Lesson 10

Adjustments to Income

Objectives

• Identify which IRA contributions are within the scope of the VITA/TCE

• Calculate and accurately report adjustments to income

• Identify contribution limits for IRAs• Calculate Student Loan Interest

Deduction

Intake and Interview Sheet

Adjustments to Income

• Contributions to traditional IRAs• Student Loan Interest Deduction• One-half of the Self-employment

Tax paid• Alimony paid

Adjustments to Income- continued

• Jury Duty Pay given to your employer• Penalty for early withdrawal of savings• Overnight travel expenses of National

Guard and Reserve members (Covered in Lesson 4 - Military Travel Expenses)

Individual Retirement Accounts

• Contributions to traditional IRAs may result in an adjustment

• Contributions to non-traditional IRAs do not create an adjustment to income and are not covered in this lesson. Examples include:•Roth IRAs•SIMPLE IRAs•Coverdell ESAs

Contribution Limits for IRAs

• Maximum contribution for 2006 is $4,000 if the taxpayer is under age 50

• Maximum contribution for 2006 is $5,000 if the taxpayer is age 50 or over

• Spousal IRAs have the same contribution limits

Deductible Contributions

• Some of the contributed amount may not be deductible depending on:

–Covered by an employer plan (yourself or spouse)

–Modified Adjusted Gross Income–Filing Status

• Excess contributions are taxed at 6% unless withdrawn by April 15th.

Non-Deductible IRA Contributions

• If the taxpayer is covered by an employer’s pension plan (as indicated on the W-2), part of the IRA contribution may not be tax deductible

• Use Form 8606 to compute and track the non-deductible portion of the IRA

• Contributions to a Roth IRA are never deductible

IRA Review Questions

IRA Review Questions (Continued)

Student Loan Interest

• The maximum deduction for 2005 is $2,500

• If taxpayer paid $600 or more should receive a statement from lender

• AGI limits apply

Other Adjustments

• One-half Self-employment tax• Penalty for early withdrawal from

savings• Alimony Paid• Jury Duty Pay given to an employer

Other Adjustments (con’t)

Targeted Questions

Quality Review

Verify that the: All adjustments, deductions and credits indicated on the intake sheet and supporting documents are included on the return.

Lesson Summary

• Income adjustments covered in this lesson

• How do they effect the Adjusted Gross Income?

• Where do you claim them?

TaxWise® Hints Review

• Worksheets are completed as data is entered on the Form 1040 or 1040A.

• Take advantage of F-9 linking directly from lines on the 1040 or 1040A

Military Course

Moving Expenses

Military Objectives

• Identify qualifying moves by assisting in determining if the move qualifies as a permanent change of station (PCS).

• Determine when allowances and reimbursements must be included in income.

• Identify deductible moving expenses.• Compute the moving expense

deduction using Form 3903.

Permanent Change of Station

• Home to Post of Duty.• Post of Duty to Post of Duty.• Post of Duty to home or nearer point

in US within one year.• Spouse and Dependant rule.

Reimbursements and Allowances

• Any payments received for a do-it-yourself (DITY) permanent change of station (PCS) move must be included in gross income.

• Certain moving and storage services and allowances are not included in gross income.

Deductible Moving Expenses

• Cost of moving household goods and personal effects.

• The cost of reasonable travel and lodging expense.

• Definition of a foreign move.• How to report Deductible

Expenses.

Lesson Summary

• Qualifications for Moving Expense Deduction

• Deductible Moving Expenses• Form 3903 – Used to compute

Moving Expense Deduction