March 14, 2011
To: CyberTax Members
From: Lynnette Lee Villanueva, Assistant National Director, AARP Tax-Aide
Subject: CyberTax 2011-13: Quality/Volunteer Tax Alerts
Quality/Volunteer Tax Alerts: *These are versions of IRS Quality/Volunteer Alerts and by IRS mandate copies of these Alerts/CyberTaxes must be available at all AARP Tax-Aide sites during the tax season either as a paper copy or available electronically, such as on flash drives or computer desktops, for reference. This Cybertax will also be posted on the AARP Tax-Aide Extranet site in a few of days*
The four Quality/Volunteer Tax Alerts issues covered in this Cybertax include: The Educator Expenses, Cash for Keys Program, Truncated (Protected) Taxpayer Identity Numbers, and Addendum to Volunteer Tax Alert 2011-05. Please review and share with other counselors who may not have access to Cybertax messages. The attachment contains the same information detailed below.
IRS Volunteer Tax Alerts: Educator Expenses, Cash for Keys Program, Truncated (Protected) Taxpayer Identity Numbers, and Addendum to Volunteer Tax Alert 2011-05
Issue: An eligible educator can deduct up to $250 of out-of-pocket expenses on line 23 of Form 1040 (up to $500, if married filing joint and both spouses are educators). Amounts that cannot be deducted as an adjustment to income (AGI) can be deducted as unreimbursed employee business expenses subject to the 2% of AGI limit which is on Schedule A, Itemized Deductions.
Volunteers should question anyone who indicates they are educators as to whether they had any eligible expenses that may be taken as an educator expense.
Confirm (by accepting oral testimony, when appropriate) the taxpayer(s):
· The taxpayer is a qualifying educator. A qualifying educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in school for at least 900 hours during the school year.
· Has at least 900 hours working in the school during the school year,
· Has qualified unreimbursed classroom expenses
Cash for Keys Program
Issue: A financial Institution initiating a foreclosure process on a home indicates that it is willing to pay the homeowner a set amount of cash in exchange for the keys to the home. The financial institution is making these payments through the new “Cash for Keys Program”. The financial institution reports these payments to the Internal Revenue Service on Form 1099-MISC.
Concern: Many taxpayers are receiving these “Cash for Keys Program” Forms 1099-MISC with the payment amount in box 7. Income reported in box 7 is subject to self employment tax. This is incorrect as this income is not subject to self employment tax; the payment amount should be in box 3.
Procedure: The money received is taxable and should be reported on Form 1040, line 21 as “other income”. Inform the taxpayer to contact the financial institution to have a corrected Form 1099-MISC issued. Inform the taxpayer it is okay to still file with the first Form 1099-MISC and to keep the corrected one for their files.
Highlights and Key Reminders
Truncated (Protected) Taxpayer Identity Numbers
Issue: IRS pilot program allows information return filers to use a shortened version of personal ID numbers by replacing the first five of the nine digits with asterisks or Xs on the following paper statements.
· An individual's Social Security number,
· IRS individual taxpayer identification number, or
· An IRS adoption taxpayer identification number (ATIN) for paper payee statements, subject to certain qualifying criteria.
For example: Social Security number 123-45-6789 would appear as
***-**- 6789, or
The notice is effective for tax years 2009 and 2010, but only applies to the following paper payee statements:
· Form 1098 series, (Mortgage Interest Statement)
· Form 1099 series, (Interest Income)
· Form 5498 series (IRA Contributions)
Addendum to Volunteer Tax Alert 2011-05
Issued February 25, 2011 (CyberTax March 1, 2011)
Form 8880 - Credit for Qualified Retirement Savings Contributions
Issue: This addendum to VTA 2011-05 should help clarify which plans can be used to compute this credit. Keep in mind that to be entitled to the Retirement Savers Credit, the contributions to the plan are generally elective or voluntary.
Eligible contributions include:
· Contributions (other than rollover contributions) to a Traditional or a Roth IRA
· Salary reduction contributions (elective deferrals, including amounts designated as after tax Roth contributions) to:
o A 401(k) plan [including a SIMPLE 401(k)] and includes the federal Thrift Savings Plan
o A 403(b) annuity
o A governmental 457 plan
o A SIMPLE IRA plan
o A salary reduction SEP
o Contributions to a 501(c)(18)(D) plan
o Voluntary after-tax employee contributions to tax-qualified retirement plan or section 403(b) annuity plan. Voluntary does not include contributions made as a condition of employment.
The above amounts may be shown in box 12 of your Form(s) W-2.
IMPORTANT NOTE: Contributions designated under Internal Revenue Code section 414(h) are treated as employer contributions and may include required contributions made by the employee. They do not qualify for the credit and should notbe included on line 2, Form 8880. These contributions are reported in box 14 of Form(s) W-2. (Some returns have these amounts included on Form 8880 and this is an error on Retirement Savers Credit.)
When calculating the Retirement Savers Credit DO NOT include any:
· Distributions not taxable as the result of a rollover or a trustee-to-trustee transfer.
· Distributions that are taxable as the result of an in-plan rollover to your designated Roth account.
· Distributions from your eligible retirement plan (other than a Roth IRA) rolled over or converted to your Roth IRA.
· Loans from a qualified employer plan treated as a distribution.
· Distributions of excess contributions or deferrals (and income allocable to such contributions or deferrals).
· Distributions of contributions made to an IRA during a tax year and returned (with any income allocable to such contributions) on or before the due date (including extensions) for that tax year.
· Distributions of dividends paid on stock held by an employee stock ownership plan under section 404(k).
· Distributions from a military retirement plan.
If you are filing a joint return, include both spouses’ amounts in both columns.
Exception: Do not include your spouse’s distributions with yours when entering an amount on line 4 if you and your spouse did not file a joint return for the year the distribution was received.
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