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Part 21. Customer Account Services

Chapter 6. Individual Tax Returns

Section 4. Tax Computation/Tax Period Changes (Cont. 1)

21.6.4  Tax Computation/Tax Period Changes (Cont. 1)

21.6.4.4 
Working Tax Computation/Tax Period Changes Procedures

21.6.4.4.8 
Schedule H, Household Employment Taxes

21.6.4.4.8.9  (10-01-2002)
Schedule H, Household Employment Taxes, Received Without Form 1040, U.S. Individual Income Tax Return

  1. Schedules H, Household Employment Taxes, http://publish.no.irs.gov/FORMS/PUBLIC/PDF/12187Y06.PDF received in Receipt and Control must be routed to the Code and Edit function.

  2. Schedules H received in other functions (e.g., Customer Service, Collection) require research to determine the appropriate action.

    If the account contains And Then
    A posted TC 150   Adjust the account using the appropriate EIN and reference numbers.
    No TC 150 Line 28 is answered "Yes" Return the Schedule H to the taxpayer. Refer to (3) below.
    No TC 150 Line 28 is answered "No" and Part IV is blank Return the Schedule H to the taxpayer. Refer to (3) below.
    No TC 150 Line 28 is answered "No" and Part IV has entries Prepare a "dummy" Form 1040 and route the Schedule H for processing.
    No TC 150 Line 28 is not answered, Part II has entries Return the Schedule H to the taxpayer. Refer to (3) below.
    No TC 150 Line 28 is not answered, Part II is blank and Part IV has entries Prepare a "dummy" Form 1040 and route the Schedule H for processing.
    No TC 150 Line 28 is not answered, Parts II and IV are blank Return the Schedule H to the taxpayer. Refer to (3) below.

    Caution:

    Edit Computer Condition Code "3" on the "dummy" Form 1040, if the credits exceed the amount of the Schedule H tax and/or there is any indication the taxpayer is liable for filing a Form 1040.

  3. When returning the Schedule H, advise the taxpayer:

    1. The Schedule H entries indicate he or she will file an income tax return.

    2. The Schedule H is being returned for inclusion with the Form 1040.

    3. To file a Form 1040X if a Form 1040 was filed without reporting the Schedule H tax.

    4. To resubmit a Schedule H, after verifying all Schedule H entries, IF a Form 1040 is not required to be filed.

21.6.4.4.8.10  (10-01-2002)
Duplicate Filing Conditions (Dummy Form 1040, U.S. Individual Income Tax Return, with Schedule H, Household Employment Taxes)

  1. Schedules H, Household Employment Taxes, http://publish.no.irs.gov/FORMS/PUBLIC/PDF/12187Y06.PDF received without Form 1040, U.S. Individual Income Tax Return, are processed with a "dummy" Form 1040. A duplicate filing condition results if the taxpayer files an original return.

    If And Then
    The "dummy" Form 1040 posted as an original (TC 150) The taxpayer's original return posted as a duplicate and by-passed DIF scoring 1. Math verify the taxpayer's original return.
    2. Adjust the account to reflect the income and tax shown on the taxpayer's original return.
    3. Route to Examination for manual screening. Use local routing procedures.
    The taxpayer's original return posted as the TC 150 Schedule H, processed with a "dummy" Form 1040, posted as a duplicate Adjust the account, using the appropriate EIN and reference numbers.

21.6.4.4.8.11  (10-01-2007)
BMF Form 941, Employer's Quarterly Federal Tax Return, Filed Instead of IMF Schedule H, Household Employment Taxes

  1. If the taxpayer filed Form 941, Employer's Quarterly Federal Tax Return, for household employees, or Form 944, Employer's ANNUAL Federal Tax Return, instead of Schedule H, Household Employment Taxes, http://publish.no.irs.gov/FORMS/PUBLIC/PDF/12187Y06.PDF (with or without Form 1040, U.S. Individual Income Tax Return), the tax must be eliminated from the BMF Form 941 (or Form 944 ) account and assessed on the IMF Form 1040 account.

    Reminder:

    These procedures should ONLY be followed when ALL of the employees reported on Form 941 (or Form 940) are household employees. If the taxpayer has both household and other employees, the employer has the option to report both types of employees on Form 941, Form 944, or Form 943, if applicable.

    Note:

    The individual campus may determine who will perform the following procedures; IMF, BMF, or both.

  2. Take the following action on the Form 941 (MFT 01) account or the Form 944 (MFT 14) account:

    1. Delete the tax; use HC 4 if payments must be transferred.

    2. Transfer payments to the IMF account.

    3. Delete the Form 941 or Form 944 filing requirements. (Also, delete the Form 940 filing requirement, if present.)

    4. Use a copy of the taxpayer's correspondence as the adjustment source document. Attach a copy of Form 941 or Form 944, if available, but DO NOT request the return from Files.

  3. Take the following action on the Form 1040 (MFT 30) account:

    1. Assess the tax originally reported on Form 941 or Form 944.

    2. Use a copy of the taxpayer's correspondence as the adjustment source document. Attach a copy of Form 941 or Form 944, if available, but DO NOT request the return from Files.

  4. If the taxpayer also erroneously reports FUTA on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, (MFT 10) for household employees:

    1. Use the procedures in (2) above to delete the FUTA tax and make any necessary credit transfers on MFT 10.

    2. Follow the procedures in (3) above to assess the FUTA portion on MFT 30. (If both FICA and FUTA tax must be assessed, assess on the same adjustment document, whenever possible.)

      Note:

      If the taxpayer has both household and other employees, the employer has the option to report both types of employees on Form 940.

  5. Provide the taxpayer a complete explanation of the adjustments to the IMF and BMF accounts.

    1. Include information concerning credit transfers or potential refund, if applicable.

    2. Remind the taxpayer to report the taxes for household employees on Schedule H.

    3. Advise the taxpayer Form 941 or Form 940 can be filed to include household employees only if other employees must be reported.

      Note:

      Employers whose total liability was $1,000 or less were mandated to file Form 944, Employers ANNUAL Federal Tax Return. See IRM 21.7.2.4.14, Employers ANNUAL Federal Tax Return, for additional filing information.

21.6.4.4.8.12  (10-01-2002)
Schedule H, Household Employment Taxes, Claims Citing IRC Section 3509

  1. IRC Section 3509 provides for employer liability for employment tax if a worker is reclassified from an independent contractor to an employee status.

  2. The taxpayer may submit an amended return, Form 1040X, U.S. Amended Individual Income Tax Return, if he/she discovers the worker was mis-classified.

  3. IMF will handle an IRC 3509 claim in the same way BMF handles the Form 941, Employer's Quarterly Federal Tax Return Claim, citing IRC 3509.

  4. To process the claim, refer to and use BMF instructions in IRM 21.7.2.4.18.6.8, IRC Section 3509.

  5. Use IMF Reference Numbers.

  6. If the ascertained date is not given, contact the taxpayer. If no answer is received, use the date of the claim as the ascertained date. See IRM 21.6.4.4.8.6, Schedule H, Household Employment Taxes - Interest - Free Provisions.

21.6.4.4.9  (10-01-2007)
Schedule J, Income Averaging for Farmers and Fishermen

  1. For tax years 1998 and later, farmers may use Schedule J, Income Averaging for Farmers and Fishermen, http://publish.no.irs.gov/FORMS/PUBLIC/PDF/25513Y06.PDF (Schedule J was titled "Farm Income Averaging" prior to 2004) to elect to average all or part of taxable farm income over the previous 3 years. Farmers may benefit from this election in a year when farm income is high and income in one or more of the previous three years was low.

  2. The American Jobs Creation Act of 2004 (HR 4520, Pub.L. 108-357), allowed fishermen to use income averaging on Schedule J to reduce their tax for tax years beginning after 2003. For additional information, see Schedule J instructions.

  3. Taxpayers enter income amounts on Schedule J http://publish.no.irs.gov/FORMS/PUBLIC/PDF/25513Y06.PDF from the appropriate line of the prior year(s) income tax returns.

    • If the taxpayer filed a Schedule J for the previous year, then the taxpayer enters amounts from the previous year's Schedule J on his or her current year Schedule J.

    • If the taxpayer did not file a Schedule J for the previous year, then the taxpayer enters income amounts on its current year Schedule J from the appropriate line of the prior year(s) income tax returns.

    • If deductions exceed gross income for any year that is a base year, you may have negative taxable income for that base year. However, any amount that may provide a benefit in another taxable year is added back in to determine the base year taxable income. See the worksheet in the instructions for Schedule J.

    The base years are determined as follows:

    If Tax Year is... Then Base Years are...
    2007 2006, 2005, 2004
    2006 2005, 2004, 2003
    2005 2004, 2003, 2002
    2004 2003, 2002, 2001

  4. If a farmer or fisherman did not file a return for any of the three previous years, the amount entered on Schedule J for that year(s) is the amount that would have been reported if the taxpayer had filed a return.

  5. The Taxpayer Notice Code explanation for Schedule J is: "Your Schedule J tax was figured incorrectly. We adjusted your account accordingly."

  6. For tax years beginning after 2003, a farmer's or fisherman's regular tax liability for purposes of computing alternative minimum tax (AMT) is determined without reduction for income averaging. Those taxpayer's receive the full benefit of income averaging because it reduces the regular tax while the AMT (if any) remains unchanged.

    Note:

    For tax years beginning prior to 2004, a farm income averaging election applied in determining regular tax liability for purposes of computing AMT. If a taxpayer owed AMT (figured without regard to farm income averaging), filing Schedule J did not reduce the total tax. However, filing schedule J could increase the credit for prior year minimum tax for a later year.

  7. With respect to base years, minor children who had unearned income and were taxed based on their parents' rates in those earlier years do not recompute their tax liability when a parent makes an election to average income in a later year. With respect to an election year, if minor children have unearned income and are taxed based on their parents' rates, the applicable tax rate is the rate determined after the parent makes an income averaging election.

21.6.4.4.9.1  (10-01-2006)
Taxable Income from Farming or Fishing and Elected Farm Income

  1. Taxable income from farming or fishing includes all of the items listed below that are attributable to any farming or fishing business:

    • Income

    • Gains

    • Losses

    • Deductions

    • Compensation received by a shareholder from an S Corporation engaged in a farming or fishing business.

    • A landlord's crop share income reported on Form 4835, Farm Rental Income and Expenses, is eligible for income averaging under certain circumstances. See Treas. Reg. §1.1301-1(b)(2).

  2. Taxable income from farming does not include gains or losses from the sale or other disposition of land.

  3. Elected farm income is the amount of taxable income attributable to a farming or fishing business that the taxpayer elects to include on line 2 of the Schedule J

21.6.4.4.9.2  (02-12-2004)
Adjusting Schedule J

  1. Math Verify Schedule J, Income Averaging for Farmers and Fishermen http://publish.no.irs.gov/FORMS/PUBLIC/PDF/25513Y06.PDF.

  2. Input the adjustment to tax with a TC 290/291.

  3. Use Reason Code 046 (tax computation) and appropriate Source Code and Blocking Series.

21.6.4.4.9.3  (10-01-2007)
USDA Discrimination Settlement Payments

  1. The United States Department of Agriculture (USDA) paid a cash settlement and granted loan cancellation to about 15,000 farmers pursuant to a settlement approved in 1999. The settlement resulted from a discrimination suit brought against the USDA by the farmers.

  2. Taxpayers may use terms other than "USDA" when communicating about these claims. Some of the other terms frequently used are:

    • Pigford vs. Glickman

    • Pigford vs. Veneman

    • Black Farmers Suit/Settlement cases

    Note:

    These are NOT African- American Reparation Claims.

  3. For 99% of the claimants, the settlement amounts fell into three categories:

    • $50,000 cash payment

    • Forgiveness of the principal and interest on certain debts (amounts varied by claimant)

    • A payment toward tax equal to 25% of the total of the $50,000 payment and the forgiveness of the debt principal (but not the interest).

    Note:

    About 430 of these claimants also received an additional $3,000 cash payment.

  4. Most taxpayers received these payments over a period of two years (the cash payment and the debt forgiveness occurred in one year) and the tax payment was remitted to IRS in the following year. The cash payment and the tax payment (the 25% amount) are taxable income. The forgiveness of debt principal is generally taxable income, but may be excludable under certain circumstances. The forgiveness of debt interest is generally not taxable income if a taxpayer uses the cash method of accounting and would have been able to deduct the payment of such interest. Otherwise, the forgiveness of debt interest is generally taxable income, but may be excludable under certain circumstances. If the taxpayer uses the cash method of accounting, the taxpayer must report the tax payment (the 25% payment) as taxable income in the year the payment was applied to the taxpayer's account.

  5. The payment of tax (25% payment):

    1. Must be claimed as an estimated tax payment for the tax year the settlement/debt forgiveness was received.

    2. The estimated tax payment is made directly to IRS by the USDA on behalf of the taxpayer.

    3. Since the taxpayers did not make this payment, they may forget to claim the credit on their return.

    4. Identify the payment by the unique DLN of 52217 (013/014) 9XX.

    5. If the farmer does not claim the estimated tax payment the tax module will show a J - Freeze. See IRM 21.5.6.4.15, J - Freeze.

    6. Approximately 1,250 USDA estimated tax payments did not post. The entity information (name control and birth date) did not match information on masterfile. In some cases, the taxpayer may be deceased and the account no longer exists.


    PROCEDURES TO FOLLOW ON THESE ACCOUNTS ONLY:

    If And Then
    You receive a contact from a taxpayer Contact is in reference to USDA Farmer's Settlement
     
     
     
    AND
     
     
    The taxpayer did not receive credit for a settlement payment     		1. Complete Form 4442, Inquiry Referral, and refer the case to Kansas City. Include a day and evening telephone for the taxpayer. Fax to the Kansas City Accounts Management Campus.
    2. Input a STAUP.
    Kansas City will open a control base, research for the payment, and contact the taxpayer on the status of the account (within 10 business days).

  6. Farmers are issued Form 1099-MISC, Miscellaneous Income, along with an instructional notice advising the farmer how to correctly report the settlement.

  7. Farmers must file a return to receive a refund.

  8. Refer to the table below to work these cases:

    If ... Then ...
    (1) This is a USDA Cash Settlement payment of $50,000.
     
     
     



     
    (2) The taxpayer reports only the settlement income (no expenses) on Schedule F, Line 10

    (3) The farmer is engaged in the business of farming.     		(1) Treat settlement payment as farm income. Report payment on Line 10 "Other Income" of the Schedule F, Profit or Loss from Farming (identify the payment as "USDA Settlement" ). Farmers receiving this payment may benefit from filing Schedule J, Income Averaging for Farmers and Fishermen.
    (2) This amount is not subject to Self- Employment Tax.
     
     
     
     
    (3) This amount is subject to self- Employment Tax.
    (1) This is a loan cancellation of: 

    1. debt principal for cash or accrual taxpayers, or

    2. debt interest for accrual taxpayers.


     
     
     
    (2) The taxpayer reports only the loan cancellation on Schedule F, Line 10 (no expenses).
     
    3) The farmer was engaged in the business of farming.
     
    (4) The farmer was insolvent at the time the loan was cancelled or if the loan was qualified farm debt.     		(1) This cancellation of debt is considered farm income. Report the amount on Line 10 of Schedule F and identify as "USDA Settlement." Farmers receiving this payment may benefit from filing Schedule J.
    (2) This amount is not subject to self-employment Tax.
     
     

    (3) This amount is subject to self-employment Tax.

    (4) Loan cancellation amounts may qualify for exclusion. Refer to Publication 908, Bankruptcy Tax Guide and Publication 225, Farmer's Tax Guide, for exclusion criteria. File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with the Form 1040, U.S. Individual Income Tax Return, to claim the exclusion.
    (1) This 25% tax payment is considered taxable farm income received in April 2000 for tax year 1999 or January of 2001 for tax year 2000. These payments are posted as TC 660s (estimated Tax Payment).
    (2). The farmer was engaged in the business of farming in the year of receipt.
    This is a 25% tax payment made by USDA directly to IRS on behalf of the farmer.     		(1) Report the payment amount on Form 1040 line 59.
    Note: Advise the taxpayer to report this payment as farm income on Schedule F, Line 10, Profit & Loss from Farming. Payment is reported in the year the payment was received by IRS. The taxpayer will receive a Form 1099 MISC showing the payment as miscellaneous income.
    (2). This income is subject to Self- Employment Tax. Note: The farmer may benefit from filing Schedule J. If there is a refund due, the farmer may choose to apply all or part of the refund to the 2001 tax return as an estimated payment by using Line 67 of Form 1040.

21.6.4.4.10  (10-01-2007)
Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700

  1. For Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700, investment income includes all income except earned income. Earned income includes:

    • Wages

    • Salaries

    • Tips

    • Professional fees

    • Amounts received as pay for personal services

    • Distributions for qualified disability trusts

  2. The child's tax is the greater of:

    • The tax at the child's tax rate on the child's taxable income, or

    • The total obtained by adding the tax computed in (a) on (an amount equal to the child's taxable income minus the child's net investment income), plus the child's share of (4) below.

  3. Net investment income is the (adjusted gross income minus earned income) minus the larger of: ($1,700 for 2007 and 2006) or, if the child itemizes deductions, ($850 for 2007 and 2006 plus the amount of itemized deductions directly connected with the production of the child's investment income).

  4. The allocable parental tax is the tax that would be imposed if the parents' taxable income included the net investment income of all the parents' children meeting the age requirements shown below at the end of the tax year, minus the tax that would other wise be imposed on the parent. A child is considered under age 18 if born on or after January 1, 1990

    • HR 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006.

    • PL-110-28, U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007. This provision only applies to children whose earned income does not exceed one-half of the amount of their support.

    .

    Note:

    .

    If ... And ... Then ...
    The parents' tax rate is higher than the child's the parent does not elect to report the child's income on Form 8814, Parents' Election to Report Child's Interest and Dividends The child's investment income is taxed at the parents' rate,
    Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700, for 2007 and 2006 ($1,600 for 2005 and 2004, $1,500 for 2003) must be used to figure the child's tax.
    The parent elects to report the child's income on Form 8814,` Parents' Election to Report Child's Interest and Dividends.   See IRM 21.6.4.4.11, Form 8814, Parents' Election to Report Child's Interest and Dividends.

  5. Refigure the child's tax if, after filing the return, the parents' taxable income, filing status, or the net investment income of the parents' other child(ren) changes.

    • Form 1040X, Amended U. S. Individual Income Tax Return must be filed if the child's tax changes.

    • The child is not subject to penalties or under payments resulting from the additional tax.

  6. For more details, see Publication 929, Tax Rules for Children and Dependents.

21.6.4.4.10.1  (10-01-2007)
Form 8615 Tax for Children Under Age 18 With Investment Income of More Than $1,700, Tax Adjustments

  1. Follow the procedures in IRM 21.5.3, General Claims Procedures, if Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700, is missing or incomplete. Address any correspondence, regarding this return, to the taxpayer (child), in care of the parent(s).

    Note:

    HR 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006. Pub. L-110-28, U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007. This provision only applies to children whose earned income does not exceed one-half of the amount of their support.

  2. Adjustment action required:

    1. Math verify the Form 8615.

    2. Update the entity to add "MINOR" to the taxpayer's (child) name.

    3. Add the parent's name(s), if available, as a second name line.

    4. Input the appropriate tax adjustment.

    5. Use reason code 099, the appropriate blocking series and source code.

21.6.4.4.10.2  (10-01-2007)
Parents' Tax Information Requested

  1. Taxpayer (child) or a legal representative may request the parents' tax return information to complete Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700. The Service will supply the information upon request. The request must be:

    • Signed by taxpayer, or a legal representative. A valid Power of Attorney or proof of legal guardianship must accompany the request.

    • Submitted after the close of the parents' tax year.

    Note:

    HR 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006. Pub. L-110-28, U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007. This provision only applies to children whose earned income does not exceed one-half of the amount of their support.

  2. The request must contain:

    • A statement of intent to comply with IRC Section 1(g).

    • A statement of an attempt to obtain the information from the parent(s).

    • An explanation of why the information is not available from the parent(s).

    • Proof the child is under age 18 (e.g., birth certificate).

    • Evidence of unearned income over $1,700 for 2007 and 2006, $1,600 for 2005 or 2004, $1,500 for 2003 (e.g., copies of current Forms 1099, or prior year return accompanied by an explanation of why Forms 1099 are not available.).

    • The parents' return information (name, address, TIN, and filing status, if available). Sufficient information must be provided to identify the parents' account.

  3. These requests are worked in the paper Adjustment function. Verify all information is present upon receipt of the request.

21.6.4.4.10.3  (10-01-2007)
Rejecting Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700

  1. Reject incomplete requests using Letter 1275C, Photocopy Request Response, or Letter 135C, Power of Attorney Needed to Furnish Information. Advise taxpayer:

    • The request is not processable

    • The specific information needed to process the request

    • To resubmit the request with the required information

  2. Reject the request if the requester did not make a sufficient attempt to obtain the parents' information. Contact the Disclosure Function for assistance, if unable to determine if the requester's attempt was sufficient.

  3. Do not honor the request if the requester does not meet the requirements of IRC Section 1(g).

    1. Close the case.

    2. Notify the requester using Letter 1275C.

    3. State the following in the letter: "We are unable to process your request since you did not establish that you need the requested information for filing your return. IRC Section 1(g) applies if you are under age 18 and you have unearned income of more than $1,700 for 2007 and 2006 ." ($1,600 for 2005 or 2004, $1,500 for 2003.)

    Note:

    HR 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006. Pub. L-110-28, U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007. This provision only applies to children whose earned income does not exceed one-half of the amount of their support.

21.6.4.4.10.4  (10-01-2007)
Processable Forms 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700

  1. Upon receipt of a processable request, take the following actions:

    1. Advise the requester to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

    2. Initiate research for the parents' return.

    If the request And Then
    Is processable The return is posted Request the return.
    Is received prior to the return due date or there is a posted extension The return is NOT posted 1. Input TC 930.
    2. Notify the requester of the reason for the delay and the approximate date we can supply the information.
    Is received after the return due date The return is NOT posted and there is no posted extension Notify the requester we cannot satisfy the request and why.

  2. Upon receipt of the parents' return, prepare a response to the taxpayer. The response must include the:

    • Parents' name, Social Security number, and filing status

    • Parents' taxable income from Form 1040, U.S. Individual Income Tax Return

    • Parents' tax from Form 1040, U.S. Individual Income Tax Return

    • Names of other dependent children claimed on the return who may affect the preparation of the requester's Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700

    Note:

    HR 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006. Pub. L-110-28, U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007. This provision only applies to children whose earned income does not exceed one-half of the amount of their support.

  3. Advise taxpayer if the tax is from the Tax Table, Tax Rate Schedules, or Schedule D.

  4. Send the completed response and all background information, including the parents' return, to the appropriate Campus or Area Disclosure Office. Disclosure must review the request and response. If both are proper, they will approve the release of the information to the taxpayer.

21.6.4.4.11  (10-01-2006)
Form 8814, Parents' Election to Report Child's Interest and Dividends

  1. The parent of a child under age 18 (born on or after 1/1/1990) may elect to include the gross income of the child in the parents' gross income. The child is not required to file a return if the parents make the election. The following conditions apply:

    • The gross income must be from interest and dividends only (including Alaskan Fund Dividends)

    • For 2006, the gross income must be more than $850 and less than $8,500

    • No estimated tax payments were made in the name or TIN of the child

    • No federal income tax was withheld in the name or TIN of the child

  2. The parents' tax is the total of:

    • The income tax determined after adding the child's income, plus

    • The lesser of $85 or 10% of the child's income over $850.

    Note:

    HR 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006.

  3. Treat the interest which would be a tax preference item of the child as a tax preference item of the parent.

  4. For more information see the instructions for Form 8814, Parents' Election to Report Child's Interest and Dividends.

21.6.4.4.11.1  (12-09-2005)
Form 8814, Parents' Election to Report Child's Interest and Dividends, Adjustments

  1. A separate Form 8814, Parents' Election to Report Child's Interest and Dividends must be prepared for each child whose income is reported on the parents' return. If the return is missing or incomplete, refer to IRM 21.5.2, Adjustment Guidelines. Take the following action on complete forms:

    1. Math verify the Form 8814, Parents' Election to Report Child's Interest and Dividends line by line.

    2. Input the appropriate adjustment (increase or decrease).

    3. Use reason code 033, the appropriate blocking series and source code.

21.6.4.4.12  (10-01-2006)
Alternative Minimum Tax (AMT) Changes

  1. The Job and Growth Tax Relief Reconciliation Act of 2003 increased the Alternative Minimum Tax (AMT) exemption amounts for tax years 2003 and 2004.

  2. In accordance with the Economic Growth and Tax Relief Reconciliation Act of 2001, the AMT exemption amounts for 2001 through 2002 are:

    • $49,000 for married filing joint or qualified widow(er) returns

    • $35,750 for single or head of household returns

    • $24,500 for married filing separate returns

  3. In accordance with the Jobs and Growth Tax Relief Reconciliation Act of 2003, section 106, the AMT exemption amounts for 2003 and 2004 are:

    • $58,000 for married filing joint or qualified widow(er) returns

    • $40,250 for single or head of household returns

    • $29,000 for married filing separate return

    Note:

    HR 1308, Working Families Tax Relief Act of 2004 extended the AMT amounts through 2005.

  4. In accordance with HR 4297, Tax Increase Prevention and Reconciliation Act of 2005, the AMT exemption amounts for 2006 are:

    • $62,550 for married filing joint or qualified widow(er) returns

    • $42,500 for single or head of household returns

    • $31,275 for married filing separate return

  5. After 2006, the exemption amount is scheduled to return to the exemption amounts from 2000 which were:

    • $45,000 for married filing joint or qualified widow(er) returns

    • $33,750 for single or head of household returns

    • $22,500 for married filing separate returns


  6. A provision to allow an individual to offset the entire regular tax liability and AMT liability by personal nonrefundable credits was added by:

    • HR 3090, Job Creation and Worker Assistance Act of 2002, for tax years 2002 and 2003

    • HR 1308, Working Families Tax Relief Act of 2004, through tax year 2005

    • HR 4297, Tax Increase Prevention and Reconciliation Act of 2005

21.6.4.4.13  (10-01-2007)
Alternative Minimum Tax (AMT), child Under Age 18

  1. Taxpayers must use Form 6251, Alternative Minimum Tax-Individuals, to figure Alternative Minimum Tax (AMT) for children under age 18.

  2. If the parent elects to report a child's interest and dividends on the parents' return the child is not subject to AMT.

  3. See table below for details:

    If ... Then ...
    Tax Year begins in 2007 The alternative minimum tax exemption amount for a child 18 years of age or under or a full-time student under 24 years of age cannot exceed the amount of the child's earned income plus $6,300.
    Tax Year begins in 2006 The alternative minimum tax exemption amount for a child under 18 years of age cannot exceed the amount of the child's earned income plus $6,050.
    Tax Year begins in 2005 The alternative minimum tax exemption amount for a child under 14 years of age cannot exceed the amount of the child's earned income plus $5,850.
    Tax Year begins in 2004 The alternative minimum tax exemption amount for a child under 14 years of age cannot exceed the amount of the child's earned income plus $5,750.

    Note:

    HR 4297, Tax Increase Prevention and Reconciliation Act of 2005 changed the age of a child from 14 to 18 years old for tax years beginning in 2006. Pub. L-110-28 U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007.

  4. Follow normal adjustment procedures if an amended return is received changing the AMT computation. See Publication 929, Tax Rules for Children and Dependents, for additional AMT information.

21.6.4.4.14  (10-01-2006)
Who is Subject to Self-Employment Tax

  1. Taxpayers must pay self-employment (SE) tax on non-exempt trade or business income of $400 or more. The SE Tax does not apply to amounts earned by:

    • Nonresident aliens

    • Members of certain religious sects who have filed for and obtained exemptions on Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits

    • Public officials, except for public officials compensated solely on a fee basis

  2. The SE tax generally applies to the earnings of self-employed persons (such as independent contractors or partners), and not to earnings received by employees.

  3. Income items that are included in computing SE tax are reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), Schedule C–EZ, Net Profit or Loss from Business (Sole Proprietorship), and Schedule F, Profit or Loss From Farming, or sometimes as "other income" on Form 1040, U.S. Individual Income Tax Return.

    Note:

    Form 1040 Instructions specifically provide that income from self-employment should not be reported as "other income" or reported on Schedule E.