities) If a deceased person has a pension without survivor benefits, any unrecovered pension contributions

may be recovered on the final return If the investment (Box 5 or box 9b, less amounts previously recovered) is greater than the amount

shown in box 1, the net loss can be claimed as a miscellaneous itemized deduction on line 28 ο Amortizable Bond Premiums - out-of-scope ο Casualty And Theft Loss - out-of-scope ο Federal Estate Tax - out-of-scope ο Schedule K-1 - out-of-scope

TAX LINE 45 ------ ALTERNATIVE MINIMUM TAX (out-of scope) • This is calculated by TaxWise; any value on this line makes the return out-of-scope

LINE 46 ------ EXCESS ADVANCE PREMIUM TAX CREDIT REPAYMENT • Note: 1040 Pg 2, line 46, and 1040 Pg 2, line 69, apply only to taxpayers who purchased their MEC through an

ACA exchange (presumably Covered California); they should have received a Form 1095-A

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57 January 27, 2016

• Complete the ACA Pg 1 and ACA Pg 2 first. (See Line 61 --- Health Care: Individual Responsibility, below on page 64)

• The client’s Form 1095-A is used to complete 8962 ο If there are multiple Forms 1095-A, the respective amounts must be totaled before being input into

TaxWise; it is not possible to create multiple 8962s ο While it is possible to reconstruct a missing Form 1095-A based on other information the client may have,

this is not at all recommended – the client should contact Covered California to get a replacement. • Taxpayers who purchased health coverage on an exchange probably received an advance premium tax credit

(APTC) (see Intake/Interview form, top of page 3) ο APTCs (also known as “subsidies”) are paid by the federal government to the health insurer, not to the

taxpayer ο The amount of the APTC paid to the health insurer was based on what the taxpayer told the ACA exchange

(Covered California) about the taxpayer’s expected income during the tax year. ▪ Note: Clients receiving APTC should notify the exchange when they have a significant change to their

income or family during the year. • The purpose of Form 8962 is to compare the APTC paid on behalf of the taxpayer to what the taxpayer was

actually entitled, based on his/her actual MAGI ο If excess APTC was paid, some or all may need to be repaid; this is shown on line 29 of the 8962

▪ The amount of repayment may be limited – TaxWise makes the computation ο If the taxpayer qualified for a PTC in excess of the APTC (if any), then line 26 of 8962 will be positive, and

TaxWise will carry the computed Net Premium Tax Credit to 1040 Pg 2, line 69 • It may be best not to work on the 8962 until 1040 Pg 1 is complete, since some 8962 calculations depend on the

taxpayer’s MAGI (AGI + any excluded foreign earned income + any exempt interest income + any nontaxable SS income).

• Go to 8962 (added to the Forms Tree if the first question on ACA Pg 1, “Did the taxpayer, spouse, or any dependent receive insurance through the Marketplace?”, has been answered “Yes”, if not already on the Forms Tree by default) ο Health coverage other than through an exchange is not relevant to the 8962

• Normally, those filing MFS are not eligible for PTC; any APTC must be repaid. There is an exception for MFS filing because of abuse or abandonment ο To use this exception, the box at the top of the form must be checked. See the Instructions for Form 8962

for eligibility for this exception • Line 2b applies only for dependents on the return who were required to file a tax return due to their gross

income. For taxpayers without dependents, or where no dependent was required to file a tax return, use F3 to confirm the amount on line 2b should be zero ο Do not include the modified AGI of dependents who are filing a tax return only to claim a refund of tax

withheld or estimated tax paid, or dependents filing only because they owe self-employment tax (Schedule C)

• If line 5 (household income as a percentage of the Federal Poverty Line) is less than 100% of FPL, and the taxpayer received APTC, read the Instructions for Form 8962 for this situation before checking “Yes” or “No” in line 6.

• Answer the question on line 9 ο The phrase “allocating policy amounts with another taxpayer” means that the client’s Form 1095-C covered

someone who is not claimed as an exemption on the client’s tax return, or that someone on the client’s tax return who was claimed as an exemption was covered by a Form 1095-C paid for by a taxpayer other than the client. One possible example would be a child whose parents divorced in 2015. ▪ If the taxpayer was in such a situation, then the return is out-of-scope because Part 4 of Form 8962 is

out-of-scope. ο If the taxpayer was married during the year and chooses to use the alternative calculation for the year of

marriage (Part 5 of the form), then the return is out-of-scope. • Answer the question on line 10, and then complete either line 11, or lines 12-23, depending on the answer

ο If line 5 is greater than 400%, you need to enter only the APTC (column C on the Form 1095-A), in either line 11 or on lines 12-23 Do not enter information into columns A or B of 8962; they are irrelevant because the client must repay

100 percent of the APTC

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January 27, 2016 58

• If the client has excessive APTC and is just above the 400% level [all APTC must be repaid], consider ways to reduce the client’s AGI to below 400%: ο Can the client make a contribution to a traditional IRA (before April 18th)? ο Can the client claim a tuition and fees adjustment (Line 34) rather than an educational credit?

• APTC repayment on line 46 of 1040 Pg 2 is an allowable medical expense on Schedule A (specifically, on A Detail, as insurance premiums), and should be treated as if the taxpayer had paid the premiums during the tax year of the return. (This is an exception to the normal “calendar year” determination.)

CREDITS Non-Refundable Credits • Non-refundable credits can only be used to offset taxes due. In contrast, refundable credits may result in a

refund (payment) to the client. • Note: Even if the 1040 Pg 2, line 47 figure (the total of all taxes on the return) is zero, some (or all) of the

Child Tax Credit may become a refundable Additional Child Tax Credit • The existence of nonrefundable credits in excess of the amount allowed in a year may affect other calculations,

such as the amount of capital loss carryover that created a tax benefit ο Enter all information for credits for which the taxpayer is eligible

LINE 48 ------ FOREIGN TAX CREDIT • Foreign taxes paid are reported on Form 1099-INT, Form 1099-DIV, Form K-1, or substitute payee statements.

For options that clients have, and how to enter amounts into TaxWise, see above at page 29

LINE 49 ------ CREDIT FOR CHILD & DEPENDENT CARE EXPENSES • Refer to Pub 4012, starting at page G-3 • This credit is available if the client paid someone else to care for a qualifying person:

(1) A dependent child who was under age 13, OR (2) A dependent or spouse, regardless of age, who could not care for him/herself And (3) this was done in order for the client to work or look for work ο Note: In the year a child turns 13, these expenses are allowable only be for the part of the year before

his/her 13th birthday • For dependents receiving care, the “DC” column next to the dependent on the Main Info form must be checked

to add 2441 Pg 1 to the Forms Tree • If the person being cared for is the spouse, manually add 2441 Pg 1, then go to the bottom of that form and

check the box for a disabled spouse, and then enter the number of months that person was disabled. ο Checking the box will populate item 2a with the spouse’s name and SSN – otherwise the form will not

accept the spouse’s name ο Normally the number of months will be “12”, but is the person was disabled for only part of the year, the

number will be less than 12. • On the 2441 Pg 1, enter required information about the care provider – for the SSN or Tax-ID, do not include

dashes ο Leave the “Type” box blank – TaxWise will fill this in ο If additional space is needed for more care providers, link from the total field for line 1 to 2441 Wkt 1,

Additional Care Providers and Qualifying Persons ο Note: The return must be paper filed if an EIN/SSN of a provider is unavailable: For the federal return, on the Main Info form, under Type of Return, check “Paper” CA Note: On CA 540 Pg 5, check “No” in response to the question (just below line 115) “Do you want

to electronically file this return?” Set the return stage to “Paper file” (or similar, depending on the return stages defined at your site)

ο Note: If the care provider worked in the client’s home and the total amount paid during the year was over $1,900, Schedule H, Household Employment Taxes, may be required, in which case the return is out-of-scope

• On line 2, enter the qualified expenses for the person(s) receiving care ο If additional space is needed for more qualifying persons, link from the total field in line 2, to 2441 Wkt 1,

Additional Care Providers and Qualifying Persons

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59 January 27, 2016

• If the taxpayer and/or spouse was a full-time student and/or disabled during the year, complete the bottom section of the form: Worksheet for Income Considered Earned by Disabled or Student Spouse. ο This increases the amount in line 4 of the form, though not dollar-for-dollar ο “Full-time” is five months (any part of a month counts as a full month) at a “brick and mortar” school,

which doesn’t have to be a college or university. • If any dependent care benefits were paid by the employer, make sure that this amount has been entered

correctly on W2; this figure will then appear on line 12 of 2441 Pg 2 • CA Note: CA also has a nonrefundable credit for Child and Dependent Care Expenses

ο When 2441 is completed, TaxWise adds CA 3506 to the Forms Tree and carries the information from 2441 ο Answer questions at the top of the form ο Note: CA 3506 Pg 1, Part I, regarding other funds received is not required (this section can be left blank) ο In CA 3506 Pg 1, Part II, two addresses are needed for each provider: The provider’s business address The location (in CA) where care was provided, even if the same as the business address

ο Complete CA 3506: get the red out

LINE 50 ------ EDUCATION CREDITS • If the client paid, or used loans, for qualified expenses for themselves or a dependent to enroll in or attend an

eligible educational institution, an education credit may apply. ο To begin the process of claiming a credit, go to 8863 Pg 2 After a name has been entered on this form, TaxWise will add 8863 Pg 1 to the Forms Tree

ο Schools that qualify are listed at fafsa.ed.gov/FAFSA/app/schoolSearch?locale=en_EN • IF the client could be claimed as a dependent by another taxpayer (Main Info form, question 6 (a)), then answer

the question at the top of 8863 Pg 1 as to whether they actually were claimed. ο A person who could be claimed as a dependent but was not is still eligible for a credit.

• The client can take ONLY ONE credit or adjustment per student ο An 8863 Pg 2 must be completed for each student for which a credit is claimed; add additional 8863 Pg 2

forms as needed • Expenses used for calculating either credit must be paid during the tax year • Expenses used for calculating either credit or for the adjustment must be reduced by any scholarship amount

designated for those expenses • The student should receive a Form 1098-T from the educational institution, which shows tuition and fees paid

or billed, and whether the student was at least a half-time student, as well as scholarships and grants ο If the educational institution reports amounts billed (box 2), then a printout of the student’s account at the

institution, or similar information from the client showing exactly when payments were made, can be very useful, because billing may be done in one year and payment in the next. (What was paid goes onto a tax return, not what was billed.)

ο See Scholarships, Fellowships & Grants – Form W-2 or Form 1098-T, above, page 22, if scholarships, etc., are taxable (see also second-to-last note on page J-5 of Pub 4012)

• There are tools that can be used to determine the amounts eligible for the two education credits and for the adjustment, to help the client decide which is best: ο Pages J-2 and J-3 of Pub 4012 provide a comprehensive overview of the client’s choices; ο The Education Calculator, an optimizer, is at cotaxaide.org/tools 1. If the client’s situation includes credits not covered by the optimizer, you can use the 2015 Education

Cookbook, available at the OneSupport Help Center (at Tax Training, then go to Tools) ο The worksheet on page 96, below, is another choice

• Note: It may be more advantageous to claim a business related expense on Sch C, if the facts fit • Note: Education expenses in excess of the amounts allowable for either credit may be deductible elsewhere • CA Note: Since CA has no education credit, an adjustment on CA C or CA A may be possible. If a Sch C Pg 1

or Sch A deduction would be proper on the federal return (except that the expenses are being used for a credit), enter an adjustment on CA C or CA A using a Scratch Pad

Which Education Benefit is Best? • For any one individual (student), only one education benefit can be claimed

Credits

January 27, 2016 60

• If the student qualifies for the American Opportunity Credit (AOC), in almost all cases it will be the most beneficial credit because ο It is a partially refundable credit ο Eligible expenses include course materials as well as tuition and fees ο The AGI limit is higher than the Lifetime Learning Credit

• If the student does not qualify for the AOC because they are not a half-time student or are not in their first four years of college, the Lifetime Learning Credit or the Tuition and Fees adjustment should be claimed, unless a Schedule C business-related expense is available and better

• A systematic process should be used determine which education credit or deduction is best: ο First complete ALL other aspects of the return. ο If the taxpayer had health insurance through the Marketplace, make sure that ACA information is entered ο Use one of the listed tools in the section immediately above; if that does not provide a clear answer, then

use a manual process. • The recommended manual process is:

ο Enter the Tuition and Fees adjustment amount only on 1040 Wkt2 Note change in the refund or balance due, as shown on the Refund Monitor or F7, and remove the

amount entered ο Enter amount information for the Lifetime Learning credit on 8863 Pg 2 Note the tax result and remove the information

ο If business-related, enter on Sch C Pg 1 or Sch A Note the tax result and remove the information

ο Enter amount information for the AOC, if the individual qualifies, on 8863 Pg 2 Note the tax result; if this produces the best result, you are done Note: Education expenses that are not claimed for the credit can be taken as an unreimbursed

business expense on Sch C Pg 1 or Sch A IF they otherwise satisfy the requirements for deductibility

Otherwise remove the AOC Credit and re-input the Lifetime Learning Credit, the Tuition and Fees adjustment, or a business-related expense (Sch C Pg 1 or Sch A) - whichever produced the best result

• If there are multiple students, proceed one student at a time. All various combinations should be tried • Note: If an education credit calculates to zero, you MUST remove the 8863 Pg 2 (or all the entries on that page)

from the Forms Tree; otherwise it will cause an e-file reject • Pub 970, Tax Benefits for Education, is a comprehensive list of options.

American Opportunity Credit (AOC) • For 2009 through 2017, this credit is applicable if all of the following apply:

ο For the first four years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution

ο When neither the American Opportunity Credit nor its predecessor, the Hope Scholarship Credit, has been claimed (by the client or anyone else) for this student for any four tax years before 2015

ο The student is enrolled at least half time in a degree program ο The student has not been convicted of a felony drug offense

• Foreign college-level study is also counted toward the first four years, if the eligible education institution counts that study toward the first four years

• Education after four years of college (as determined by the educational institution) is ineligible for the credit • These qualifying first four years do not have to immediately follow secondary school and do not have to be

continuous; there can be breaks between • Up to 40% (maximum $1,000) of this credit may be refundable • Allowable expenses are tuition, fees, books, supplies and computers required as a condition of enrollment • Amounts paid by others, such as grandparents, are deemed paid by the taxpayer • Go to 8863 Pg 2 • Answers 20 through 26

ο Note: The wording of question 23 can be confusing. The question is asking whether the AOC has already been claimed four times, not whether it has been claimed at least once prior to 2015. Answering “Yes” means that the taxpayer cannot claim the AOC in 2015 or in any future year, for that student.

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61 January 27, 2016

• In the “American Opportunity Credit” section, enter a dollar amount in line 27, or link from line 27 to a Scratch Pad, to list the qualifying expenses ο Note that the credit will be split between 1040 Pg 2, line 49 and 1040 Pg 2, line 66

• Use the three lines at the bottom of Main Info to record the individuals and years for which the American Opportunity credit has been claimed

• When the student is the client and is less than 24 year of age, refer to Pub 4012, page J-8, which is a set of seven questions to be answered to determine if the refundable part of AOC can be claimed ο If you reach question 7, and the answer to that question is “... no, you do not qualify ...”, then go to 8863

Pg 1, and check the box in Part I that is just above line 8.

Lifetime Learning Credit • This credit is for all other postsecondary education not covered under the AOC • Allowable expenses are normally only tuition and fees. Amounts required to be paid to the institution for

course-related books, supplies, and equipment are also allowable, but usually such items can be purchased from places other than the institution

• Amounts paid by others, such as grandparents, are deemed paid by the taxpayer • The limit is $10,000 of costs per return, regardless of the number of dependents

LINE 51 ------ RETIREMENT SAVINGS CONTRIBUTION CREDIT • This credit is available to taxpayers who made elective contributions to IRAs, Roth IRAs and other qualified

plans, IF their adjusted gross income was below certain maximums (listed at the top of 8880) ο The amount of the credit decreases as AGI increases, up to the maximum

• Entries of qualified retirement plan information from box 12 of a W2 or IRA contribution on an IRA Wkt will carry to 8880, which will then appear red on the Forms Tree

• Go to 8880 • Answer the questions about student status • Answer the questions about any plan distributions - use F3 to confirm a zero distribution

ο Distributions from some (not all) plans should be included for the current year and the two prior years • Refer to the instructions on 8880, the information on page G-7 of Pub 4012, or Chapter 38, “Other Credits”,

in Pub 17

LINE 52 ------ CHILD TAX CREDIT • This credit is for taxpayers who have a qualifying child under age 17

ο It is in addition to the child and dependent care expenses and earned income credits • On the Main Info form, TaxWise places an “” in the CTC column once a date of birth is entered for a

dependent who was under the age of 17 as of the end of the tax year • If the CTC applies, TaxWise creates and completes 1040 Wkt3 • If needed, more information is on pages G-8 and G-9 of Pub 4012, and in Pub 972, Child Tax Credit Note: If the client’s tax liability is less than the allowable Child Tax Credit, the client MAY be eligible for the refundable Additional Child Tax Credit – TaxWise will complete 8812

LINE 53 ------ RESIDENTIAL ENERGY CREDITS, Note: Congress did extend the provision for residential energy credits for the 2015 tax year. Go to 5695 Pg 1 • Part I is out-of-scope • Go to 5695 Pg 2 (Part II)

ο A 10% credit is allowed for new energy efficient property installed in or on a main home Second homes, rental homes, or other property do not qualify

ο There are lifetime (cumulative) limits going back to tax year 2006 ο For certain items, such as insulation, only the costs of the material can be claimed – not the costs of

installing the material, or permits, or any other costs The client must have documentation, such as a billing from the contractor, for such items, in order to

separate material costs from all other costs

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January 27, 2016 62

ο Refer to the Instructions for Form 5695 as necessary

LINE 54 ------ OTHER CREDITS Schedule R: Credit for the Elderly and Disabled • If TaxWise determines that the client may qualify for this credit, TaxWise adds Sch R Pg 1 and Sch R Pg 2 to

the Forms Tree • This credit applies ONLY if the taxpayer or spouse

ο (1) was age 65 or older at the end of the tax year OR (2) retired on permanent and total disability, had taxable disability income, AND was under the mandatory retirement age

ο Income limitations apply based on filing status, types of income, and AGI ο Page G-10 of Pub 4012, and Chapter 33, “Credit for the Elderly or the Disabled”, of Pub 17, show

details of the determination as to whether a client qualifies • If the form appears, complete Sch R Pg 1 after making sure that all income has been entered into TaxWise

ο If the taxpayer(s) is on permanent disability (the related box on the Main Info form, in the Taxpayer Information section, should have been checked), and was under 65 On Sch R Pg 1, complete Part II, Statement of Permanent and Total Disability On Sch R Pg 2, line 13b, enter the amount of any non-taxable veterans pension or any other pension,

annuity or disability income that was excluded from being reported as income on the Form 1040 • Most Tax-Aide clients who are over age 65 are collecting Social Security, and therefore DO NOT qualify for

this credit, because the thresholds are so low ο Those who delay drawing Social Security benefits until after age 65 still may not qualify for the credit

because their AGI is too high ο If you see this credit on line 54 of 1040 Pg 2, double-check to make sure all Social Security payments

(Form 1099-SSA and RRB-1099) have been entered in TaxWise All other Line 54 credits are out-of-scope: • Form 3800, General Business Credits • Form 8396, Mortgage Interest Credit • Form 8834, Plug-In Electric And Electric Vehicle Credit • Form 8859, Carryforward of the District of Columbia First-Time Homebuyer Credit • Form 8910, Alternative Vehicle Credits • Form 8936, Plug-In Electric Motor Vehicle Credit

OTHER TAXES LINE 57 ------ SELF EMPLOYMENT TAX • TaxWise completes Sch SE using entries from Sch C • If self-employment income is from a notary business, self-employment tax does not apply

ο Go to Sch SE and enter the net profit from the notary business on line 3 ο Go to 1040 Pg 2, line 56, and check the notary box

• Self-employment tax does not apply to statutory employees - FICA and Medicare taxes were withheld on their Form W-2

• Unique rules apply to the clergy and are out-of-scope

LINE 58 ------ UNREPORTED SOCIAL SECURITY AND MEDICARE TAX • An amount on this line comes from 4137 tip income not reported on Form W-2s; see Tip Income on Form

1040, Line 7, above, page 23 • Form 8919, Uncollected Social Security and Medicare Tax on Wages, is out-of-scope

LINE 59 ------ ADDITIONAL TAX ON IRA, OTHER QUALIFIED PLANS • A 10% tax is assessed on early withdrawals from IRAs and other tax-favored accounts

ο “Early withdrawal” means before the age of 59½

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63 January 27, 2016

ο TaxWise will assess the 10% tax based on code 1 in box 7 of the Form 1099-R ο The surtax is 25% in the case of a SIMPLE early withdrawal – code S in box 7 of the Form 1099-R

• If the additional tax was assessed, it will show in Part I of 5329 TP 1 or 5329 SP 1 as well as on Line 59. ο If no exception applies (see below), it is not required to print or attach Form 5329 to the return

• The codes for exceptions are listed in Pub 4012, page H-2 ο Codes can also be found via F1 > Index > Exception Codes for Additional Tax on Early Distributions ο For additional exceptions that apply to annuities, see Pub 575, Pension and Annuity Income

5329 Part I – Additional Tax on Early Distributions • If there is an exception to the penalty, check the box on 1099R (below box 7) that is labeled “Check to force

Form 5329”, then go to 5329 TP 1 or 5329 SP 1 ο The amount subject to penalty is shown on line 1 ο Enter the appropriate code and the amount that is NOT subject to additional penalty on line 2

5329 Parts II through VIII - Out-of-scope • If the client received a Form 1099-QA, Distribution from ABLE Accounts: , determine if the distribution was

spent on qualified expenses – for the designated beneficiary’s blindness or disability, in maintaining or improving his or her health, independence, or quality of life. ο If so, the return is in-scope; the distribution is not reportable as income and does not have to be entered into

TaxWise ο If not, Part II of 5329 TP 1 needs to be filled out, which is out-of-scope

5329 Part IX – RMD Not Taken • If the client failed to take their required minimum distribution (RMD), they may be liable for the excess

accumulation surtax (50%), which is computed in Part IX • RMD information, including the exact percentage of December 31 balances that must be distributed to meet

RMD requirements, can be found at irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf • The client needs to correct the problem by taking the required distribution – this will result in a double

distribution for the year in which the correcting distribution is taken. • Go to 5329 TP 2 or 5329 SP 2, if on the Forms Tree; otherwise, go to 5329 TP 1 or 5329 SP 1 to create the

5329 TP 2 or 5329 SP 2, then go to that form. ο Enter the RMD amount in line 52 and the amount actually distributed in line 53. If the client has more than one retirement account subject to RMD, link from line 52 to a Scratch Pad,

and enter the RMD amounts on the Scratch Pad. Similarly, if the client had distribution (on a Form 1099-R) from more than retirement account, link

from line 52 to a Scratch Pad, and enter the RMD amounts on the Scratch Pad. • A waiver of the 50% surtax may be requested in Part IX of 5329 TP 2 (or SP 2)

ο Link from the box at line 54 to the Line 54 TP (or SP) form, which is titled “Line 54: Explanation for Request of Waiver of Tax”

ο Complete the Line 54 TP (or SP) form: Describe the circumstances that led to the failure and how the shortfall has been remedied (by taking the required distribution, belatedly) Remediation must be done; the IRS may ask for proof the required distribution was done before

approving the waiver. Ideally, remediation will be done before the Form 5329 is sent to the IRS, but if that would delay the return beyond April 18, don’t wait for remediation before filing the return.

LINE 60A --- HOUSEHOLD EMPLOYMENT TAXES (out-of-scope) LINE 60B ---- FIRST-TIME HOMEBUYER CREDIT REPAYMENT, FORM 5405 • 2008 homebuyers, who received the First Time Homebuyer credit (2008 Form 1040, line 68), must repay the

credit, starting in 2010 ο The repayment is spread over 15 years, at 500 per year (so payments could continue through 2024) ο Use of 5405 will track the total repaid when Carry Forward occurs. ο Direct entry of the repayment amount is also permissible on 1040 Pg 2, line 60b

• Repayment of some or all of the un-repaid portion of the credit may be required if the home is disposed of ο Repayment depends on whether the house was disposed of at a profit or loss ο See Form 5405 instructions

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January 27, 2016 64

• The first-time homebuyer credit claimed during 2009 – 2011 was subject to repayment if, with some exceptions, one of the following happened within 36 months of the purchase date (that is, no later than December 31, 2014): ο There was a disposition of the home, including death of a joint owner or divorce, or ο The home was no longer used as the main home

• If 5405 is used or required because of a disposition, a separate 5405 will be required for the taxpayer and spouse

• The exceptions for destruction / condemnation (F or G) are out-of-scope

LINE 61 ------ HEALTH CARE: INDIVIDUAL RESPONSIBILITY ACA Pg 1 and ACA Pg 2 • The ACA tab in Pub 4012 (the December 2015 update is here, the January 2016 update is here) has detailed

information on actions required in TaxWise because of the ACA • Line 61 is calculated by TaxWise based on information on ACA Pg 1 and ACA Pg 2, and supporting forms

ο If the health coverage situation is straightforward – everyone on the return was covered for the entire year by Medicare, or Medicaid (Medi-Cal in California), or employer insurance, then ACA Pg 1 and ACA Pg 2 can be done at any time.

ο Otherwise, it’s best to complete ACA Pg 1 and ACA Pg 2 after all other information (income, adjustments, itemized deduction) has been entered, but before deciding which education benefit to claim, if a choice is possible, and/or before deciding how to treat a scholarship with regard to income and expenses. Until the rest of the return is completed, it is not possible to determine if the taxpayer qualifies for a

low-income exemption Similarly, if a penalty (SRP) is due, it’s not possible to be sure of the amount (to be discussed with the

client) until the AGI for the return (bottom of 1040 Pg 1) is known. • Proof of coverage:

ο In general, we accept the client’s word as to what health coverage was in effect. Clients should not be asked to provide documentation or other proof, except when they have Marketplace coverage, in which case they must have a Form 1095-A, Health Insurance Marketplace Statement

ο Starting with tax year 2015, some employers and insurers are required to issue Form 1095-B, Health Coverage, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. If the client has such a form, the information on it may be useful (for example, to test whether an employer’s offer was affordable). Do not ask clients if they have received such a form from their employer or insurer but failed to bring

it with them; either the form is with their other tax documents, or it is not. If it is not, under no circumstances should the client be asked to go home, search for the form, and return at another time.

• On ACA Pg 1, answer the question “Did the taxpayer, spouse, or any dependent receive insurance through the Marketplace?” If you answer “Yes”, TaxWise adds 8962. (If “Yes” was checked by mistake, and then changed to “No”, delete 8962.) ο How to complete the 8962 is discussed above: See Excess Advance Premium Tax Credit Repayment on

page 56 • Answer the question “Was the taxpayer, spouse, or any dependent granted a Marketplace exemption or do you

want to apply for a Marketplace, household income, or gross income exemption?” If you answer “Yes”, TaxWise adds 8965, if not already on the Forms Tree. ο How to complete the 8965 is discussed in the next section

• TaxWise should list, on the ACA Pg 1 and ACA Pg 2, the name of each person listed on the return for whom a personal exemption is claimed. For each person listed, answer the three questions as to whether the person had MEC and/or exemptions for the entire year, part of the year, or none of the year. ο Check specific month(s) for a person ONLY when the second item, “part of the year”, has been selected. ο NEVER check a month if the first or third option has been selected for a person. ο If you are unsure about exemptions, go to 8965 and complete that, then return to ACA Pg 1 and ACA Pg 2

to finish. • After ACA Pg 1 and ACA Pg 2 are completed, as well as 8962 and/or 8965, if required, review the calculation

of the individual responsibility penalty, IF any is listed on line 61 of 1040 Pg 2. ο Use the information on lines 1 to 14 of ACA Pg 2 for this review

• After confirming that a penalty amount in line 61 is correct, discuss the penalty with the client.

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65 January 27, 2016

ο For tax year 2016, the penalty will increase to $695 or 2.5% of MAGI, whichever is higher, per person. ο The IRS has asked that Tax-Aide volunteers notify taxpayers who do not have health insurance that they

should visit Healthcare.gov to learn about the options available. The IRS has provided reminder statements that can be given to the taxpayer, in either English or Spanish – see Pub 5243

• Note: Beginning with tax year 2015, a taxpayer may legitimately choose to not claim a dependent in a situation where, if claiming that dependent, the taxpayer would incur a Shared Responsibility Payment that would exceed the tax benefits of including the dependent on the tax return.

Health Coverage Exemption • Go to 8965 • Complete the applicable section(s) for the entire family or for each tax family member that is eligible for an

exemption in any month or for the full year • If the client received an exemption from the Marketplace, enter the ECN in Part I

ο If the client has not received their Marketplace exemption yet, use “PENDING” as the ECN ο The IRS will be receiving updates from the Marketplace and will follow-up as needed

• Information about exemptions that can be claimed on the return and those that must be obtained from the Marketplace can be found at the following: ο Pages ACA-6 through ACA-13 of Pub 4012 (December 2015 updates here) ο The ACA Exemption Quick Reference Guide, available at the OneSupport Help Center in the Volunteer

Portal (volunteers.aarp.org) [in the “Tax Training” section; go to “Affordable Care Act (ACA) Training”] ο Form 8965 instructions

• New in 2015 are two forms to determine whether one of the affordability exemptions (codes A and G; note that code G isn’t applicable to CA) is valid for the client, and should be used on 8965: ο 1040 MCA Wkt, Marketplace Coverage Affordability Worksheet, is used to calculate the annualized

monthly premium. That number feeds into the other new form: ο 1040 Aff Wkt, Affordability Worksheet This worksheet compares the Calculated Affordability Threshold to the Required Contribution Amount,

to determine if coverage was unaffordable

LINE 62 ------ OTHER TAXES • If a W2 has a box 12 code M or N for uncollected Social Security/RRTA or Medicare tax on the taxable cost of

group-term life insurance, the amount will be shown on this line as UT – no further action is needed • The other taxes (Forms 8959 and 8960) are out-of-scope

PAYMENTS AND REFUNDABLE CREDITS LINE 64 ------ FEDERAL INCOME TAX WITHHELD • Federal tax withheld is carried to this line from entries on W2s and some 1099s • For Form 1099 withholding not listed elsewhere (for example, on a Form 1099-B), enter on second row of the

two line 64 rows. ο If there are multiple amounts, link from that field and enter on a Scratch Pad

LINE 65 AND CA 540 LINE 72 - 2015 ESTIMATED TAX PAYMENTS • These are payments that the client HAS MADE using either 1040ES (federal) and/or 540ES (CA) for the

CURRENT tax year • Go to F/S Tax Paid worksheet

ο Note: See Estimated Tax Payments for Next Year, below, page 75, to prepare payment vouchers for NEXT year’s estimated tax payments as well as applying any overpayments (refunds) from this return to the NEXT year’s estimated tax

Federal Estimated Tax Payments • Enter any overpayment amount from last year that was credited toward estimated taxes for the current year • Enter payment dates shown on the client’s checks or in the client’s checkbook • Enter actual amount paid in each quarter • The fields to the right are calculated fields – do not attempt to change these fields

Payments and Refundable Credits

January 27, 2016 66

State Estimated Tax Payments (Middle section on the same form) • Note that this section loads horizontally – unlike the federal • All payments for state taxes (for any tax year) made during the tax year will be carried to Sch A • The payments for the current tax year will be carried to the CA tax return as taxes paid • Enter payments made for prior years on the applicable line • Mark the box in the column with the “*” if the Q4 2015 payment was made before 1/1/2016, so that this

payment will be deducted on Sch A for the current tax year, if itemizing and using state taxes as a deduction

LINE 66 ------ EARNED INCOME CREDIT • EIC is available to people who have earned income, subject to income limits. • It is a refundable credit – it is not necessary to owe federal tax to claim the credit • Higher income limits apply when there is more than one qualifying child, up to three children – see pages I-2

and following in Pub 4012 for limits and other EIC information • If there is no EIC qualifying child:

ο EIC is available to taxpayers at least age 25 (as of year-end) and under age 65 (as of year-end) If MFJ, only one taxpayer has to meet the age requirement

ο The taxpayer cannot be a dependent or a qualifying child. • The taxpayer can claim a child, for EIC purposes, who lives with the taxpayer even though that child cannot be

claimed as a dependent because the child provided more than one half of their own support or because the noncustodial parent is claiming the dependent ο In such a case, enter code “0” on the Main Info form, in the code column of the Dependents/Nondependents

section • When dependents or nondependents are included on the return, the “EIC” box on the Main Info form must be

checked next to dependents or nondependents for those that are eligible to be claimed for EIC. TaxWise will not check these boxes – they must be checked by the preparer. ο If in doubt, check the box for EIC; TaxWise will remove the checkmark if not applicable

• If the return qualifies for EIC credit, complete the Sch EIC and Sch EIC Wkt which TaxWise has added to the Forms Tree

• When completing Sch EIC, answer only question 4a OR 4b – answering both causes the return to be rejected by the IRS

• Answer all questions needed to remove the red on the worksheet • Note: Line 7 of Sch EIC Wkt asks if “The child is unmarried”. Ask the client to provide the answer to this

question, if the child is old enough to be legally married; do not assume the answer is “No”.

LINE 67 ------ ADDITIONAL CHILD TAX CREDIT • If a taxpayer’s tax liability is less than the allowable non-refundable CTC, the taxpayer may be able to claim

the refundable ACTC • TaxWise computes this credit automatically on 8812 • The ACTC is limited to 15% of any earned income above the current year’s limit ($3,000) • The total of the two credits will be $1,000 or less per eligible child

LINE 68 ------ AMERICAN OPPORTUNITY CREDIT • Up to 40% (maximum $1,000) of the AOC will be refundable

ο See American Opportunity Credit (AOC), above, page 60

LINE 69 ------ NET PREMIUM TAX CREDIT • Taxpayer must have purchased their health coverage on an exchange, such as Covered California • For details about this credit, see above, page 56.

LINE 70 ------ AMOUNT PAID WITH REQUEST FOR EXTENSION TO FILE • Directly enter any payment made • When doing a prior year return, remember to ask if payments have been made

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67 January 27, 2016

LINE 71 ------ EXCESS SOCIAL SECURITY TaxWise makes this entry automatically if there are multiple W2s for an individual and the combined wages exceed the maximum subject to Social Security taxes for the year.

LINE 72 ------ FEDERAL TAX ON FUELS, FORM 4136 (out-of-scope) LINE 73 ------ CREDITS 2439 (out-of-scope)

CA ADJUSTMENTS & DIFFERENCES This section identifies specific situations that MAY need to be addressed on CA returns. • While California generally follows IRS tax law, there are a number of situations where California and the

federal law differ – see FTB Pub 1001, Supplemental Guidelines to California Adjustments, for more information

• These differences are summarized on CA Schedule CA (540) by either adding to, or subtracting from the amounts reported to the IRS on Form 1040

• In most cases, TaxWise will make the appropriate adjustments from entries on the federal forms • The preparers and the reviewer must verify the differences reflected on CA CA and correct any problems by

ο Returning to the appropriate forms on the federal return, OR ο Making an adjustment on CA CA or CA C or CA A as detailed in the respective section of this manual ο Caution: Use a Scratch Pad to adjust the specific field Do not do a direct entry, which may require an override, and which may cancel other adjustments that

TaxWise flows to the CA return

FILING STATUS Head of Household • CA 3532 MUST be completed for CA returns being e-filed as head of household • Failure to complete the form will generate an error when running diagnostics • This form is significantly different than CA Form 4803e, which it replaced. It no longer asks a series of Yes or

No questions. • Line 6 of the form asks for the number of days that the child lived with the taxpayer. In the case of a birth

and/or death of a child during the tax year, enter “365” as the number of days. • Note: If the CA return is being paper filed, TaxWise may not add the CA 3532 to the Forms Tree. Even if the

form is on the Forms Tree, it may not be red, although it is a required form for CA returns with HoH status. Similarly, the form may be omitted from the standard print packet; if so, the form must be printed separately, so that it can be mailed with the rest of the CA paper return.

INCOME EXCLUDIBLE FOR CA California taxes worldwide income except for: • Ridesharing fringe benefits - the employer should have reported this difference by reporting different state

wages on Form W-2 – the CA adjustment must be manually entered, see W2 - State Section, above, page 21 • Clergy housing income – see FTB Pub 1001 (tax provisions peculiar to clergy are out-of-scope) • Indian tribal members’ income, if the member lives and works on their own tribe’s land – see Form W-2 Indian

Tribal Income (Form W-2), above, page 23, or 1099 MISC Income, above, page 46 • Interest paid on municipal bonds issued by the state of California, including counties, cities, and agencies – see

above, page 25 • Interest earned from U.S. Government Savings Bonds, U.S. Treasury Bills, and any other bond of the U.S. or

U.S. territories – see, again, above, above, page 25 • Dividends from CA municipal and U.S. government bond funds – see 1040 Line 9 above, page 28 • Any state tax refunds – see 1040 Line 10 above, page 30 • Tier 1 (1040 Line 20 above, page 44) and Tier II Railroad Retirement benefits (1040 Line 15/16 above, page

42) • Unemployment compensation paid by CA or another state (1040 Line 19 above, page 43) • Social Security benefits (U.S. only) (1040 Line 20 above, page 44) • CA lottery winnings (1040 Line 21 above, page 45) (lottery winnings from other states are taxable for CA)

CA Adjustments & Differences

January 27, 2016 68

• Government agency authorized reward from a crime hotline (see FTB Pub 1001) • HSA distribution in excess of qualified medical expenses – see Health Savings Accounts in CA, below, page

69

INCOME INCLUDIBLE FOR CA California taxes certain items which are not taxable on the federal return: • Wages – HSA employer contributions – see Health Savings Accounts in CA, below, page 69 • Interest from non-CA state and municipal bonds – see 1040 Line 8 above, page 25 • Interest or other income earned in an HSA – see Health Savings Accounts in CA, below, page 69 • Dividends from non-CA municipal bond funds – see 1040 Line 9 above, page 28 • Retirement payments from foreign governments, such as Canadian OAS, CPP, QPP, or German Social Security

– see above, page 42 • Discharge of indebtedness excludible for on the federal return:

ο For tax years 2014 and 2015 only, California does not conform to the federal exclusion of income from forgiven debt on a taxpayer’s principal residence. If a taxpayer has a Form 1099-A or Form 1099-C for one of these years, and that form pertains to their principal residence, the return is out-of-scope. (More information at ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml )

ο Discharge of indebtedness for other types of debt, if excluded from income, is out-of-scope on the federal return, so conformity to California law is not an issue.

Military Income • See FTB Pub 1032, Tax Information for Military Personnel, for differences – must have Military

certification to prepare such returns

Inherited Property Basis Difference (above, page 33) • Property inherited from decedents dying in 2010 has a basis of FMV on the date of death for CA purposes • Federal basis may be different when shown on Form 8939 – if so, the return is out-of-scope

IRA Basis Difference • Note: For the federal return, the IRA basis recovery is on Form 8606 Part I • There may be a basis difference for CA as shown in the table below • The client must have records showing the amount contributed for each of these years and the amount deducted

for federal and CA, if any ο Without records, there will be no adjustment of the taxable IRA distribution

• Generally, CA basis in excess of federal basis is applied to reduce the amount of taxable IRA distribution until CA basis is the same as federal basis ο Thereafter, no further adjustment would be needed as CA follows federal IRA basis recovery rules

• FTB Pub 1005 has detailed instructions and worksheets Year Federal California

1975 Maximum deduction of $1,500 No IRA deduction

1982-1986 Maximum of $2,000; must be earned income Maximum of $1,500; not allowed if covered by pension plan

1987-1994 IRA limited to net federal Sch C income plus wages

IRA limited to net income on CA C Pg 1 if less than federal

2007-2009 AGI limits increased for deductible IRA for active participants

CA AGI limits lower, allowed deduction could have been lower

2007-2009 Catch-up provisions Non-conformity 1987 - Present Non-deductible contributions Separate election

Capital Loss Carryover (CA Sch D) • Capital loss carryover amounts can vary between federal (see above, page 36) and CA; however, we don’t see

these differences because the return would usually be out of scope • TaxWise does NOT automatically carry forward the unused loss amount from the prior year’s CA Sch D

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69 January 27, 2016

• If not yet entered, confirm that the prior year’s return did not have a different net capital loss for CA than for federal. If there is a difference, confirm that the CA amount is correct and use the CA return amount (our typical client would not have such a federal to CA difference)

• Go to CA D ο Enter either (a) the combined federal long and short term carryover [this is the norm] or (b) the CA amount

from the prior year [if confirmed to be different, correctly] on line 6 as a positive number • Verify that CA CA Pg 1, line 13, Capital gain or loss, has correct numbers. (The first column is from the federal

return; the second and third columns should be zero, unless the prior year federal and prior year CA carryforward amounts were validly different.)

DEDUCTIONS ALLOWED BY CA • Educator expenses for which a federal adjustment was claimed

ο Claim in CA Sch A if the requirements for deductibility are satisfied • Medical Expenses reimbursed by HSA distribution – see Health Savings Accounts in CA, two sections below • Work-related expenses for which a federal education credit or tuition and fees adjustment was claimed

ο Claim in CA Sch C or CA Sch A if the requirements for deductibility are satisfied

DEDUCTIONS NOT ALLOWED BY CA • State or local income taxes (Sch A, line 5, above, page 53) • Foreign income taxes (Sch A, line 8, above, page 54) • PMI deducted as interest on the federal return (Sch A, line 13, above, page 54) • CA Lottery gambling losses (1040 Line 21 – Other Income, above, page 45, and Sch A, line 28, above, page

56)

HEALTH SAVINGS ACCOUNTS IN CA • CA does not recognize HSAs nor the trust that is created for federal tax purposes

ο This can impact many parts of a return • W2 – contributions made by an employer to a Health Savings Account and shown in box 12 code W of the

Form W-2 are not federally taxable, but they are taxable by California and must be manually added: ο Go to CA CA Pg 1, line 7, Wages, and link to a Scratch Pad from the Additions column ο Describe the entry as a HSA employer contribution and enter the amount as a positive figure

• Interest or other income earned in an HSA account is currently taxable on the CA return ο Do not start a new line for HSA on either the Interest Stmt or the Dividend Stmt, to make this adjustment.

TaxWise – as of 2015 – does not carry lines with solely CA info to the CA return ο Go to CA CA Pg 1 and do either of the following: Enter the income as an addition on line 21f, and describe as HSA interest or HSA dividend Or make a scratch pad adjustment to line 8a (interest) or line 9a (dividends)

• Capital gains or losses within the HSA trust are recognized for CA ο Go to CA D Pg 1 and add the sale transaction ο Note: this may result in a different capital loss carryover for CA purposes Make a note on the bottom of the Summary form.

• If there are HSA distributions in excess of qualified medical expenses, TaxWise includes the distribution in income for federal; but, it is not taxable for CA ο TaxWise does not make the CA adjustment ο Go to CA CA Pg 1 and enter a subtraction on line 21f for the HSA distribution included in 1040 Pg 1, line

21 • TaxWise carries medical expenses (reimbursed by the HSA and not deducted on federal Schedule A as shown

on 8889 Pg 1, line 15) to CA A, so no manual adjustment should be needed

CA-ONLY CREDITS Child and Dependent Care Credit (CA 3506) CA 540 Pg 2, Line 40 • See Line 49 -- Credit for Child & Dependent Care Expenses, on page 58

CA Adjustments & Differences

January 27, 2016 70

College Access Tax Credit Code 235 CA 540 Pg 2, Line 43-45 • This credit, which began in tax year 2014, is for individuals who make cash contributions to the College Access

Tax Credit (CATC) Fund • Donors must apply for the credit and get certified by the California Educational Facilities Authority (CEFA)

before they can make the donation • The amount of the credit for each taxable year is calculated as:

ο 60% of the amount contributed for the 2014 taxable year ο 55% of the amount contributed for the 2015 taxable year ο 50% of the amount contributed for the 2016 and 2017 taxable years

• Information for the credit is input on CA P Pg 2, in Section A2 • If the taxpayer itemizes, the deduction on Sch A of the contribution amount must be reduced, on the CA return,

by the amount for which a credit is claimed ο Make a subtraction adjustment on CA CA Pg 2, on line 41, equal to the amount on CA P Pg 2

Joint Custody Head of Household Credit Code 170 CA 540 Pg 2, Line 43-45 • This credit is available to a person who who files as Single or as MFS if

ο The person paid more than one-half the household expenses for his/her home ο Which is the main home of the taxpayer’s child, step-child, or grandchild for at least 146 days but less than

219 days of the taxable year ο And the custody arrangement for the child is part of a decree of dissolution or legal separation, or part of a

written agreement entered into before the final decree is issued • If MFS, the client must have lived apart from their spouse/RDP for the entire tax year • The credit is 30% of the tax due (CA 540 Pg 2, line 35) limited to a credit of $431 in 2015 • The credit is input on CA P Pg 2, line 12 – if the client qualifies, click the button on that line • The credit cannot be claimed if the Dependent Parent Credit, code 173, is claimed

ο TaxWise will not permit both credits to be claimed • See FTB Instructions for Form 540 if there are any questions about entitlement to this credit

Dependent Parent Credit Code 173 CA 540 Pg 2, Line 43-45 • Note: There are very limited situations where a MFS return is in-scope – see above, at page 15 • This credit is available to a person filing MFS who

ο cannot claim Head of Household status ο because they have no dependent child that would qualify them as “considered unmarried” ο but does have a dependent parent(s) ο for which the taxpayer paid more than half the household expenses

• The taxpayer must have lived apart from their spouse/RDP for the last half of the tax year • The credit is 30% of the tax due (CA 540 Pg 2, line 35), with a maximum credit of $431 in 2015 • The credit is input on CA P Pg 2, line 13 – if the taxpayer qualifies, click the button on that line • Note: The credit cannot be claimed if the Joint Custody HoH Credit code 170 is claimed

ο TaxWise will not permit both credits to be claimed • FTB Instructions for Form 540 has full details, if there are questions.

Senior Head of Household Credit Code 163 CA 540 Pg 2, Line 43-45 • This credit is available for a person 65 or older who

ο Qualified as head of household for 2013 or 2014 ο Does not qualify for HoH in 2015 because the qualifying relative for HoH died in 2013 or 2014 ο Whose AGI does not exceed $69,902 for 2015 – caution, TaxWise may not apply this income limit

properly • See FTB Instructions for Form 540 for full details • Eligibility for the credit is input on CA P Pg 2, Section B1 – if the client qualifies, check the box on line 14 • The credit is 2% of CA Taxable Income (CA 540 Pg 2, line 19), but not more than $1,317 for 2015 – caution,

TaxWise may not apply this income calculation properly

CA Adjustments & Differences

71 January 27, 2016

Child Adoption Credit Code 197-- out-of-scope Renter’s Credit (non-Refundable) CA 540 Pg 2, Line 46 • Eligibility:

ο For 2015, CA AGI is less than $38,259 (single) or $76,518 (MFJ, HoH, or QW) ο Rent was paid on a principal residence in CA for 6 months or more during the tax year ο Residence can be a mobile home for which the client pays rent for the land ο The residence is not exempt from property taxes (typically when the property is owned by a non-profit

organization) ο The client did not claim a homeowners property tax exemption at any time during the year

• If CA AGI is too high or there is no CA income tax (540 Pg 2, line 35), then no credit will be allowed ο In such situations, answer “No” to the question “Did you pay rent…” on CA 540 Pg 1, to avoid filling out

CA Rent Wkt (a waste of time of the preparer and the client) • If the client is eligible for the credit, check the “Yes” box (Did you pay rent….) on CA 540 Pg 1

ο TaxWise adds the CA Rent Wkt to the Forms Tree ο The CA Rent Wkt is for the taxpayer’s records; it is not filed with the CA return ο Questions 1 through 10 must be completed before TaxWise calculates the credit, which shows on line 11 of

the form, and also on CA 540 Pg 2, line 46 ο Leaving one or more fields red will not result in an error when running diagnostics, nor will it prevent the

return from being successfully e-filed For landlord information, either a name plus an address, or a name plus a telephone number, is

sufficient

California Earned Income Tax Credit (EITC) CA 540 Pg 2, Line 75 • Beginning in 2015, CA has a refundable state EITC. The credit, which appears on line 75 of 540 Pg 3, can be as

much as $2,653. • Eligibility:

ο For 2015, CA AGI must be less than $6,580 if there are no qualifying children, less than $9,880 if there is one qualifying child, or less than $13,870 if there are two or more qualifying children.

ο The credit is based on earned income reported on a W-2 form, such as wages, salaries, and tips, which must be subject to California withholding Unlike the federal EITC, income from self-employment does not qualify for the California EITC

ο The taxpayer, spouse, and any qualifying children must each have a social security number issued by the Social Security Administration that is valid for employment

ο Filing status cannot be MFS • FTB 3514, California Earned Income Tax Credit, must be completed and filed with the return

ο Goto CA 3514 and answer all required questions ο Line 11 of the form asks for the number of days that the child lived with the taxpayer. In the case of a birth

and/or death of a child during the tax year, enter “365” as the number of days.

STATE TAX WITHHELD • CA taxes withheld from wages, Form 1099-R, or any other Form 1099 will appear on CA 540 Pg 3, line 71, if

properly entered on the respective forms • Verify CA amounts withheld from all forms 1099-B, 1099-INT, 1099-DIV were entered and are properly

reflected in CA 540 Pg 3, line 71 (third row), as there is no input form for these ο If state tax withholding is done from more than one of the following forms, the state tax return must be

paper filed: W-2GU, 1099A, 1099B, 1099C, 1099DIV, 1099G, 1099INT, 1099LTC, 1099MISC, 1099MSA, 1099OID, 1099PATR, 1099Q, 1099S, 1099SSA, or 1099RRB E-filing of a CA return that has multiple withholdings will result in a CA reject, with reject code CA 41

• CA tax withheld from a state-only form (for example, on a CA Form 593, Real Estate Withholding Statement) must be entered on CA 540 Pg 3, line 73 linked to CA 593, CA 592-B, or a Scratch Pad

STATE ESTIMATED TAX PAYMENTS • See the section State Estimated Tax Payments, above, page 66, for how these payments are entered

Refund or Balance Due

January 27, 2016 72

• If the return is being prepared after an extension, enter any payment made at the time the extension was requested, in the 2nd row of line 72 on CA 540 Pg 3

CA USE TAX • CA 540 Pg 4, line 95 is used to report the amount of CA use tax due on purchases of goods from out-of-state

sellers, where such sellers did not charge California sales tax • Use tax on items costing $1,000 or more must be calculated using the use tax worksheet found in the CA Form

540 instructions • If all goods purchased were (each) less than $1,000, the Estimated Use Tax Lookup Table in the instructions

can be used • Credit for payment of another state’s sales tax can be claimed, if assessed, to the extent of the applicable CA

use tax on that purchase • Note: Goods purchased outside the U.S., carried into the U.S. (not shipped), and declared for customs purposes

are subject to use tax to the extent they exceed $800

CA-ONLY VOLUNTARY CONTRIBUTIONS • California allows the taxpayer to make contributions to any special funds listed on CA 540 Pg 4 • Unlike giving $3 to the Presidential Election Campaign Fund, a CA contribution increases the amount due or

decreases the amount of the refund

REFUND OR BALANCE DUE UNDERPAYMENT PENALTIES • Calculation of estimated tax penalties is out-of-scope • If the client owes the IRS more than $1,000 or CA more than $500, the client may be billed for the penalty at a

later date • Inform the client of potential penalty(ies) • Advise them that we are taking the penalty(ies) off the return • The IRS/FTB may calculate a penalty and bill the client accordingly

Clearing the Federal Penalty • Note: Clearing the federal penalty may not be necessary if template defaults are set to zero out that penalty • If 2210 Pg 1 – Pg 4 appear on the Forms Tree with an exclamation point, TaxWise has computed a federal

penalty Note: Do NOT simply go into form 1040 and delete the penalty. This will cause a transmission reject, even if the amount is as small as $1.00

ο Go to 2210 Pg 1 and DO ONLY THE FOLLOWING, nothing else: Enter a value of $1 on line 8 (last year’s total tax liability) – DON’T do anything else If some fields remain red, that is okay – ignore them 2210 becomes inactive in the Forms Tree and the form is not transmitted with the e-file

Clearing the CA Penalty • If CA5805 Pg 1 – Pg 3 appears on the Forms Tree with an exclamation point, TaxWise has computed a CA

penalty Note: Do NOT simply go into form 540 and delete the penalty. This will cause a transmission reject, no matter how small the penalty amount was • Go to CA5805 Pg 2 and DO ONLY THE FOLLOWING, nothing else

ο Enter a value of $1 on Part II, line 5 (last year’s tax liability) - DON’T do anything else ο If some fields remain red, that is okay – ignore them ο 5805 becomes inactive in the Forms Tree and the form is not transmitted with the e-file

INJURED SPOUSE CLAIM • If there is a refund due (because of withholding or estimates paid by the client) and that refund will be offset by

debts to the IRS of the spouse, debts that originated before marriage, the client may request that a Form 8379, Injured Spouse Allocation, be filed with the return

Refund or Balance Due

73 January 27, 2016

• Because Form 8379 requires income splitting, it is out-of-scope • CA Note: There is no equivalent provision for the California return

DIRECT DEPOSIT • A client’s federal or CA refund can be deposited directly to the client’s bank account, which

ο Eliminates printing and mailing a check and ο Gets the refund to the client at least one week sooner

• While the client is not specifically notified by the IRS or FTB when the refund has been deposited, it will show up on the next bank statement (the bank might notify its client)

• Clients who do not use checks should be encouraged to go to their bank to obtain a letter of account verification • If the client is unable or unwilling to produce account verification or wants to use the account information from

the prior year’s return, then it is acceptable to put the non-verified account information on the return, provided that the preparer: ο Advises the client that without verification the account information put on the return is at their own risk,

and if the funds do not arrive in their account that there will be no way to trace or replace the funds and ο Have the client write their initials next to the account information on the printed return The initials will serve as indication that they have been warned that the account information has not

been verified in the event that the funds are misdirected as a result of the information provided by the client

ο The preparer must make a note at the bottom of the Main Info form regarding the source of bank account information, if other than a pre-printed check

• Never take numbers over the phone from the client • Enter the 9-digit Routing/Transit number (which is always on the left side of the MICR encoded line) and the

account number. ο Never use a deposit slip – the routing number for deposit slips is often different than the routing number for

checks • Omit spaces, dashes, and special symbols • DO NOT enter the check (sequence) number, which will match the check number on the upper right corner of

the check ο The check number may appear before the account number, though it normally is after.

Federal • The bank account information must be entered in two places for verification:

1. Near the bottom of the Main Info form, above the Practitioner PIN and 2. Near the bottom of 1040 Pg 2

ο The information must match If it does NOT match, an error message will appear when running diagnostics

• Federal refunds can be split among three accounts. ο If a refund is to be split, complete 8888 and leave the information blank on the Main Info and 1040 Pg 2

• On 8888, the client can designate a portion of their federal refund to buy up to $5,000 in U.S. Series I Savings Bonds ο The amount requested (line 4) must be a multiple of $50.00

Refund or Balance Due

January 27, 2016 74

ο The bonds can be issued in the name of both taxpayers, if this is a joint return, or in the name of just one spouse, or for others, and a co-owner or beneficiary can be designated

ο Taxpayers can contact Treasury Retail Securities at 1-800-245-2804 to check the status of their bonds

CA • If there is a federal refund and a CA refund, CA 540 Pg 5 must have the appropriate box checked to have the

refund deposited in: ο The same account as the federal (do not enter bank account info on CA form) ο A different account, or ο Mailed

• If there is no federal refund but there is a CA refund or if the CA refund is to go to a different account, check the second box in the Direct Deposit section of CA 540 Pg 5 ο Account 1 bank information below the check boxes will now turn red ο After the bank information is entered, another set of boxes further down on the page will turn red; re-enter

the information here, for verification ο Do not enter the bank information for such CA refunds on the Main Info form, 1040 Pg 1, or any place that

is not red • The CA refund can be split between two bank accounts. This is entered on CA 540 Pg 5

ο If splitting between accounts, enter the amount to be deposited in each account • If direct deposit is selected, answer the question regarding whether the financial institution is in the U.S. (If the

default is set to “No”, make sure that the financial institution is in fact in the U.S.)

DIRECT DEBIT Federal • When a client has a federal balance due, they may request direct withdrawal from their bank account

ο Go to Main Info, and enter the bank account information ο Go to 1040 Pg 2, in the Electronic Filing Only section, and check the Yes box Do not enter bank information on the 1040 Pg 2

ο Go to ACH 1040/ES (ESTIMATE), which TaxWise will have added to the Forms Tree Enter the bank account information a second time, for verification Enter the amount the client wants debited Specify the withdrawal date – this can be as late as April 18 If the client might be subject to a penalty for underpayment of taxes, paying immediately rather

than on or near April 18 could reduce the penalty

CA • Electronic funds withdrawal is also an option for CA balance due • Go to CA 540 Pg 5, Direct Deposit of Refund or Electronic Funds Withdrawal of Balance Due section

ο Select the first Electronic Filing Only button (the fourth button in the section) Enter the date the client wants the funds withdrawn Enter the amount of funds to withdraw

ο Enter the bank account information for this withdrawal in Account 1 This is required even if the payment is from the same account as on federal forms

ο Re-enter the bank account information in the following section for verification of the account numbers • If direct deposit is selected, answer the question regarding whether the financial institution is in the U.S. (If the

default is set to “No”, make sure that the financial institution is in fact in the U.S..

DIRECT PAY • Federal: After Tax-Aide has e-filed a return, the axpayer can go to IRS.gov/Payments to pay a balance due on

that return, or to make a quarterly estimated payment ο One option is “Pay Directly from Your Bank Account”; this is functionally the same as direct debit There is no fee

ο Another option is “Pay with Your Debit or Credit Card” Processing fees are charged (and paid to third parties). For credit cards, the fee is approximately 2

percent of the payment (this varies by processing company)

Estimated Tax Payments for Next Year

75 January 27, 2016

• CA: The taxpayer can go to ftb.ca.gov to see a similar range of options.

ESTIMATED TAX PAYMENTS FOR NEXT YEAR FEDERAL ESTIMATED TAX PAYMENTS Go to 1040ES Pg 1 Pre-printed IRS payment vouchers are no longer furnished by the IRS if the prior year return is e-filed • If a client expects a balance due of $1,000 or more for the next year and wish to avoid penalties, they may

ο Increase withholding from their paychecks using Form W-4, available online, or from their employer ο Increase withholding from their retirement income using Form W-4P, which can be completed online and

then printed ο Increase withholding from federal payments (for example, Social Security), using Form W-4V, which can

be completed online, and then printed ο Make estimated payments, as described in this section

• Quarterly payments of estimated tax must be mailed, with Form 1040ES, separately from the 1040V or tax return

• The client address used on the vouchers does not have to be the same as the address on the tax return ο Checking the box near the top of Payment Voucher 1 allows a change of name or address

There are two ways to compute estimated taxes:

Option 1 • Estimate taxes at a level desired by the client: (a) to avoid an underpayment penalty (90%, 100%, or 110% of

the current year’s liability; less than $500 due with the return – refer to Chapter 4, "Tax Withholding and Estimated Tax", of Pub 17 for details), or (b) to pay as close as possible to the total amount expected to be due, or (c) to generate a refund. Which of these is the goal is the client’s decision to make.

• If no substantial change in income is expected for the following year, look at this year’s return and discuss the option of paying more or less based on the current year’s result

• On the third row of line 16, “Estimate desired [amount]”, enter the total estimated tax amount desired to be collected for the next year – the amount will be divided into four equal parts and carried forward to the vouchers

Option 2 • If a substantial change in income, filing status, dependents, or credits is expected, fill in the “non-computed”

fields of 1040ES Pg 1 ο Scroll down the form to fill in any other additional income and credit information, based on this year’s

return and additional information from the client ο TaxWise will compute the appropriate estimated payments and enter the amount on the vouchers

Hint: Note that computed tax does not subtract any withholding from any source; therefore, you need to input the estimated withholding for the following year on line 15

Application of Overpayments to Next Year’s Estimated Taxes • A refund can be applied to next year’s estimates. This is not recommended for several reasons:

ο If the prior year paper return is not brought in by the client, or and the return has no Carry Forward data, there is a good chance that the client will not remember that an amount was applied, or how much.

ο If there was any change to the return – either by the IRS, or by an amended return, the amount shown on the printed Form 1040, Page 2, as being applied, will probably have been affected. The client may not remember or mention such a change.

• However if the client insists, proceed as follows: ο On 1040ES Pg 1, above the first voucher, is a section that shows the amount of the refund, followed by

boxes that allow the refund to credit either “All” or “1st Installment Only” ο Checking ALL will apply all of the refund to the estimates, starting with the first, until used up If the refund is more than the total estimates, the balance of the refund will be refunded and this will be

shown on 1040 Pg 2

Final Steps in Tax Return Preparation

January 27, 2016 76

Checking ALL and asking for equal division will reduce each estimate payment by the same amount ο Checking the “1st installment only” box will apply the refund only to the first installment and will refund

any amount not used for the first installment • If a client specifies a partial amount of their refund to be applied that does not match or exceed their first

installment, the amount applied to the next year’s tax shown on the 1040ES Pg 1 must be overridden and the partial amount entered ο The Local Coordinator may have to accomplish the override

Payment of Estimates with Automatic Withdrawal • Automatic withdrawal from the client’s bank account is done by using ACH 1040/ES (ESTIMATE)

ο This can be a big advantage for clients who may forget their obligation to pay estimates on time ο If this approach will be used, remind the client that they must assure that sufficient funds are in their

account on the designated withdrawal date(s) • Go to ACH 1040/ES (ESTIMATE)

ο If using ACH for the balance due on the 2015 return, add another ACH 1040/ES (ESTIMATE) for each estimated payment to be done by direct debit

ο Complete the form • Note: Alternatively, clients may use the direct pay system at IRS.gov/Payments/Direct-Pay; there is no charge

for ACH withdrawals from the client’s bank account

CA ESTIMATED TAX PAYMENTS (CA 540ES WKT) • If a client expects a balance due of $500 or more for the next year, they may

ο Increase withholding from their paychecks (Form DE 4 should be available from their employer) ο Increase withholding from their retirement income (Form DE 4P is available at

edd.ca.gov/pdf_pub_ctr/de4p.pdf; it can be completed online and then printed) ο Note: State tax cannot be withheld from Social Security nor from unemployment payments ο If withholding will be insufficient, the client should make estimated payments in order to avoid penalties

• CA estimated payment requirements are slightly different from the IRS requirements, but are generally close enough that the same procedures can be used to estimate the tax

• Go to CA 540ES Wkt and use the same process for calculating the estimated tax as used for federal (above) • CA estimates are distributed 30% to the first quarter, 40% to the second, none to the third, and 30% to the

fourth quarter • Print four individual pages (including the worksheet) in TaxWise, if printing the ES forms only, or generate the

PDF for the return and print only the four pages involving CA estimated tax payments • If the client wants to do electronic funds withdrawal(s) rather than mailing check(s)

ο After completing CA 540ES Wkt, go to CA 540 Pg 5, bottom of page, to specify the tax payments that are to automatically withdrawn from the client’s bank account

PRINTING BLANK ESTIMATE FORMS • TaxWise requires an entry on 1040ES Pg 1 and/or CA 540ES Wkt

ο Enter $1 on 1040ES Pg 1, line 15, Income tax withheld ο Enter $1 on CA 540ES Wkt, line 20, Income tax withheld ο Print each page

FINAL STEPS IN TAX RETURN PREPARATION COMPLETE THE PREP USE FORM • On the Prep Use form, answer the questions on line 11 and line 12 about language and disability, if the client is

willing to provide the information (check the Intake/Interview form to see if the information is there before asking the client)

• Add your initials as the preparer, on line 13

CLEAR ALL WARNINGS ON THE FORMS TREE • Look for problem forms on the Forms Tree:

Final Steps in Tax Return Preparation

77 January 27, 2016

ο The form name may be the normal color, but with a yellow triangle on the left: ο Or, more commonly, the form name will be in red

• To clear the problems, within each form: ο Use Ctrl+E to move to the next red field ο Make or correct entries for all required fields, or use F3 to confirm a zero entry is correct Do not use F3 to “solve” problems: be sure that no entry is in fact required

• Repeat until no forms are marked as a problem ο Always scroll down to check the entire Forms Tree; a problem form may not be visible until you scroll

down

RUN DIAGNOSTICS • Click the Run Diagnostics icon on the toolbar, or use Ctrl+D • TaxWise does a complete review of the return and displays a list of errors, warnings, overrides, and estimates

for both the federal return and the state return • Items in the Errors and Warnings sections must be carefully examined, and corrections made as needed • For Errors, it is possible to quickly access a federal form that has an error by double-clicking on the error

message ο This does not work for state or other errors that are not underlined ο If there are multiple copies of the same form, review each until the error is found and corrected

• Warnings will not prevent e-filing, but still may indicate a problem. Don’t ignore them. • Overridden Entries include changes done through options within TaxWise, such as (on a W2) “Check and make

changes to the U.S. address or foreign address below, or “Check to take calculations off of lines 3, 4, 5, and 6” ο Each should be reviewed and verified

• Estimated Entries occur because forms that are loaded on the Forms Tree by default are not used ο These entries are okay; they do not need to be reviewed or corrected

• After all corrections have been made, click on the “Refresh” button or the “Run Diagnostics” icon, to see what has changed ο If there were no errors, and you then made changes, there will be third option, the “run diagnostics again”

link, below the diagnostics window. • When no diagnostic errors are detected, TaxWise will usually indicate that the return is eligible for e-filing by

showing a “Create e-Files” link • If no “Create e-Files link” is shown, there are three possibilities:

ο In fact there are still diagnostic errors that have not been corrected ο The return has been marked, on both the Main Info form, to be paper filed ο The return has no income (bottom of 1040 Pg 1), so it cannot be e-filed (for example, the only income is

from Social Security) If the client needs a tax return for legal or governmental reasons, or qualifies for a refundable tax credit,

such as the American Opportunity Credit, or wants to file for identity theft reasons, then change the return so it can be e-filed: Go to 1040 Wkt7, line 17 or below, and enter “TO ALLOW E-FILING”, with an amount of $1

CREATE E-FILES

Creating an e-file assigns the Submission IDs to the federal and CA returns; these IDs will print on the 8879s • Note: It is important for the preparer to create e-files, unless the return is going to be paper-filed, because this

step can identify errors otherwise not detectable • Click on the “Create e-File(s)“ link on the diagnostics screen menu (if this link is not visible, see the section

immediately above) • If errors are displayed, they must be corrected in order for e-filing to be done. Errors are often caused by

ο Unacceptable punctuation (&, /) or extra spaces ο Unused forms with stray entries ο Other errors that may be hard to trace – ask QR or the Local Coordinator for assistance, if needed

• TaxWise acknowledges when e-files are created successfully • The preparer should delete e-files created in this step, since quality review has not yet been done. Deleting

e-files prevents them from being mistakenly sent to the IRS and/or FTB.

Final Steps in Tax Return Preparation

January 27, 2016 78

Deleting E-Files • To delete e-files so the ERO won’t have an e-file loaded which doesn’t match the logs, and which could be

mistakenly e-filed: ο Make a minor change in a form (for example, add a character to the end of the home address, on the Main

Info form) ο Go to another form ο Return to the first form, and reverse the minor change

PRE-QUALITY REVIEW Before the quality review takes place, the preparer may want to do a quick review: • Do the entries agree with the Social Security cards, Form W-2s, Form 1099-Rs, tax withheld, etc? • Does any item seem strange or surprising (it’s not clear where it came from)?

ο If so, check it further; consider asking another counselor to help • Did the taxpayer get all the expected credits? • Review the CA 540 return, especially CA CA Pg 1 and CA CA Pg 2

ο Do all the expected CA differences show up in the CA return?

RETURN STAGES • Setting the return stage is a very important step in the return process • Setting the correct return stage lets the ERO know the status of the return, consequently making his/her

transmitting job easier and more accurate • Normally, the preparer should set the return stage when finishing the return, and the reviewer should check that

it was set as part of the quality review of the return. However, district or site policy may be different. ο It is recommended that sites have a “Ready to Review” (or similar) return stage that the preparer sets, after

completing his/her work. • The list of possible return stages is set by your district or local site. Check with your Local Coordinator if it’s

not clear which return stage to select. • The return stage can be set in three places: from the Return Summary on the toolbar (when a return is open);

using the “Check Return Status” link in the Refund Monitor; or from the Active Returns list (or any other return view), when no return is open (in the column labeled “Stage”)

QUALITY REVIEW • Every return prepared at a Tax-Aide site must be quality reviewed by another counselor.

ο if the return requires additional certification (in 2015, the only additional certification is HSA), the both the preparer and reviewer must be so certified

• The client should be present to observe the quality review and answer any questions • Part VIII, “IRS Certified Volunteer Quality Review Section”, on page 4 of the Intake/Interview form, lists

actions to be taken by the reviewer • Quality review is best done on screen rather than from printouts

ο Printing summary worksheets for multiple W-2s or Form 1099-Rs may be tempting, but it is not recommended because the reviewer will not see any red input fields that should to be addressed

• The reviewer must: ο Examine the Intake/Interview form and supporting documents supplied by the client and compare them

with the entries on the returns to check for the accuracy and completeness of data entry ο Look at all TaxWise forms that were used in conjunction with all the data submitted by the client

• When the quality review is finished, the reviewer should: ο Enter their initials on line 14 of the Prep Use form. ο Make sure that the return stage is correct

• Note: Either the reviewer or preparer should re-run diagnostics and create e-files again as the last step before printing

REVIEW RETURNS WITH CLIENT • Per the Tax-Aide Policy and Procedures Manual, either the preparer or the quality reviewer must review the

return with the client to the extent needed or requested to ensure client understanding.

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79 January 27, 2016

ο Part of the review is to point out to the client that the accuracy and completeness of the return is the client’s responsibility, as stated on the Forms 8879 (federal and state), and on the Tax Record Envelope.

• This review can be done either from the computer screen OR by printing the returns ο Decide which works best for you and the client ο For more complex returns, such as those with many documents, it may be easier to work from a printed

copy – see “Printing Returns”, immediately below. • If the prior year return is available, you might review the differences with the client

ο The Summary form (printed as “Three –Year Tax Summary”) may also be used for this, if the client’s prior year return was done at the local site (if so, there would be data Carry Forward)

• When satisfied that the returns are in good order, continue

PRINTING RETURNS • Re-run diagnostics and create e-files again, if this was not done just before starting the review of the return with

the client, or if that review of the return with the client resulted in any change to the return. • Click on the “Print Return” icon on the toolbar. (This assumes that the print sets are setup by your TC or LC. If

not, your LC will have to provide printing instructions.) • A PDF file will be created; when it is ready, the dialog will show a link “Open in a new window”. Click on that

link. • The PDF can be scrolled through to see what will print. The PDF can also be used in reviewing the return with

the client on the screen (see above). • Print the PDF file by clicking on the printer icon near the bottom of the screen • In the resulting print dialog, either print the entire file (normal), or select specific pages to be printed (unusual)

ο If you work at more than one Tax-Aide site, or are using a personal computer, make sure that the printer listed in the print dialog is the correct one If, after you expect printing to begin, it does not, one of the most common causes is having specified

the wrong printer [if this happens repeatedly, change the default printer; if necessary, get another counselor to assist]

Another reason why something might not print is a printer problem: out of paper, out of ink, or a paper jam, for example

• After printing a return, collate according to the paper return assembling instructions on page 82 below • Note: A PDF files created in the printing process may NOT be saved and may NOT be given to the client.

Printing Pages for the Software Transition • For the 2017 filing season, AARP Tax-Aide will change from TaxWise software to TaxSlayer Pro software. It is

recommended that counselors print additional documents to help minimize transition issues. (It is unclear whether there will be carryforward data in the 2017 filing season, and, if so, how comprehensive it will be.)

• The list of additional documents that are suggested be printed is in a document called “Preparing for Software Change – 2016 Filing Season”, available at the OneSupport Help Center (go to “Tax Training”, then “Tools”)

Printing Individual Forms • Using the “Print Return” icon starts the process that prints a standard set of tax forms. Occasionally a needed

form is not being printed in that standard set, as in the following situations: ο Itemized interest and/or dividends on Schedule B are less than $1,500 TaxWise recognizes that Schedule B is not required, and does not print it Sch B can be printed for the client’s copy of the return

ο Itemized deductions apply for the CA return, but the federal return uses the standard deduction TaxWise does not print Schedule A CA A (CA Schedule A) can be printed for the client’s copy of the CA return

• To print individual forms, open the return, if not already open ο Use the “Print Form” link in the left panel ο Select the form to be printed and a PDF file will be created; print that ο Printing any W2 or 1099R generates a one page summary of these documents

• In some cases, printing individual pages of the entire PDF is faster than printing individual forms. For example, assume that you had printed the return and then discovered that the client needed quarterly estimated tax vouchers. After updating the return in TWO (and re-creating e-files), the fastest way to print the four vouchers

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would be to create another PDF file by clicking the Print Return icon, finding the page numbers of the vouchers, and printing only those pages rather than the whole return.

Printing Blank Forms • TaxWise allows the printing of blank forms, which may be requested by a client who is coming to the site only

for advice or assistance with a return that he or she has, or plans to, manually prepared • Starting with no return being open, click on the Help icon on the toolbar • Click “IRS Forms and Publications” • Look up the appropriate form • Print the requested number of copies

Suppressing the California Return • In some cases you will not be creating both a federal and a CA return (for example, the client did not live in

California during the tax year) ο To remove all CA forms from the Forms Tree, in the State Information section of the Main Info form,

remove the “CA”, and also check the box to the right of “If you are not preparing a state return, check here” • The ERO must be made aware of this:

ο In the Activity Reporting log, note that there will be no CA return. ο Also write a note at the bottom of the Main Info form or in the Taxpayer Diary, depending on what your

local site prefers.

Client Letter • Clients appreciate the information and professional “touch” in client letters; sites are encouraged to use client

letters with site or district contact information • TaxWise client letters are printed separately from the return by clicking on the Client Letters on the toolbar

after the return is printed • Your LC must create the Client Letters and give instructions on the use of them • Some sites may have an alternate procedure to the Client Letter feature of TaxWise, such as a form letter.

E-FILING: SIGNATURES AND ATTACHMENTS • The taxpayer’s signature and (if married) the spouse’s signature are required for all tax returns.

Practitioner PIN (Electronic Signature) • Both the federal and CA returns use electronic signatures • The question on CA 540 Pg 5, “If electronically filing, does the taxpayer want to sign the return

electronically?” must be answered “Yes” (this is normally set as the default) ο TaxWise will then print a CA 8879 for the client to sign ο Note: If answered “No,” TaxWise prints CA Form 8453, which is not used by Tax-Aide

• The Self Select and Practitioner PIN section on the Main Info form should be completed (again, this is normally done by default, in the standard template)

• IRS 8879 and CA 8879 will be generated – the client(s) must sign both • Attach the signed IRS Form 8879 and the signed CA 8879 to the client’s copy of the returns • Your ERO will advise what documentation is required to allow the ERO to e-file a return • If attachments to the return are needed, see Using 8453 or Scanning PDF Attachments, below, page 81

Married Filing Jointly • If a return is MFJ and only one taxpayer is present, use the Practitioner PIN method and print the return

ο Have the taxpayer sign the Form 8879, IRS e-file Signature Authorization, and the CA Form 8879, California e-file Signature Authorization for Individuals

ο Instruct the taxpayer to return with the signature of the spouse on the federal and CA 8879 forms, so the return can be filed electronically

ο Make it clear that the return will not be filed until a Tax-Aide volunteer at the site has witnessed the signed forms [but remember that we do not keep these forms]

• Note: A married taxpayer can sign for a spouse when injury or disease prevents the spouse from being able to sign; otherwise the taxpayer must have a power of attorney (POA)

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81 January 27, 2016

Self-Select PIN (Electronic Signature) This method is not used by Tax-Aide

Deceased Person - Signature Requirements • A surviving spouse will sign the return and add “as surviving spouse” after their name • A executor or administrator will sign their own name with their title as per

ο Copy of the will appointing the executor, if there is one ο Other authorizing document, such as a court appointment ο If there is no document, the term “executor” includes anyone in actual or constructive possession of any

property of the decedent – see Pub 559, Survivors, Executors, and Administrators ο 1310 refund due a deceased taxpayer will be required if the return is filed by other than a surviving spouse

and there is a refund • If attachments to the return are needed, see Using 8453 or Scanning PDF Attachments, below, page 81

Power of Attorney (POA) • If an agent is signing the return for a taxpayer, a Power of Attorney (POA) must be submitted to the IRS, either

by mail (with a Form 8453) or as an electronic attachment • Note: A Power of Attorney expires when a person dies • Add 2848 Pg 1, Power of Attorney and Declaration of Representative, to the Forms Tree

ο Check the box at the top of the form, "Check here if using this form", and a box to indicate whether the form is for the taxpayer or spouse

ο Do not fill out any other information on the 2848 Pg 1 In the Forms Tree, 2848 Pg 2 will be red. This is okay; it will not cause a diagnostics error.

ο After the Form 2848 prints with the return, set it aside for shredding ο Use the POA provided by the taxpayer's agent in place of the printed Form 2848

• See the next section regarding how to transmit the document by paper or electronically

Using 8453 or Scanning PDF Attachments • In TaxWise, three types of supporting documents can be submitted either as a scanned PDF, electronically (the

return must be e-filed, of course) or by U.S. mail, accompanied by a Form 8453. ο POA or similar authorizing document If scanning, check the box near the top of 2848 (“Check here to select a PDF file”), after the document

is scanned. ο Broker’s statement (as discussed above, page 34) Check the appropriate box at the top of Sch D Pg 1 to indicate whether attaching a PDF file or creating

a Form 8453. (Check the second box only after the document is scanned.) ο Divorce papers or Form 8332, Release/Revocation of Release of Claim to Exemption for Child by

Custodial Parent Check the appropriate box on the Main Info form, in the Noncustodial Parents section, to indicate

whether attaching a PDF file or creating a Form 8453. (Check the second or fourth box only after the document is scanned.)

• If scanning, one option is to do the scanning on site, and then return the original document(s) to the client. The other option is to make one copy of the original, on-site, and then to do the scanning later, off-site.

• If sending paper documents to the IRS, using Form 8453, then two copies of the original documents are needed. • All document copies, and two copies of Form 8453, if used, must be given to the ERO, together with the

preparer’s Activity Log, at the end of the day. ο Note: TaxWise automatically adds 8453 when it is needed. When the tax return is printed, the Form 8453

should be in the print packet, twice, and should be pulled out, not given to the client. • If your site uses Form 8453, then the ERO will send one copy to the IRS Processing Center in Austin, TX, with

one copy of related documents, and the other copy of the 8453, with related documents, to the IRS SPEC representative for the district. ο The ERO can get mailing labels from their SPEC representative

• If your site uses PDF files to send information to the IRS: ο After the IRS and the FTB have accepted the returns, the ERO is responsible for securely deleting the

electronic files (PDF)s. If copy(s) of document(s) were made, to do scanning off-site, then the ERO must ensure that these copies are shredded after the IRS and FTB have accepted the returns.

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January 27, 2016 82

PAPER RETURNS Starting • When paper returns are required because the return cannot be e-filed, the following must be done to prevent

generating e-files: ο For the federal return, on the Main Info form, under Type of Return (just below box 6d), “Paper” must be

checked ο CA Note: The state return must also be set to be a paper return. On CA 540 Pg 5, “No” must be checked in

response to the question (just below line 115) “Do you want to electronically file this return?” • The return stage should be set to “Paper file” (or similar, depending on the return stages defined at your site) • The preparer’s Activity Log should be annotated to indicate a paper return, and the reason why • It is highly recommended to enter information about why the return is being paper-filed into either the Taxpayer

Diary or the bottom of the Main Info form. ο If the situation is likely to recur for the 2016 tax year, also enter a note at the bottom of the Summary form

• On paper-filed returns, many non-dollar fields are not required, because paper tax forms will be attached to the return. ο However, unless you are an expert on paper-filed returns, it is better to complete the forms in TaxWise as if

the return will be e-filed.

Printing • Click the “Print Return” icon on the toolbar • Print two copies of the PDF, which includes the federal copy to be attached to the CA, if required, or print one

full copy and then print selected pages from the PDF. ο If the CA return requires the federal return to be attached (that is required if there is any Form 1040

schedule other than A or B), then the first page of the CA 540 form will say, near the top, “ATTACH FED RETURN”

Signing and Collating • The client(s) must sign the second page of the IRS 1040 AND the last page of CA 540 returns being mailed • Federal – collate according to Attachment Sequence No. (at the top right of the form) • CA – collate according to numerical / alpha sequence, followed by the federal return, if required

ο TaxWise prints “ATTACH FED RETURN” on page 1 of the Form 540 page when the federal return is required to be attached

• Attach to the first page of 1040 and 540 returns: ο Form W-2s (Fed / CA, respectively) For the CA return, CA Sch W2s (shown on the Forms Tree as CA W-2 Pg 1 and CA W-2 Pg 2) can be

used in place of Form W-2s. Don’t attach both CA Sch W2s and paper W-2s to the CA return. If the return has more than two W-2 forms, click “+” on CA W-2 Pg 1 in the Forms Tree (summary

schedule with two Form W-2s per page) to add more CA W-2 forms as needed (each CA Sch W2 has information on two paper Form W-2s)

Enter (sequential) number “1” on the first CA W-2 Pg 1; enter “3” on the second (if there is a second of these), “5” on the third, and so on.

ο Form W-2Gs, if tax was withheld (Fed / CA, respectively) ο Form 1099-Rs, if tax was withheld (Fed / CA, respectively) ο Any other forms showing tax withheld

Mailing • Instruct the client to mail the returns with any payment vouchers and checks, but separately from any

payments of quarterly estimated tax • Mailing addresses are shown on page iv, above

EXITING A RETURN BEFORE COMPLETION • IF you need to stop working on a return before completing it – for example, the client needs to come back with

a missing tax document, then: ο If e-files have been created, delete them:

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83 January 27, 2016

Make a minor change in a form (for example, add a character to the end of the home address, on the Main Info form)

Go to another form Return to the first form, and reverse the minor change

ο Change the return stage to indicate the reason why the return is not complete. (The exact return stage to be used depends on the choices defined by your district or local site.)

ο Enter an explanation of what is required to finish the return either in the Taxpayer Diary or at the bottom of the Main Info form

ο Add an explanation of the status of this return to your Activity Reporting log

SUBMITTING E-FILES • At most sites, only the ERO submits e-files. • Some sites want preparers to submit e-files after the quality review has been complete and the client has signed

(authorizing e-filing) and left the site. If that is the process at your site: ο Click the “Submit e-files” icon on the toolbar (if not visible, then you have a tax return open, and need to

close the return) to start the process Do not submit returns based solely on the Return Stage – make sure that your Activity Reporting log

also indicates that the return will be electronically filed, and that is ready to be filed. ο Use your Activity Reporting log to keep track of which returns you have submitted, and which have been

accepted. ο Follow site instructions as to the process for submitting these files – for example, not submitting a CA

return until the U.S. return has been accepted

UNABLE TO PAY/LATE FILING • Returns prepared by Tax-Aide will always be filed by April 18, except for returns prepared by authorized sites

that are open year-round • Prepare regular vouchers for full payment (the client can always change the dollar amounts)

ο Inform the client of the payment options below if they cannot pay in full by April 18 • More information can be found in Pub 594, The IRS Collection Process

Pay Late • If payment can be made within four months (that is, by August 18), pay as much as possible by April 18. • The client must contact the IRS at 800-829-1040 or go online at irs.gov/Individuals/Online-Payment-

Agreement-Application and request a Short Term agreement of 30, 60, 90, or 120 days ο Do not request an installment agreement, which has fees. ο This will stop the tracers and the placement of the account in collection status

• Discuss with the client how payments will be made ο Print as many voucher forms (Form 1040-V) as the client wants, or ο If the client prefers to pay directly, by credit card or from their bank account, direct the client to

irs.gov/Payments • The taxpayer will owe interest at the federal rate (3 percent annually, as of December 2015) plus a late penalty

of 0.5% per month after the due date of April 18

Pay by Credit Card • At irs.gov/Payments, with the option “Pay with Your Debit or Credit Card”, the client can pay some or all of

their balance due using a credit card ο Processing fees are charged (and paid to third parties). For credit cards, the fee is approximately 2 percent

of the payment (the fee varies by processing company)

Pay on Installment Agreement • Should be considered only if the client cannot pay their balance due within 4 months • 9465 is used to request an installment agreement

ο The return can be e-filed with this form ο There is a one-time set-up fee of $120, which can be reduced to $52 by agreeing to pay by direct debit, or

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January 27, 2016 84

$43 by filing Form 13844 (not available on TaxWise) for low-income households (below 250% of the Department of Health and Human Services poverty guidelines)

ο The client can choose the monthly due date and payment amount, and may arrange to have the funds withdrawn directly from a bank account

• They will owe interest and a late-payment penalty of 0.25% of the balance due each month • While on an installment agreement, the client may amend the agreement, including adding additional years, if

necessary, on IRS.gov • CA Note: CA 3567 is used to request installment payments for taxes owed on the CA return

ο A $34 filing fee applies

Hardship extension of time to pay • Note: Form 1127 (not available on TaxWise) can be used request an extension of time to pay because of undue

hardship

Late Filing • If no tax is due or the client is due a refund, there is no penalty as long as the return is filed within three years

of the due date ο After 3 years, unclaimed tax refunds are forfeited and become the property of the U.S. Treasury.

• Penalties if tax is owed: ο The interest on the amount past due can vary by quarter For all of 2015, it was 3% per year for each federal and CA return, compounded daily

ο The late filing penalty is 5% per month of the unpaid tax up to a maximum penalty of 25% of the amount due for each federal and CA return If the return is filed more than 60 days late, the minimum penalty is $135 or the full amount of the tax

due, whichever is less

Refunds • There is a deadline for claiming refunds • For federal – three years from the date the return was due. For example, the last day for claiming a refund on a

2012 return (due April 15, 2013) will be April 15, 2016. • For CA – four years from the due date of the return. For example, the last day for claiming a refund on a 2011

return (due April 15, 2012) will be April 15, 2016.

Prolonged Failure to File • Unlike the three-year deadline for refunds, there is no limit on how far back the IRS can go in assessing taxes

for non-filed returns • Repeated failures to file could result in criminal charges, which carry a maximum fine of $25,000 and one year

in prison for each count if convicted

OTHER RETURNS PRIOR YEAR RETURNS Counselors doing a prior year return must have been certified for the year of that return. Only returns for the last three prior years may be prepared in Tax-Aide – clients needing older returns should be referred to a paid preparer (but note that they must file ONLY if they will have balance due, or in response to an IRS request). So, for example, if it is February 2016, then returns as far back as tax year 2012 can be prepared. • Note: IRS offices no longer assist taxpayers with the preparation of prior year returns • The prior year TWO software is accessed by appending the two-digit year to the standard URL for TWO

ο For example, for a tax return for 2013, the URL would be twonline.taxwise.com/13 ο The background for the prior year TWO site will be burgundy, tan (brown), or purple

• If multiple prior year returns are needed (for example, 2012, 2013, and 2014), do the oldest year first, so that data Carry Forward can be used, sequentially, for the other years.

• Federal forms and instructions for prior years can be viewed and downloaded from irs.gov/Forms-&-Pubs • Note: The IRS will not do direct deposit refunds for prior year returns. If direct deposit information is entered

on the tax return, the IRS will still mail a paper check to the taxpayer.

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85 January 27, 2016

• After completing a prior year return, exit the prior year TWO site, to avoid having time-out messages and other possible software problems. The background color – for the current year - should again be blue. ο If you got to the prior year TWO site by opening a new tab or a new window, close that tab or window ο If you got to the prior year by appending the two-digit year to the already open, current year TWO site, then

reverse the process by removing text in the URL so that it becomes just twoline.taxwise.com • CA Note: California has a four-year statue of limitations, rather than the federal limit of three years, but going

back four years is out-of-scope for our program. If a client believes he/she could get a significant refund from the FTB by filing such a return, the client should consider using a paid tax preparer.

AMENDED RETURNS Counselors doing an amended return must have been certified for the year of that return. Only the returns for last three prior years may be amended in Tax-Aide. Clients needing to amend older returns should be referred to a paid preparer . • Amended returns CANNOT be e-filed • When amending a federal return, check to see if the CA return also needs to be amended

ο Both can be easily done at the same time on the computer • An adjustment letter (CP2000) is not automatically a reason to amend a return

ο If there are no changes other than those proposed by the IRS, the client only needs to tell the IRS that he/she accepts the proposed changes; no 1040-X is needed.

ο However, even if the federal adjustment proposed is correct and is accepted, a CA amended return may be necessary to so that CA information agrees with the IRS-adjusted 1040 amounts

• There will be instances when the federal return rejects and the necessary correction(s) change the state return amounts ο If the state return has already been accepted, the ERO will have to generate a state amendment and arrange

for the taxpayer’s signature and mailing of the amended state return • If amending a return for a prior year, make sure that you are working in the TaxWise version for that prior year

– see the section above. • If have access to the original return on TWO, including a prior year return, open that return

ο You can open a return, to amend it, only if it was prepared in TWO at your site. • If you do not have access to the original return, then a new return must be created to match the original return:

ο Enter information from the original return on appropriate supporting TaxWise forms using information from the original return Do not enter the original return numbers directly on 1040 Pg 1 and 1040 Pg 2, because some items,

such as the amount of Social Security payments that are taxable, or allowable medical deductions, can change if there is an adjustment in income

If contact information (address, phone number) has changed, enter current information rather than what was on the original return

ο Since the amended return must be paper filed, information such as employer or payer names and addresses usually do not need to be entered. That’s because: Forms, such as W-2s, that were sent with the original return, do not need to be sent again For forms that do need to accompany an amended (paper) return, such as a W2 missing from the

original return, submit the original paper version that the taxpayer has. • If amending a current year return, make a note at the bottom of the Main Info form as to why an amendment

was filed, and the date • Change the type of filing from e-file to paper for both federal and CA

ο On the Main Info form, under Type of Return (just below box 6d), check “Paper” ο On CA 540 Pg 5, check “No” in response to the question (just below line 115) “Do you want to

electronically file this return?” • Set the return stage according to local instructions

Before Making Changes to the Original Return • Confirm that all amounts in TaxWise, on the 1040 and CA 540, match the amounts on the original federal return

(Form 1040) and California return (Form 540) • Lock (“override”) the amounts in Column A, Original Amount, as follows:

ο Federal return:

Request for Extension of Time to File

January 27, 2016 86

Go to 1040X Pg 1 Check the box on the first line to “Override the original entries in column A…” before making any

changes to any forms ο California return Go to CA 540X Pg 1 Check the red box above line 1a State wages to “Override all original entries in Column A…” before

making any changes to any forms

Make Required Changes • Go through each form that requires revision, and make the necessary changes

ο This updates both the federal and CA returns ο DO NOT make numeric changes directly on 1040X or CA 540X

• Once all changes are completed and both revised returns are correct: ο Open each page of 1040X and complete any remaining red fields ο Open each page of CA 540X and complete any remaining red fields

• On 1040X Pg 2 and CA540X Pg 3, explain each change separately and in detail ο The item being changed ο The amount previously reported and the corrected amount ο The reason the change was needed, noting any documents that are attached that support the change

Print the Amended Return(s) • In addition to printing Forms 1040-X and 540-X, any form or schedule that has been changed from the return as

originally filed should be printed and attached to the amended return ο For example, if the return is amended to add a Form 1099 for interest income: Federal: 1040-X, Schedule B (if required) and any other form that changed (for example, Schedule A if

medical deductions changed) should be attached and mailed in CA: 540-X, and copies of CA and federal pages that changed, should be attached and mailed in

ο Do not attach the Form 1040 (original or revised) or the CA Form 540 (original or revised) • Click the print return icon on the toolbar

ο Either print two copies of the PDF, or print one full copy and then print selected pages. • Write “as amended” at the bottom of each page that is being re-filed as part of the amended return

ο Attach all supporting forms and schedules for items changed (make sure all information on a revised schedule, including payer names, is shown)

• Federal: The client must sign and mail one copy of the 1040-X with all revised supporting forms and schedules ο Attach any corrected Form W-2s and Form 1099s if there was withholding ο Do not mail in the revised Form 1040 (the client does get a copy of this, of course) unless a change appears

only on the Form 1040 - for example, alimony paid, on line 11, rather than on a support schedule that is printed and mailed in.

• CA: The client must sign and mail one copy of the 540-X with the revised CA forms or schedules, any changed federal schedules, and documents supporting each change, such as a corrected W-2 or a new 1099-R

• If the amended return is the result of a letter or notice from the IRS or FTB, mail the amended return, with a copy of the letter attached, to the address shown on the letter

• The client should be given full set of pages of the amended returns; mark these “Amended – Copy”

REQUEST FOR EXTENSION OF TIME TO FILE • An automatic six-month extension of time to file a federal return is available for most taxpayers by submitting

Form 4868, which can be done as follows: ο Filing Form 4868 by phone or on IRS.gov between February 1 and April 18 if a payment is due ο E-filing Form 4868 (if approved by your LC or ERO) with direct debit if a payment is due ο Mailing a paper Form 4868 with a check for any tax due

• CA grants an automatic extension of time to file as long as the tax is paid in full by the due date ο No form is needed if no payment is required ο If a payment will be made to the FTB, CA Form 3519 is the payment voucher.

End-of-Shift

87 January 27, 2016

• The key point that the client must understand is that any tax liability (which will have to be estimated) must be paid to both the IRS and CA by April 18, otherwise interest and/or a penalty will accrue

• To create a Form 4868: ο Name and address information must be completed on the Main Info form. Then, in the Self Select and

Practitioner PINs section, select Form 4868 with or without direct debit, as appropriate ο 4868 is added by TaxWise to the Forms Tree ο Go to 4868 and click the box at the top of the form ο TaxWise puts figures into line 4 and line 5 based on any forms in the return that have been filled out, such

as W2s and Sch A. To adjust these two lines for information not entered into TaxWise – for example, missing information – link line 4 and/or line 5 to a Scratch Pad, and put missing information there

ο Enter the amount to be paid, if any, on line 7 (normally this would be the same as line 6, but that is not required)

ο An extension can be e-filed; alternatively, print Form 4868 so the taxpayer can mail the form with a check for the amount on line 7 Note: E-filing must be coordinated with and approved by your LC or ERO

ο At some later date the clients will need to file the return – which will almost always be after April 18 when Tax-Aide services are no longer available, except for limited sites

• When there is a payment due for CA: ο Complete the direct debit information on CA 540 Pg 5, or ο Go to CA 3519 and check the box at the top of the form

• Inform the client that the returns must be complete and filed by October 15 • Printing any pages of the return is not recommended, since the return is not complete and will not be filed.

Printing any pages may lead the client to believe that the return was filed by Tax-Aide ο If printing any pages, use a watermark or manually write “DRAFT” on each page to make clear that the

return will not be filed by Tax-Aide

END-OF-SHIFT Assemble Documents to Give to the ERO • (1) Your completed Activity Reporting log

ο Look at “Active Returns” in TaxWise to make sure that all returns that you worked on were correctly recorded on the log In particular, for any returns not completed, the information in the Comments column section MUST

be consistent with the Return Stage for that return. ο If your site has each counselor track Q&As on their own log, then make sure that you have recorded the

number of clients for whom you answered tax questions, where the clients were not getting their return prepared by your site

• (2) Any Form 8453s and related attachments, in duplicate, IF your site has copying capability ο Alternatively, the ERO will get only one copy of the Form 8453s and related attachments, and make the

duplicate copy at a later time.

Tax Aide Site Sign-in Sheet • Some sites track information centrally and want preparers to help with that tracking. If so, then:

ο Check that everyone you have seen is properly recorded on the site sign-in sheet (cross-check with TaxWise information and/or your Activity Reporting log)

ο Record, on the site sign-in sheet, the number of tax questions that you answered that did not involve a client whose return was being prepared by your site

Shutdown Procedures for IRS and AARP Foundation Equipment • Log out of TWO by clicking the Logout link at the far right of the TWO toolbar Follow the proper procedures for shutting down your laptop computer – do not just pull out the power cord and close the lid! Not fully shutting down could result in the battery running down to zero, and will always add extra start-up time the next time you use your computer. • Shut down the computer using the appropriate Windows commands.

site logs

January 27, 2016 88

• Wait until the screen turns completely black and the power switch goes dark before pulling out the power plug and closing the lid

• When the power plug is pulled, ALL lights on the keyboard should go out ο If they don’t, then the shutdown process was not done properly

• Put the laptop, power cord, mouse, and mouse pad in your laptop case, making sure that you have the correct case (the computer’s identifying number matches the number on the case, or the case has a label or other information identifying it as yours

SITE LOGS • The AARP Foundation must track counseling activity at each site, because this is the basis for the IRS grant

that partially funds the program • In addition, the site ERO needs to track which returns are to be e-filed • Sites can use various logs, which may include:

ο Site Sign-in sheet: to keep track of clients in order to determine the sequence of service, and to track counseling services provided

ο Activity Reporting log: information about returns worked on by each preparer; this is used by the site’s ERO to control e-file processing

• Sites can use their own formats for logs as long as they collect the following required elements of client activity: ο Paper-filed current year returns ο Prior year federal returns prepared ο Amended federal returns prepared ο State-only returns prepared ο Count of “Q&A” services (services for a client where no return was prepared)

• Your LC provides this information to the DC at specific intervals. Some of this information may be collected by the ERO and given to the LC.

INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER (ITIN)

• Federal law requires individuals with U.S. income, regardless of immigration status, to pay applicable U.S. taxes

• The ITIN is a nine-digit number (that begins with the number 9 and has a 7 or 8 as the fourth digit) that was created for use on tax returns by those taxpayers who do not currently qualify for (or have) a Social Security number

• An ITIN will be issued to individuals who have a valid filing requirement, who file in order to claim a refund of taxes withheld, or for whom an ITIN is needed on the tax return of another individual (for example, a parent or spouse)

• The ITIN does NOT: ο Authorize work in the U.S. ο Provide eligibility for Social Security benefits OR the Earned Income Tax Credit ο Provide valid identification outside the tax system ο Establish immigration status

• More information on ITINs can be found at irs.gov/Individuals/General-ITIN-Information, in Chapter 1, "Filing Information", of Pub 17, and in Pub 1915, Understanding Your IRS Individual Taxpayer Identification Number

Taxpayer does NOT have Valid SSN or ITIN • Click “New Return” • Mark “Apply for ITIN” • A dummy identification number (for example, ITI-N0-0001) will be assigned but will not print on the return • Prepare the tax return • Return cannot be e-filed

Individual Taxpayer Identification Number (ITIN)

89 January 27, 2016

ο For the federal return, on the Main Info form, under Type of Return, check “Paper” ο On CA 540 Pg 5, check “No” in response to the question (just below line 115) “Do you want to

electronically file this return?” • The client must complete the W-7 that is printed with the paper return • The client must submit the paper return together with the W-7 and required documentation to the following:

ο If mailing, to the following address, and not to any other IRS office: IRS, ITIN Operations PO box 149342 Austin, TX 78714-9342

ο If in person, to an IRS Acceptance Center or to an IRS-authorized Acceptance Agent authorized to review the information Local Acceptance Agents can be located using irs.gov/Individuals/Acceptance-Agent-Program

• On the state return (paper-filed), write “Applied For” in the SSN field ο The client should contact the FTB (1-800-852-5711) once the ITIN is received

Taxpayer has Valid ITIN (from Prior Years) • The client should bring the IRS letter which assigned their ITIN • Check documents to make sure name is correct (SSN will be incorrect) • Create the return using the ITIN as appropriate for the primary or secondary taxpayer • For W-2 Forms, the box on the W2 that says that the Main Info form has an ITIN should already be checked.

Enter the SSN that appears on the paper Form W-2. The return can still be e-filed. • If a Form 1099-R form has an incorrect SSN, submit as a paper return

ο For the federal return, on the Main Info form, under Type of Return, check “Paper” ο On CA 540 Pg 5, check “No” in response to the question (just below line 115) “Do you want to

electronically file this return?” • If tax documents have an incorrect name, submit as paper return

Taxpayer Now has a Valid SSN (Previously Filed Using an ITIN) • Prepare the current year return using the new, valid SSN, and e-file the return • If of benefit to the client, amend prior year(s) returns that were filed using an ITIN

ο The reason stated on 1040X Pg 2 should include “Previous return filed with ITIN _______” as well as describing what else has changed

ο Note: Effective December 2015, if a prior year ITIN return could not claim EIC, then EIC may not be claimed on an amended return with a SSN

Form W-7 • Preparation of a Form W-7, Application for IRS Individual Taxpayer Identification Number, as a separate

document, not part of a tax return, is out-of-scope • A blank W-7 can be printed from the IRS.gov website • To complete the form, the applicant(s) should consult the instructions accompanying the W-7 • The application can be made by mail or at any IRS Assistance Center or Acceptance Agent • It generally takes 4 to 6 weeks to receive the ITIN • In most cases the applicant must provide (a) the original, completed tax return(s) for which the ITIN is being

requested, plus (b) either a valid passport or two of the following forms, plus (c) the W-7 application form

National Identification Card U.S. Military Identification Card U.S. Driver’s License Foreign Military Identification Card Civil Birth Certificate Visa Foreign Driver’s License U.S. Citizenship and Immigration (USCIS) photo ID U.S. State Identification Card Medical Records (dependent only) Foreign Voters Registration Card School Records (dependents and students only) •

Glossary

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GLOSSARY ACA Patient Protection and Affordable Care Act ACTC Additional child tax credit AGI Adjusted gross income AMT Alternative minimum tax AOC American Opportunity credit, formerly HOPE education credit APTC Advance premium tax credit (part of the ACA) CASDI California state disability insurance CCH Commerce Clearing House- publisher of TaxWise COD/CODI Cancellation of debt / Cancellation of debt income CTC Child tax credit DC District Coordinator - the individual responsible for all sites in a district EFIN Electronic Filing Identification Number - a unique number assigned by the IRS to identify each

electronic filing site, which is used as the electronic “address” for the site EIC / EITC Earned income credit EIN / FEIN Employer (Tax) Identification Number - the federal ID number for processing employer payroll

information ERO Electronic Return Originator - the person responsible for the efiling of tax returns FMV Fair market value HoH Head of household (filing status) HSA Health savings account ITIN Individual taxpayer identification number – for those without a SSN LC Local Coordinator (the individual responsible for one or more tax preparation sites) LTC Long-term care MAGI Modified adjusted gross income For 8965 purposes: AGI + excluded foreign earned income + exempt interest income For 8962 purposes: AGI + excluded foreign earned income + exempt interest income + nontaxable

SS income (but not Supplemental Security - SSI) MEC Minimum essential coverage (for ACA) MFJ Married filing jointly (filing status) MFS Married filing separately (filing status) OPM Office of Personnel Management - the federal agency which pays government pensions PAB Private activity bond POA Power of attorney Pub IRS Publication PSO Public safety officer PTC Premium tax credit (ACA) – the federal subsidy for those buying insurance through an exchange QW Qualifying widow/er (filing status) RDP Registered domestic partner RTN Routing transit number (9-digit number assigned by the Federal Reserve to identify each bank) S Single (filing status) SC State Coordinator - the individual responsible for all districts in on of the five sub states in

California SDI Same as CASDI SIDN Site Identification Number - a unique seven digit number starting with “S” assigned to each

physical counseling site operated by Tax-Aide SPEC Stakeholder Partnerships Education and Communication office of the IRS SRP / ISRP (Individual) Shared Responsibility Payment (for ACA) SS / SSN Social Security / Social Security number TC Technology Coordinator for a Tax-Aide district TWO TaxWise Online VI / VP / VPDI

Voluntary Insurance / Voluntary Payment / Voluntary Payment Disability Insurance - NONE of which are deductible (on Schedule A) as a state tax

91 January 27, 2016

INDEX AARP Volunteer Information ............................... 1 ACA

Advance Premium Tax Credit Repayment ..... 56 Exemptions ..................................................... 65 Full-Year Coverage ........................................ 64 Net Premium Tax Credit ................................. 66 Shared Responsibility Payment ...................... 64

ACH Automatic Withdrawal Balance Due ................................................... 74 Estimates ........................................................ 76

Additional Child Tax Credit ............................... 66 Adjustments

Alimony Paid ................................................. 50 Certain Business Expenses (2106) ................. 49 Early Withdrawal of Savings .......................... 50 Educator ExpenseS ......................................... 49 Health Savings Account ................................. 49 IRA Deduction ............................................... 50 Jury Duty Pay to Employer ............................ 51 Moving Expenses ........................................... 50 Self-Employed Health Insurance.................... 50 Self-Employment Tax ..................................... 50 SEP, SIMPLE Plans........................................ 50 Student Loan Interest ..................................... 51 Tuition and Fees ............................................. 51

Advance Premium Tax Credit ............................ 56 Alimony

Alimony Paid ................................................. 50 Alimony Received .......................................... 30

Amended Returns ............................................... 85 American Opportunity Credit ............................ 60

Refundable AOC ............................................ 66 Annuities ............................................................ 37 Attachments

8332 ................................................................ 16 8453 or PDF ................................................... 81 Broker's Statement ......................................... 34

Bank Information ............................................... 17 Business Codes................................................... 31 Business Income................................................. 30 CA Adjustments

CA Differences ............................................... 67 CA Lottery ...................................................... 45 Capital Loss Carryover ............................. 36, 68 Deductions Allowed ....................................... 69 Deductions Not Allowed ................................ 69 Excludible Income.......................................... 67 Foreign Income Tax Deduction ...................... 54 Foreign Pensions ............................................ 45 HSA ................................................................ 69 HSA Deduction .............................................. 50 HSA Distributions .......................................... 47 HSA Employer Contributions ........................ 21

HSA Investment Income ........................... 25, 28 Includible Income ...........................................68 Indian Tribal Income ................................. 23, 46 Inherited Property 2010 ..................................35 IRA Basis Difference ......................................68 Other State Bond Interest ................................25 Pensions 86/87 3-Yr Rule ...............................41 Public Safety Officer Benefits ........................39 Railroad Retirement Green Form ...................42 Railroad Tier 1 Blue Form ..............................44 State Tax Refund .............................................30 U.S. / Municipal Fund Dividends ...................28 U.S. Bond Interest ...........................................25 Unemployment Income ..................................43 Wages, State Wages Differ ..............................21

CA Voluntary Contributions ............................... 72 Canadian Pensions .............................................. 42 Canadian Social Security .................................... 45 Cancellation of Debt ........................................... 47 Capital Gains & Losses ...................................... 33 Capital Loss Carryover ....................................... 36

CA Adjustment................................................68 Carry Forward of Prior Year's Data .................... 11 CASDI ................................................................ 22 Casualty and Theft Losses .................................. 56 Charitable Contribution Carryover ..................... 55 Charitable Contributions ..................................... 55 Child Care Expenses ........................................... 58 Child Tax Credit ................................................. 61

Additional CTC ..............................................66 Client Letter ........................................................ 80 Codes

1099-R, box 7 .................................................38 5329, Exceptions to the Penalty ................ 38, 63 Business (Sch C) .............................................31 TWO Color .......................................................4 W-2 box 12 .....................................................20

College Access Tax Credit - CA ......................... 70 Color Codes .......................................................... 4 Cost Basis

Inherited Property ...........................................35 Credits

Additional Child Tax ......................................66 American Opportunity ....................................66 Child & Dependent Care ................................58 Child & Dependent Care - CA ........................69 Child Tax Credit ..............................................61 College Access - CA .......................................70 Dependent Parent Credit - CA ........................70 Earned Income ................................................66 Education ........................................................59 EITC - CA.......................................................71 Elderly & Disabled, ........................................62

January 27, 2016 92

First-Time Homebuyer/Repayment ................ 63 Foreign Tax .................................................... 58 Joint Custody HoH Credit - CA ..................... 70 Renter's Credit - CA ....................................... 71 Residential Energy ......................................... 61 Retirement Savings ........................................ 61 Senior HoH - CA ............................................ 70

Credits - CA Only Child & Dependent Care ................................ 69 College Access ............................................... 70 Dependent Parent ........................................... 70 EITC ............................................................... 71 Joint Custody HoH Credit .............................. 70 Renters ............................................................ 71 Senior HoH Credit .......................................... 70

Currency Exchange Rates .................................. 45 CyberTax Messages ............................................. 1 Deceased Spouse/Taxpayer ................................ 14

Representative ................................................ 81 Signature ........................................................ 15

Deductions ......................................................... 51 Charitable Contribution Carryover ................. 55 Charitable Contributions ................................ 55 Gambling Losses ............................................ 45 Interest Paid .................................................... 54 Itemized .......................................................... 52 Medical ........................................................... 52 Medicare Insurance ........................................ 44 Miscellaneous ................................................. 56 Mortgage Insurance ........................................ 54 Noncash Charitable Donation ........................ 55 Other Taxes..................................................... 54 Personal Property Tax (DMV) ....................... 54 Real Estate Taxes............................................ 53 Standard Deduction ........................................ 51 State Taxes Paid.............................................. 53 Unrecovered Pension Investment ................... 56

Dependent Care Expenses .................................. 58 Dependents ......................................................... 15

More Than Four ............................................. 16 Standard Deduction ........................................ 49 Taxpayer as a Dependent ................................ 15

Determining if a Return is Required .................... 9 Diagnostics ......................................................... 77 Difficulty of Care Payments ............................... 48 Direct Debit

Balance Due - CA .......................................... 74 Balance Due - Federal .................................... 74 Estimates - CA ............................................... 76 Estimates - Federal ......................................... 76

Direct Deposit .................................................... 73 Split Accounts ................................................ 73 U.S. Savings Bonds ........................................ 73

Direct Deposit - CA ........................................... 74 Direct Pay ........................................................... 74 Dividend Income

AMT-PAB .......................................................28 CA Exemption Rule ........................................29 Capital Gain Distribution ................................28 Dividend Stmt .................................................27 Exempt Interest Dividend ...............................28 Foreign Taxes ..................................................29 Non-Dividend Distribution .............................28 Ordinary ..........................................................28 Qualified .........................................................28

Donations to Tax-Aide .......................................... 2 Early Distribution Additional Tax ....................... 62 Early Withdrawal Penalty ................................... 26 Earned Income .................................................... 49

While a Prisoner .............................................24 Earned Income Credit ......................................... 66 Earned Income Tax Credit - CA ......................... 71 Education

Credits .............................................................59 Scholarships ....................................................22 Student Loan Interest ......................................51

Education Trust Income (1099-Q) ...................... 46 Educator Expenses Adjustment .......................... 49 E-Files

Creating ..........................................................77 Deleting ..........................................................78

E-FILES Change to Paper ..............................................82

Elderly & Disabled, Credit ................................. 62 Employer ID

1099-R State Tax ID .......................................39 W-2 .................................................................20 W-2, CA ..........................................................21

End of Shift ......................................................... 87 Equipment, Lost or Stolen .................................... 1 ERO Documents ................................................. 87 Estimated Tax Payments ..................................... 65 Estimates for Next Year ...................................... 75 Extensions ........................................................... 86 Failure to File ...................................................... 84 Family Leave Income ......................................... 43 Federal Tax Withheld .......................................... 65 Filing Status ........................................................ 13

Head of Household - CA ................................67 Final Steps - Tax Returns .................................... 76 First-Time Homebuyer Credit/Repayment ... 63, 64 Foreign Accounts or Assets ................................ 24 Foreign Government Pensions ............................ 42 Foreign Taxes ...................................................... 29 Forms

1040 Sch A ......................................................52 1040 Sch B ......................................................24 1040 Sch C ......................................................31 1040 Sch D .....................................................33 1040 Sch E ......................................................42 1040 Sch R ......................................................62 1040-ES ..........................................................75

93 January 27, 2016

1040-X ............................................................ 86 1098 ................................................................ 54 1098-T ...................................................... 22, 59 1099-B ............................................................ 33 1099-C ............................................................ 47 1099-DIV ....................................................... 27 1099-G ............................................................ 43 1099-INT ........................................................ 25 1099-K ............................................................ 31 1099-LTC ....................................................... 47 1099-MISC (Other Income) ........................... 46 1099-OID ....................................................... 27 1099-Q ............................................................ 46 1099-QA ......................................................... 63 1099-R ............................................................ 37 1099-R CSA/OPM ......................................... 41 1099-S ............................................................ 36 1099-SA ......................................................... 47 1116 .......................................................... 29, 58 1310 ................................................................ 15 2106 .......................................................... 49, 56 2106-EZ .......................................................... 56 2441 ................................................................ 58 2848 ................................................................ 81 4137 .......................................................... 23, 62 4852 ................................................................ 22 4868 ................................................................ 86 5329 .......................................................... 38, 62 5405, Disposition ..................................... 63, 64 5695 ................................................................ 61 8283 ................................................................ 55 8332 ................................................................ 16 8379 ................................................................ 72 8453 ........................................ 16, 34, 80, 81, 87 8606 .......................................................... 39, 40 8615 ............................................................ 9, 22 8812 ................................................................ 66 8853 ................................................................ 47 8863 ................................................................ 59 8879 .................................................... 17, 77, 80 8880 .......................................................... 21, 61 8888 ................................................................ 73 8889 ................................................................ 47 8917 ................................................................ 51 8939 ................................................................ 35 8962 ................................................................ 56 8965 ................................................................ 65 9465 ................................................................ 83 ACH 1040 ...................................................... 74 CA 3506 ......................................................... 69 CA 3519 ......................................................... 86 CA 3532 HoH ................................................. 67 CA 3567 ......................................................... 84 CA 540-ES ..................................................... 76 CA 540-X ....................................................... 86 CA 5805 ......................................................... 72

CA 593 ............................................................37 CA 8453 ..........................................................80 CA 8879 ..........................................................14 CA Sch C ........................................................32 CA Sch CA .....................................................67 CA Sch D .................................................. 36, 68 CA Sch P .........................................................69 F/S Tax Paid ....................................................65 Main Info ........................................................12 Prior Year ........................................................84 RRB-1099 Tier 1 Blue Form ..........................44 RRB-1099-R Tier 2 Green Form ....................42 Sch K-1 ............................................... 27, 33, 42 SSA-1099 ........................................................44 W-2 .................................................................19 W-2G ..............................................................45 W-7 .................................................................89

Gambling ............................................................ 45 CA Lottery ......................................................45 Losses .............................................................45

German Pension .................................................. 42 German Social Security ...................................... 45 Glossary .............................................................. 90 Head of Household CA 3532 .............................. 67 Health Savings Account

Deduction ........................................................49 Distributions ...................................................47 In CA ..............................................................69 Interest Income ...............................................25 IRA Rollover ...................................................40 W-2, CA ..........................................................21

Help Hotline Numbers ...............................................1 TWO Help Center .............................................7

Household Employee Income ............................. 24 Identity Theft .................................................. 9, 17 Identity Verification ............................................ 11 Income

Alimony ..........................................................30 Annuities .........................................................37 Business Income .............................................30 CA Lottery ......................................................45 CA/Non-CA Bonds .........................................25 Capital Gain Distribution ................................28 Capital Gain or Loss .......................................33 Capital Loss Carryover ...................................36 Dividends ........................................................27 Family Leave ..................................................43 Farm ................................................................43 Gambling Winnings ........................................45 Household Employee ......................................24 Indian Tribal Income ................................. 23, 46 Interest ............................................................24 IRA Distributions ............................................37 IRA Exclusion Worksheet ...............................39 Non-Employee Compensation ........................46

January 27, 2016 94

Notary Fees .................................................... 33 Other ............................................................... 45 Pensions .......................................................... 37 Prepaid Funeral Plan ...................................... 27 Rents & Royalties........................................... 42 Sales of Securities .......................................... 33 Scholarships ................................................... 22 Social Security ............................................... 44 Social Security Disability Insurance (SSDI) .. 44 State Tax Refund ............................................ 30 Tips ................................................................. 23 U.S. Bonds ..................................................... 25 Unemployment ............................................... 43 Wages ............................................................. 19 While a Prisoner ............................................. 24

Incomplete Return .............................................. 82 Injured Spouse .................................................... 72 Interest Income ................................................... 24

AMT - PAB .................................................... 26 Early Withdrawal Penalty ............................... 26 Foreign Taxes ................................................. 29 Government Bonds ......................................... 25 Interest Stmt ................................................... 25 OID ................................................................. 27 Prepaid Funeral Plans ..................................... 27 Seller Financed Mortgage .............................. 24 Tax Exempt .................................................... 25

Interview Mode .................................................. 11 Interviewing the Client ......................................... 9 IRA

CA Basis Difference ....................................... 68 Contribution ................................................... 50 Distribution .................................................... 39 Early Distribution ........................................... 38 Exclusion Worksheet ...................................... 39 Failure to take RMD - additional tax.............. 63 Nondeductible Contributions ......................... 40 Rollover .......................................................... 39 Roth Conversion ............................................. 40 Transfer .......................................................... 39

ITIN .................................................................... 88 1099-R ............................................................ 37 No SSN, No ITIN ........................................... 88 SSN After Filing with ITIN ............................ 89 Valid ............................................................... 89 W-2 ................................................................. 19

Jury Duty Pay ..................................................... 45 Given to Employer ......................................... 51

Kiddie Tax ...................................................... 9, 22 Late Filing .......................................................... 84 Lifetime Learning Credit .................................... 61 Mailing Addresses ............................................... iv Main Info Form .................................................. 12 Married Filing Separately .................................. 15 Married, Legally ................................................. 15 Medicaid Waiver Payments ................................ 48

Medical Expenses ............................................... 52 Mileage

Business ..........................................................32 Charitable ........................................................55 Medical ...........................................................52

Miscellaneous Deductions .................................. 56 Mortgage

Interest Paid ....................................................54 PMI .................................................................54 Points ..............................................................54 Reverse ...........................................................54

NAEOB .............................................................. 25 Noncustodial Parent ............................................ 16 Notary Fee Income ............................................. 33 Organizing Your Work ........................................ 10 Other Income ...................................................... 45 Other Tax Deduction ........................................... 54 Overpayment, Applied to Next Year ................... 75 PAB (Private Activity Bond) .............................. 26 Paper Returns ........................ 22, 37, 82, 85, 88, 89 Partnership Income ............................................. 27 Payments

Credit Card......................................................83 Direct Debit (ACH) ........................................74 Direct Pay .......................................................74 Estimated Tax .................................................65 Installment Agreement ....................................83 Late .................................................................83

Penalties Late File / Payment .........................................84 Underpayment of Tax .....................................72

Pensions .............................................................. 37 3-Year Rule Before 1986 ................................40 CA 3-Yr Rule 86/87 Difference ......................41 Canadian RRSP ..............................................42 Foreign - CA Taxable ......................................45 Foreign Government .......................................42 Simplified General Rule .................................40 Unrecovered Investment .................................56

Personal Property Tax (DMV) ............................ 54 Phone Numbers ............................................... 1, 13 PIN – Practioner / Identity .................................. 17 Power of Attorney (POA) ................................... 81 Prep Notes........................................................... 18 Prep Use Form .................................................... 18 Prepaid Funeral Plan ........................................... 27 Presidential Campaign ........................................ 13 Printing

Amended Return .............................................86 Blank Estimates for Next Year ........................76 Blank Forms....................................................80 Individual Forms .............................................79 Returns ............................................................79 Simplified Method ..........................................41 Suppressing CA Return ...................................80

Prior Year Returns ............................................... 84

95 January 27, 2016

Private Activity Bond (PAB) .............................. 26 Public Safety Officer

Health Insurance (Form 1099-R, box 5) ........ 40 Survivor Benefits Exclusion ........................... 39

Quality Review................................................... 78 Railroad Pensions ......................................... 42, 44 Real Estate Tax Deduction ................................. 53 Refunds

Deadline to Claim Overpayment .................... 84 Rental Income .................................................... 42 Renter's Credit - CA ........................................... 71 Research A Topic .................................................. 8 Residential Energy Credit .................................. 61 Resources ............................................................. 1 Retirement Income ............................................. 37 Retirement Savings Contribution Credit ............ 61 Return Notes....................................................... 18 Return Stage ....................................................... 78 Returns

Amended ........................................................ 85 Extending Time to File ................................... 86 Paper ................................. 22, 37, 82, 85, 88, 89 Printing ........................................................... 79 Prior Years ...................................................... 84 Starting ........................................................... 10

Reverse Mortgage .............................................. 54 Review Return with Client ................................. 78 RMD Not Taken ................................................. 63 Rounding .............................................................. 3 Royalty Income .................................................. 42 RRB-1099-R Blue Form .................................... 44 RRB-1099-R Green Form .................................. 42 Salaries ............................................................... 19 Sale of Main Home ............................................ 36 Sales Tax Deduction ........................................... 53 Salutation ........................................................... 12 Savers Credit ...................................................... 61 Scholarships, Fellowships, Grants ..................... 22 Scope .................................................................... 2 S-Corp Income ................................................... 27 SDI ..................................................................... 22 Self-Employment Tax ........................................ 62

Notary Fee Exemption ................................... 33 Seller-Financed Mortgage .................................. 24 Shared Responsibility Payment .......................... 64 Shortcut Keys ....................................................... 4 Sick Pay .............................................................. 22 Signatures

8879 / CA8879 ............................................... 80 Deceased Person ....................................... 15, 81 Paper Returns ................................................. 82 Power of Attorney .......................................... 81

Simplified Method ............................................. 40

Site Logs ............................................................. 88 Social Security

Excess Tax Payments ......................................67 Income ............................................................44 Lump-Sum Prior Year Payment ......................44 Supplemental Security Income (SSI) ..............44

Social Security Number Verification .................. 11 Starting a New Return ........................................ 10 State Return ........................................................ 16 State Tax Deduction ............................................ 53 State Tax Refund ................................................. 30 Student Loan Interest .......................................... 51 Submission ID .................................................... 77 Substitute W-2 .................................................... 22 Summary Form ................................................... 19 Tax Payments

CA Estimated Tax ...........................................66 Estimated Taxes ..............................................65 Excess Social Security Tax .............................67 With Extension ...............................................66 Withholding ....................................................65

Tax-Aide Program ................................................ 2 Taxpayer Diary ................................................... 18 Telephone Numbers ........................................ 1, 13 Third Party Designee .......................................... 17 Tip Income .......................................................... 23 Trust Income ....................................................... 27 Tuition and Fees Adjustment .............................. 51 TWO

Add Forms to Forms Tree .................................7 Confusing Situations .........................................7 Data Entry .........................................................3 Help ..................................................................7 Screen Layout ...................................................6 Shortcut Keys....................................................4 Start of Shift Procedures ...................................3 Toolbars icons ...................................................5 User Roles .....................................................3, 6

U.S. Savings Bonds ...................................... 25, 73 Unable to Pay ...................................................... 83 Underpayment of Tax Penalty ............................ 72 Unemployment Income ...................................... 43 Use Tax on Purchases ......................................... 72 W-2

Multiple ..........................................................22 Substitute ........................................................22

Wages .................................................................. 19 CA Different ...................................................21

Where to File .......................................................iv Withholding

CA ...................................................................71 Federal ............................................................65

Zip Code ............................................................. 13

January 27, 2016 96

EDUCATION BENEFITS WORKSHEET

97 January 27, 2016

CALIFORNIA INCOME TAX INTERVIEW WORKSHEET (Optional form; may be used in conjunction with Federal Form 13614-C, or as a source for questions) (11/14/15)

Name: Date

County: Married ____* Single ____

To be completed by all Taxpayers Yes No Not sure

1. Were you (and your spouse, if filing a joint return) a California resident for the entire year 2015?

2. Was any of your income taxed by another state or local government or did you pay taxes to a foreign country?

3. Do you (or your spouse if filing a joint return) have a filing responsibility in another state? (For example, you have a rental property or you worked in another state during the year.)

4. Did you or your spouse receive any Indian Tribal Income during the tax year? (If no, skip to Q.5)

Did you reside on Indian tribal land?

Did you work on Indian tribal land?

5. Did you take any IRA withdrawals and previously made any contributions to your IRA while a legal resident of California that were not fully deductible in California (generally prior to 1987)?

Do you have records of those contributions that were not deducted?

6. Did you receive a reward from a crime hotline? (CA (540) line 21 B)

7. Did you pay rent for your home in California for at least 6 months during the tax year? (Rent Wkt)

8. If you are the noncustodial parent of a child, did you maintain your home as the main home for a child that lived with you for at least 146 days but less than 219 days? (credit code 170)

9. If over 65 years of age and you qualified to file as head of household in 2013 or 2014, did your qualifying dependent die in either 2013 or 2014? (credit code 163)

10. If you sold real estate during the tax year, did you receive form CA 593?

11. Did you claim a California credit for a new home purchase? If so, what year _______________

12. Did you purchase items for use in California without paying sales tax at the time of purchase? (purchases by phone, over the Internet, or by mail, for example) (line 95)

13. Would you like to make a voluntary contribution to one or more special fund? (line 110)

Complete only if you want to file Married – Filing Separately* Yes No Not sure

14. Did you live apart the entire year AND do you have no intention to reconcile

15. Are any of your funds commingled

16. Were you a full-year resident of California

17. Name of spouse (print):

18. Spouse’s Social Security number:

19. Is your spouse a U.S. Citizen, a U.S. national, or a resident of the United States?

20. Is your spouse taking the standard deduction on his/her tax return?

21. Spouse’s address (if known) (print):

22. If you are married filing separately, did you pay for the support of a dependent parent? (credit code 173)

*Local Coordinator or reviewer must approve Married Filing Separately status