Link and Learn - Miscellaneous Credits Flashcards
Nonrefundable Credits
A nonrefundable credit can only reduce the tax liability to zero. All the credits discussed in this lesson are nonrefundable credits.
Generally, nonrefundable credits are applied against federal tax in the order they are listed on Form 1040, Tax and Credits section, page 2.
Eligibility Requirements- retirement savings contributions credit
The retirement savings contributions credit is a nonrefundable credit eligible taxpayers may claim if they made a qualifying contribution to a retirement plan. If the contribution is tax deductible (such as a traditional IRA), the taxpayer receives the benefit of the tax deduction and a tax credit. This is considered a double benefit and is rarely allowed.
Eligibility for this credit is affected by adjusted gross income, filing status, age, whether the taxpayer can be claimed as a dependent, and being a full-time student. To determine if a taxpayer qualifies for the credit, conduct a probing interview guided by the Retirement Savings Contribution Credit — Decision Tree in the Volunteer Resource Guide, Nonrefundable Credits tab.
Eligibility Requirements (continued) - retirement savings contributions credit
To be eligible for the credit, taxpayers’ contributions must be elective or voluntary. Eligible contributions include:
Traditional or Roth IRA contributions (other than rollover contributions)
Elective deferrals to a 401(k) or 403(b) plan (including designated Roth contributions), a governmental 457 plan, SEP, or SIMPLE plan
Voluntary employee contributions to a qualified retirement plan as defined in section 4974(c) (including the federal Thrift Savings Plan), or
Contributions to a 501(c)(18)(D) plan
Eligibility Requirements (continued) - retirement savings contributions credit
In most cases, the eligible contributions will be listed on the taxpayer’s Form W-2. It is important to input the information into the software exactly as it appears on Form W-2. Review the taxpayer’s Form W-2 for the following:
Amounts listed in box 12 and preceded by one of the following codes: D, E, F, G, H, S, AA, or BB
Contributions to traditional or Roth IRAs may not appear on any tax document. In the course of the interview with the taxpayer, be sure to ask if the taxpayer made a contribution to an IRA or other retirement account.
Click here for the Form W-2 Instructions, which include a complete list of Box 12 codes.
Tip
Some employers allow employees to make after-tax contributions to a Roth plan. These after-tax contributions are listed on Form W-2, box 12 with code AA for a Roth 401(k) or BB for a Roth 403(b).
Tax software hint.
If Form W-2 is entered into the software correctly and completely, the program will carry the appropriate information to Form 8880. Go to the Volunteer Resource Guide, Income tab, Form W-2 Instructions for software entries.
Tax software hint.
If the taxpayer contributed to a Roth or a traditional IRA, whether it is deductible or not, you should link to the IRA deduction worksheet and enter the information. The software will carry the appropriate contributions to Form 8880. Go to the Volunteer Resource Guide, Adjustments tab, Form 1040 - Adjustments to Income for software entries.
Factors that Reduce the Eligible Contribution - retirement savings contributions credit
Even if taxpayers qualify for the credit, their eligible contributions will be reduced by certain distributions received during the “testing period.” The testing period includes:
The tax year
The two preceding tax years, and
The period between the end of the tax year and the due date of the return, including extensions
The types of distributions that reduce the eligible contributions include any distribution:
Traditional or Roth IRAs.
401(k), 403(b), governmental 457, 501(c)(18)(D), SEP, or SIMPLE plans.
Qualified retirement plans as defined in section 4974(c) (including the federal Thrift Savings Plan).
For married taxpayers filing a joint return, both spouses may be eligible for a credit on a maximum annual contribution amount of $2,000 each. If either spouse has a distribution during the testing period, both spouses must reduce their eligible contribution by that amount.
Tip
Question the taxpayer to determine if there have been any distributions in the testing period. Do not include distributions that were not taxable because they were rolled over or transferred to another qualified plan. See Publication 4012, Nonrefundable Credits tab, for additional exceptions that do not need to be included in total distributions.
Determining the Amount of the Credit - retirement savings contributions credit
Calculate the retirement savings contributions credit on Form 8880, Credit for Qualified Retirement Savings Contributions, and report the amount in Form 1040, Tax and Credits section.
The credit can be as low as 10% or as high as 50% of a maximum annual contribution of $2,000 per person depending on filing status and AGI.
Review the notes in Volunteer Resource Guide Nonrefundable Credits tab, Form 8880.
Credit for the Elderly or the Disabled - Eligibility Requirements
The next credit that will be covered is the credit for the elderly or the disabled. The credit for the elderly or the disabled is calculated on Schedule R and reported on Form 1040, Tax and Credits section.
Qualifying Individuals
To qualify for the credit for the elderly or the disabled, individuals must be:
Age 65 or older at the end of the tax year, or
Under age 65, retired on permanent and total disability, receiving taxable disability income, and under the mandatory retirement age their company has set
Tip
A taxpayer with a permanent and total disability is unable to engage in “substantial, gainful activity,” in other words, paid employment. Taxpayers who can do such work are not considered disabled. Working in a sheltered workshop setting, however, is not considered substantial, gainful activity.
Mandatory retirement age is the age set by a taxpayer’s employer at which the taxpayer would have been required to retire, had the taxpayer not become disabled.
Generally, disability income comes from an employer’s disability insurance, health plan, or pension plan. The payments replace wages for the time the taxpayer missed work because of the disability. The plan must provide for disability retirement for the payments to be considered disability income.
To guide your interview and determine if the taxpayer is a qualifying individual, refer to the Credit for Elderly or Disabled — Decision Tree, Figure A. Are You a Qualified Individual?, in the Volunteer Resource Guide, Nonrefundable Credits tab.
Eligibility Requirements (continued) - Credit for the Elderly or the Disabled
Income Limits
In addition to being a qualified individual, the taxpayer’s total income must be within certain limits. Few taxpayers qualify for this credit because the credit calculation includes the taxpayer’s nontaxable social security, veterans’ benefits, or other excludable pension, annuity, or disability benefits. Most taxpayers’ social security benefits alone exceed the limit.
Taxpayers cannot take the credit IF filing status is: AND AGI is equal to or more than: OR nontaxable social security or other nontaxable pension(s) is equal to or more than:
Single, Head of Household, or Qualifying Widow(er) with Dependent Child
$17,500
$5,000
Married Filing Jointly and both spouses qualify
$25,000
$7,500
Married Filing Jointly and only one spouse qualifies
$20,000
$5,000
Married Filing Separately and did not live with spouse at any time during the year
$12,500
$3,750
Determining the Amount of the Credit - Credit for the Elderly or the Disabled
Calculate the credit for the elderly or the disabled on Schedule R, Credit for the Elderly or the Disabled, and report the amount in Form 1040, Tax and Credits section.
Schedule R has three parts:
Part I, Filing Status and Age
Part II, Statement of Permanent and Total Disability, which ensures that
Part III, Figure Your Credit
Caution
Since the tax software automatically calculates the credit for the elderly or the disabled, all social security and railroad retirement benefits must be entered on the worksheet for social security benefits. Amounts must be entered even if no social security is taxable.
Tax software hint.
The tax software uses the data from the Main Information Screen and income amounts entered on the return to determine whether the taxpayer is eligible for the credit, complete most of Schedule R, and transfer the credit amount to the appropriate line of the Form 1040. Go to the Volunteer Resource Guide Nonrefundable Credits tab, for software entries.
Mortgage Interest Credit
Taxpayers who hold qualified mortgage credit certificates (MCCs) under a qualified state or local government program may claim a nonrefundable credit for mortgage interest paid. The taxpayer must have a document titled, “Mortgage Credit Certificate (MCC).” The amount of the credit is on the certificate.
This topic is out of scope for the VITA/TCE programs and is included for your awareness only. Taxpayers who wish to claim this credit should seek the assistance of a professional tax preparer.
Total Nonrefundable Credits
The total of all nonrefundable credits is reported on the applicable line in Form 1040, Tax and Credits section.
Tax software hint.
Based on your entries for all the credits, the tax software calculates the total of the taxpayer’s credits and enters the amount on the Total Credits line. Remember, the nonrefundable credits cannot exceed the taxpayer’s federal income tax.
