Adjustments to Income

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Adjustments to Income
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For AGI and From AGI

• Deductions For AGI
• Had any expenses as an educator
• Received income from self-employment
• Paid a penalty for early withdrawal of savings
• Paid alimony
• Made contributions to a traditional IRA
• Paid student loan interest
• Received income from jury duty that was turned
  over to an employer
• Paid college tuition

• Deductions From AGI
• Standard Deduction
• Itemized Deduction

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Adjustments Breakdown

• The taxpayer's total adjusted gross income (AGI)
  is the amount that is used to compute some
  limitations, such as the medical and dental
  deduction on Schedule A and the credit for child
  and dependent care expenses. To find the
  taxpayer's AGI, follow the instructions on Form
  1040
• Add the amounts in the far right column of the
  Income section (lines 7 through 21) and enter the
  result on line 22. This is the taxpayer's total
  income.
• Add the Adjustments to Income (the amounts in
  lines 23 through 35) and enter the result on line
  36. These are the total Adjustments.
• Subtract line 36 from line 22 and enter the
  result on line 37. This is the AGI.

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Types of Expenses For AGI

• Had any expenses as an educator
• Received income from self-employment
• Paid a penalty for early withdrawal of savings
• Paid alimony
• Made contributions to a traditional IRA
• Paid student loan interest
• Received income from jury duty that was turned
  over to an employer
• Paid college tuition

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Educator Expenses

• Who Qualifies?
• Teacher, instructor, counselor, principal, or
  aide for grades K-12, employed at least 900 hours
  are eligible( ineligible are Home-School)
• Expenses that qualify include books, supplies,
  equipment (including computer equipment,
  software, and services), and other materials used
  in the classroom.

• Expenses that do not qualify are home schooling,
  nonathletic supplies for physical education, or
  health courses.

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Educator Expenses Continued

• Individual
• can deduct no more than 250
• Spouse (both are educators)
• Can deduct no more than 500 together if you
  exceed this for either spouse the excess may be
  treated as an itemized employment-related
  deduction on Schedule A.
• Each taxpayer can not deduct more than 250

• Educator expenses are reduced by any of these
  applicable reimbursements
• Any reimbursement that is not listed on Form W-2(
  from the school you worked)
• Redeemed tax-free interest on U.S. Series EE and
  I Savings Bonds
• Excludable payments from a Qualified Tuition
  Program (QTP) or Coverdell Education Savings
  Account (ESA)

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Self Employment Tax

• A portion of self employment tax is deductible
• Must complete Form SE
• Line 27 on the Adjustments for Gross Income
• 50 of SE deductible

8
Early Withdrawal Penalty

• Taxpayers can adjust their income by deducting
  penalties they paid for withdrawing funds from a
  deferred interest account before maturity.
• Must have Form 1099-INT, Interest Income, or Form
  1099-OID, Original Issue Discount, documenting
  the penalty.
• The penalty is entered into the interest
  statement of TaxWise.

9
Alimony Paid

• Tax payer paying a spouse or former spouse under
  a divorce or separation instrument
• Payments made in form of
• Cash
• Payment of spouses expenses(such as medical
  bills, housing costs, and other expenses can
  qualify as alimony.)
• Child support and voluntary payments are not
  deductible
• Taxpayer considers qualified payments as
  deductible income
• Taxpayer receiving alimony must treat it as
  income

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Where to Look/Tips

• Alimony Requirements in the Adjustments section
  of the Volunteer Resource Guide (Tab E).
• For additional information on alimony, refer to
  the Alimony chapter in Publication 17 and
  Publication 504, Divorced or Separated
  Individuals.

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IRA Contributions

• A traditional IRA is any IRA that is not a Roth
  or Simple IRA.
• Benefits of a traditional IRA
• Some contributions may be deductible
• Amounts are not taxed until distributed
• Retirement Savings Contribution Credit

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IRA Contributions-Guidelines to Follow

• Eligibility Requirements
• Types of IRAs Verify the types to which the
  taxpayer and spouse contributed. Only
  contributions to traditional IRAs are deductible.
• Age Limit Taxpayers can contribute to a
  traditional IRA only if they are less than 70 ?2
  years of age at the end of the tax year.
• Compensation Individuals must have taxable
  compensation (wages, self-employment income,
  commissions, taxable alimony, taxable
  scholarships or fellowships.
• Time limits Contributions must be made by the
  due date for filing the return, not including
  extensions. Verify with taxpayer that
  contributions were made by the due date of the
  return.

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IRA Contributions-Guidelines to Follow

• Factors that affect whether Traditional IRA are
  deductible are
• Whether the taxpayer (or spouse, if Married
  Filing Jointly) is covered by a retirement plan
  at work, and
• The taxpayer's Modified Adjusted Gross Income
  (MAGI) before taking the deduction.
• If the taxpayer or spouse is covered by a
  retirement plan, the deduction amount will be
  reduced or eliminated if the MAGI on the tax
  return is above a certain limit.

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IRA Contributions Limits

• There is a limit on the amount taxpayers can
  contribute to traditional IRAs. The total
  contributionthat is, the combined contributions
  to all accounts, including Roth and traditional
  IRAscannot be more than the smaller of
• 5,000 (6,000 if age 50 or older by the end of
  the tax year), or
• A taxpayer's compensation includible as income
  for the year

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IRA Contributions Limits Continued

• Spousal IRAs are also subject to certain
  limitations. If married taxpayers file a joint
  return and one spouse's compensation is less than
  the other spouse's compensation, the most that
  can be contributed for the year to the spousal
  IRA is the smaller of the following amounts
• 5,000 (6,000 if age 50 or older), or
• The total compensation includible in the gross
  income of both spouses for the year reduced by
  all of the following Traditional IRA
  contributions for the spouse with the greater
  compensation, and
• Any contribution for the year to a Roth IRA for
  the spouse with the greater compensation
• In other words, as long as they file a joint
  return, married taxpayers' combined IRA
  contributions cannot exceed their combined
  compensation, and neither spouse can contribute
  more than 5,000 (or 6,000 for 50 and older) to
  their own IRA.

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Links and Helpful Tips

• For more information on all types of IRAs, refer
  to the Individual Retirement Arrangements (IRAs)
  chapter in Publication 17 and Publication 590,
  Individual Retirement Arrangements.
• See Publication 17 for more information on
  compensation.
• To determine the traditional IRA deduction amount
  for taxpayers covered by an employer's retirement
  plan, refer to the traditional IRA deduction
  phaseout charts in the Adjustment section of the
  Volunteer Resource Guide (Tab E),
• Enter the total contributions to traditional IRAs
  that were made (or will be made) for each spouse
  (on a joint return) by April 17, 2012. The
  deduction is reported on line 32 of Form 1040
• TABLE FOR PHASEOUT http//apps.irs.gov/app/vita/c
  ontent/17/17_05_105pop.jsp
• TABLES FOR MAGI http//apps.irs.gov/app/vita/cont
  ent/17/17_05_065pop.jsp
• Turn to the Volunteer Resource Guide (Tab 3) for
  more information about the IRA Deduction
  Worksheet.
• Review the charts on the Effect of Modified AGI
  on Traditional IRA Deduction in Pub 4012 (Tab E)
  
• Link from Form 1040, line 32 to an IRA Worksheet
  to type any IRA contributions

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Student Loan Interest

• Interest paid on a student loan for qualified
  higher education expenses that were
• For the taxpayer, the taxpayers spouse (if MFJ)
  or a person who was the taxpayers dependent when
  the loan was obtained
• Paid within a reasonable period
• For an eligible student, An eligible student is
  one enrolled in and carrying at least one-half
  the normal load for a qualified program. The
  standard for what is half the normal full-time
  work load is determined by each eligible
  educational institution
• An eligible program may include study abroad that
  is approved for credit by the institution where
  the student is enrolled.
• A student loan interest deduction is generally
  the smaller of 2,500 or the interest paid that
  year on a qualified student loan.

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Guidelines to Follow

• Taxpayers cannot deduct as interest on a student
  loan any amount that is an allowable deduction
  under any other provision of the tax law (e.g.,
  as home mortgage interest) this is a double
  deduction
• This amount is gradually reduced (phased out) or
  eliminated, based on the taxpayer's filing status
  and MAGI. Effect of MAGI on Student Loan
  Interest Deduction in the Adjustment section of
  the Volunteer Resource Guide (Tab E).
• To qualify, a student loan
• Must be solely to pay qualified education
  expenses, and
• Cannot be from a related person or made under a
  qualified employer plan

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Reductions to Student Loan Interest

• Before calculating qualified expenses on a tax
  return, the following tax-free income amounts
  must be subtracted
• Employer-provided educational assistance benefits
• Tax-free withdrawals from a Coverdell ESA or from
  a qualified tuition program
• U.S. savings bond interest excluded from income
  because it is used to pay qualified higher
  education expenses
• Certain scholarships and fellowships
• Veteran's educational assistance benefits
• Any other nontaxable payments (other than gifts,
  bequests, or inheritances) received for
  educational expenses

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Student Loan Interest

• To claim the deduction, the taxpayer must have
  paid qualified student loan interest for an
  eligible student under all the following
  conditions
• The taxpayer cannot use Married Filing Separately
  status married taxpayers must file a joint
  return with their spouse
• The taxpayer cannot be claimed as a dependent on
  someone else's return
• The taxpayer is legally obligated to pay interest
  on a qualified student loan
• The taxpayer paid interest on a qualified student
  loan
• The interest is on a loan used to pay tuition and
  other qualified higher education expenses for the
  taxpayer, the taxpayer's spouse, or someone whom
  the taxpayer claimed as a dependent, when the
  loan was taken out
• The education expenses were paid or incurred
  within a reasonable period of time before or
  after the loan was taken out
• The person for whom the expenses were paid or
  incurred was an eligible student

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Where to Look

• Line 33 on the 1040
• Form 1098, Box 1
• In case you need to verify if an institution is
  valid but they should have form 1098 with them
  http//ope.ed.gov/accreditation/
• See Publication 970, Tax Benefits for Education,
  for more information on the student loan interest
  deduction.

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Tuition and Fees Deduction

• Can deduct up to 4,000 in qualified tuition and
  related expenses
• If you claim this deduction you cannot claim the
  education tax credits (American Opportunity
  Credit or Lifetime Learning Credits) work with
  the client to figure out the best benefit
• Rule The amount of the deduction is determined
  by the taxpayer's filing status, MAGI, and other
  factors.

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Tuition and Fees Deduction-Guidelines

• The deduction can be claimed for the taxpayer,
  the taxpayer's spouse (if filing a joint return),
  and any dependent (for whom the taxpayer claims a
  dependency exemption) who attended an eligible
  educational institution during the tax year.
• In order to claim a deduction for expenses paid
  for a dependent who is the eligible student, the
  taxpayer must have paid the qualified expenses
  and claim an exemption for the dependent. If
  students are eligible to be claimed as a
  dependent (even if not actually claimed) and paid
  their own expenses, no one can take the
  adjustment. However, students who do not qualify
  as a dependent can claim the deduction, even if
  tuition and fees were paid by someone else. In
  that case, the students can treat the amounts
  paid for tuition and fees as a gift.

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Tuition and Fees Deduction-Guidelines

• The deduction cannot be claimed by married
  taxpayers who file separately or by an individual
  who is claimed as a dependent on another
  taxpayers return.
• The taxpayer must have paid for the qualified
  expenses for the dependent.
• Qualified education expenses do not include
  payments for
• Insurance, room and board, medical expenses
  (including health fees), transportation, or
  similar personal, living, or family expenses
• Course-related books, supplies, nonacademic
  activities and equipment unless it is paid as a
  condition of enrollment or attendance
• Any course or other education involving sports,
  games, hobbies, and noncredit courses unless the
  course or other education is part of the
  student's degree program

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Where to Look/Tips

• To help you figure the tuition and fees
  deduction, the taxpayer should have received Form
  1098-T, Tuition Statement. Generally, an eligible
  education institution must send Form 1098-T or a
  substitute to each enrolled student by January
  31. However, the form only reports "amount
  billed" or "payments received."
• Form 8917, Tuition and Fees Deduction, will help
  you compute the taxpayer's Modified AGI for this
  deduction. The tax software will complete this
  part of Form 8917 automatically.

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Out of Scope

• Out of Scope Situations for VITA/TCE
• The following are out of scope for this lesson.
  While this list may not be all inclusive, it is
  provided for your awareness only.
• Other adjustments to income on Form 1040, such
  as
• Self-employed health insurance deduction
• Self-employed SEP, SIMPLE, and qualified plans
• Domestic production activities deduction
• Form 8606, Nondeductible IRAs