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

21.6.4.4 
Working Tax Computation/Accounting Period Changes

21.6.4.4.9  (12-02-2011)
Schedule J, Income Averaging for Farmers and Fishermen

  1. Farmers and fisherman may use Schedule J, Income Averaging for Farmers and Fishermen, to elect to average all or part of taxable 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 (PL 108-357), allows fishermen to use income averaging on Schedule J to reduce their tax for tax years beginning after 2003.

  3. Taxpayers enter income amounts on Schedule J from the appropriate line of the prior year(s) income tax return(s).

    • If the taxpayer filed a Schedule J for the previous year, then the taxpayer enters income 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 return(s).

    • If deductions exceed gross income for any year that is a base year, there may be 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...
    2012 2011, 2010, 2009
    2011 2010, 2009, 2008
    2010 2009, 2008, 2007
    2009 2008, 2007, 2006

  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 taxpayers 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  (10-01-2009)
Taxable Income from Farming or Fishing and Elected Farm Income

  1. Taxable income from a farming business, as defined in IRC section 263A(e)(4), 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.

  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  (10-01-2009)
Adjusting Schedule J

  1. Math Verify Schedule J, Income Averaging for Farmers and Fishermen.

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

  3. Use Reason Code 046 and appropriate Source Code and Blocking Series.

21.6.4.4.9.3  (04-29-2013)
USDA Discrimination Settlement Payments

  1. The United States Department of Agriculture (USDA) paid a cash settlement and granted loan cancellation to about 15,000 African American 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. See IRM 21.6.6.3.1, African-American Reparation Claims, for more information.

    Note:

    For Keepseagle/Native American claims, see (6).

  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).

  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. For example, 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. If the taxpayer uses the cash method of accounting, the taxpayer must report the tax payment (the 25% payment) as taxable income for the year when 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 Document Locator Number (DLN) of 52217 or 43217 (013/014) 9XX.

    5. If the farmer does not claim the estimated tax payment, the tax module will show a J - Freeze. See IRM 21.5.6.4.19, J -- Freeze.

  6. In 2011, the USDA reached a settlement in the Keepseagle v. Vilsack class action lawsuit. The lawsuit claimed the USDA discriminated against Native Americans by denying them equal access to credit in the USDA Farm Loan Program.

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

    • Keepseagle v. Vilsack

    • Native American Settlement Case

  8. Keepseagle settlements were divided into two categories:

    • Track A - claimants received an award of up to $50,000 plus an additional 25% in withholding (for a total of up to $62,500)

    • Track B - claimants received up to $250,000 with no income tax withheld

    • Track A and Track B - claimants may have also received debt forgiveness

  9. Both Track A and Track B claimants were issued a Form 1099-MISC, Miscellaneous Income, along with an instructional notice prepared by a third party (not the IRS) advising the farmer how to correctly report the settlement.

  10. Farmers who had debt forgiveness received a Form 1099–C, Cancellation of Debt.

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

  12. Refer to the table below to work both the Pigford and Keepseagle cases:

    If ... And Then ...
    This is a USDA Cash Settlement payment.   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.
    The taxpayer reports only the settlement income (no expenses) on Schedule F, Line 10 This amount is not subject to Self- Employment Tax.
    The farmer is engaged in the business of farming. This amount is subject to Self- Employment Tax.
    This is a loan cancellation of: 
    1. debt principal for cash or accrual taxpayers, or

    2. debt interest for accrual taxpayers.

      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 (Form 1040).
    The taxpayer reports only the loan cancellation on Schedule F, Line 10 (no expenses). This amount is not subject to Self-Employment Tax.
    The farmer was engaged in the business of farming. This amount is subject to Self-Employment Tax.
    The farmer was insolvent at the time the loan was cancelled or if the loan was qualified farm debt. 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.
    PIGFORD CLAIMS ONLY
    This 25% tax payment received January 2008 for tax year 2007 is considered taxable farm income for tax year 2008. These payments are posted as TC 660s (estimated Tax Payment).
      Report the payment amount on Form 1040 as an estimated tax payment.
    Note: Advise the taxpayer to report this payment as farm income on Schedule F, Line 10. 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 for tax year 2008.

    Caution:

    If the taxpayer is no longer engaged in farming, the miscellaneous income can be reported on Line 21 of the Form 1040 with a notation USDA Settlement Payment, Black Farmer, Pigford Suit, etc.

    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.
    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 subsequent year tax return as an estimated payment.
    Pigford and Keepseagle claims
    The taxpayer's account was not properly credited with the estimated tax payment or withholding
    The payment or withholding cannot be verified
    1. Complete Form 4442, Inquiry Referral, and refer the case to Kansas City. Include a day and evening phone number for the taxpayer. Fax to Kansas City P&A, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    2. Input a STAUP if in a balance due status.

    3. Kansas City will open a control base, research the issue, and contact the taxpayer upon resolution.

21.6.4.4.10  (01-10-2012)
Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900

  1. For Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, 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 the bullet above (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: ($1,900 for 2009, 2010 and 2011) or, if the child itemizes deductions, ($950 for 2009, 2010 and 2011 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 otherwise be imposed on the parent. A child is considered under age 18 at the close of the taxable year.

    • PL 109-222, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from under 14 to under 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.

    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 Certain Children Who Have Investment Income of More Than $1,900, for 2009, 2010 and 2011 ($1,800 for 2008, $1,700, for 2007 and 2006 and $1,600 for 2005 and 2004) 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.   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  (12-29-2009)
Form 8615 Tax for Certain Children Who Have Investment Income of More Than $1,900, Tax Adjustments

  1. Follow the procedures in IRM 21.5.3, General Claims Procedures, if Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, is missing or incomplete. Address any correspondence, regarding this return, to the taxpayer (child), in care of the parent(s).

    Note:

    PL 109-222, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from under 14 to under 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.

  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  (01-10-2012)
Parents' Tax Information Requested

  1. A taxpayer (child) or a legal representative may request the parents' tax return information to complete Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900. 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:

    PL 109-222, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from under 14 to under 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.

  2. The request must contain:

    • A statement of intent to comply with IRC 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 $1,900 for 2009, 2010 and 2011, $1,800 for 2008, $1,700 for 2007 and 2006, and $1,600 for 2005 or 2004 (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  (10-01-2013)
Rejecting Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900

  1. Reject incomplete requests using Letter 1275C, Photocopy Request Response, or Letter 135C, Power of Attorney Needed to Furnish Information. Advise the 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 at ≡ ≡ ≡ ≡ ≡ ≡ ≡ , 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 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 you need the requested information for filing your return. IRC 1(g) applies if you are under age 18 and you have unearned income of more than $1,900 for 2011." ($1,900 for 2009 and 2010, $1,800 for 2008 and $1,700 for 2007)

    Note:

    PL 109-222, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from under 14 to under 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.

21.6.4.4.10.4  (10-01-2010)
Processable Forms 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900

  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 Certain Children Who Have Investment Income of More Than $1,900

    Note:

    PL 109-222, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from under 14 to under 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.

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

21.6.4.4.11  (01-10-2012)
Form 8814, Parents' Election to Report Child's Interest and Dividends

  1. The parent of a child under age 18 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 2012, the gross income must be more than $950 and less than $9,500

    • 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 in excess of $1900 to the parent's income, plus

    • The lesser of $95 or 10% of the child's income over $950.

    Note:

    PL 109-222, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from under 14 to under 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 fulltime 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. Treat any interest which is 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  (02-08-2013)
Alternative Minimum Tax (AMT) Changes

  1. The exemption amounts for the alternative minimum tax are as follows:

    Filing Status Tax Year 2012 Tax Year 2011 Tax Year 2010 Tax Year 2009
    Married filing joint / Qualified widow(er) $78,750 $74,450 $72,450 $70,950
    Single / Head of household $50,600 $48,450 $47,450 $46,700
    Married filing separate $39,375 $37,225 $36,225 $35,475

  2. The provisions above allow an individual to offset the entire regular tax liability and AMT liability by personal nonrefundable credits.

21.6.4.4.13  (02-08-2013)
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 2012 The alternative minimum tax exemption is earned income plus $6,950 for a child under 18 years of age, or a child age 18, or a student under age 24, if the earned income did not exceed 1/2 of the child's or student's support.
    Tax Year 2011 The alternative minimum tax exemption is earned income plus $6,800 for a child under 18 years of age, or a child age 18, or a student under age 24, if the earned income did not exceed 1/2 of the child's or student's support.
    Tax Year 2009 and 2010 The alternative minimum tax exemption is earned income plus $6,700 for a child under 18 years of age, or a child age 18, or a student under age 24, if the earned income did not exceed 1/2 of the child's or student's support.
    Tax Year 2008 The alternative minimum tax exemption is earned income plus $6,400 for a child under 18 years of age, or a child age 18, or a student under age 24, if the earned income did not exceed 1/2 of the child's or student's support.

    Note:

    PL 109-222, Tax Increase Prevention and Reconciliation Act of 2005 changed the age of a child from under 14 to under 18 years old for tax years beginning in 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.

  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  (10-01-2012)
Who is Subject to Self-Employment Tax

  1. Taxpayers that maintain a trade or business must pay Self Employment (SE) tax on net earnings of $400 or more. The SE Tax does not apply to amounts earned by:

    • Nonresident aliens, unless an international social security agreement applies

    • Members of certain religious sects who filed and had approved a Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits

    • Members of the clergy who filed and had approved Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners

    • Public officials, except for public officials compensated solely on a fee basis whose services are not covered by a Section 218 agreement

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

  3. Income items 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) , Schedule E, Supplemental Income and Loss, Part II, 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, Part I.

  4. Changes in SE income may change the SE tax liability and related income tax deduction.

  5. The best source of information for reporting SE tax are the instructions for Schedule SE (Form 1040), Self-Employment Tax, for the applicable year. There are a number of special rules relating to SE tax other than the above.

  6. For more details, see Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or Schedule C-EZ).

21.6.4.4.14.1  (10-01-2013)
Self-Employment Tax

  1. The Social Security Administration (SSA) determines social security benefits based, in part, on the tax reported on Schedule SE, Self-Employment Tax.

    • Usually taxpayers must pay self employment (SE) tax on all net earnings if over $399.99, regardless of age, even if receiving social security or Medicare benefits (See Publication 17, Your Federal Income Tax, for exceptions).

    • The Medicare portion of the SE tax (2.9%) applies to all earnings from self-employment, even if the maximum amount to which social security tax applies is reached.

    • SE tax is entered on the appropriate line of Form 1040, U.S. Individual Income Tax Return.

  2. Taxpayers subject to SE tax complete either the Short Schedule SE (Section A) or the Long Schedule SE (Section B).

    1. It may be beneficial for the taxpayer to use the optional method for computing SE tax to obtain social security credit (Part II, Schedule SE, Section B).

    2. Taxpayers filing jointly must file separate Schedules SE if they both have self-employment income unless one spouse qualifies to use Short Schedule SE and the other must use Long Schedule SE, then both taxpayers can use the same form.

    3. Taxpayers electing to use the qualified joint venture option must file separate Schedules SE. See Schedule SE instructions.

  3. For tax year 2013 and subsequent, taxpayers may be subject to an additional .9% Medicare tax. See IRM 21.6.4.4.19, Additional Medicare Tax, for more information.

21.6.4.4.14.2  (01-03-2013)
Self-Employment Tax Adjustments

  1. Taxpayers may file an amended return to change self employment (SE) income and SE tax originally reported. Verify the changes against the tax account information. Research the returns and records of accounts as needed. Correct the SE income and SE tax by the following input:

    1. TC 29X for the adjustment, which includes the SE tax change.

      Caution:

      Do not decrease the posted amounts to less than zero.

    2. Item reference number 889 to increase or decrease the SE tax (line 5, Short Schedule SE, and line 12, Long Schedule SE).

    3. Item reference number 888 to increase or decrease the AGI, when applicable.

    4. Item reference number 886 to increase or decrease the taxable income, when applicable.

    5. Item reference number 878 to increase or decrease the primary SE income (PRIM–SE–INCM) (line 4, Short Schedule SE, and the smaller of line 6 or 9, Long Schedule SE).

    6. Item reference number 879 to increase or decrease the secondary SE income (SECND–SE–INCM) (line 4, Short Schedule SE, and the smaller of line 6 or 9, Long Schedule SE).

    7. Item reference number 895 to increase or decrease the primary Medicare income (PRIM–MEDICARE–INC) (line 4, Short Schedule SE, and line 6, Long Schedule SE).

    8. Item reference number 896 to increase or decrease the secondary Medicare income (SECND–MEDICARE–INC) (line 4, Short Schedule SE, and line 6, Long Schedule SE).

    9. Use RC 044 when adjusting SE tax.

      Note:

      A reason code is not required for a ripple effect change. See IRM 21.6.7.4.1.3, Reason Code (RC).

  2. Combined wages, tips and net earnings, up to the amount shown in the table below, are subject to any combination of the 12.4% social security part of SE tax, social security tax or railroad retirement (tier 1) tax.

  3. Combined wages, tips and net earnings are subject to any combination of the 2.9% Medicare part of SE tax, social security tax or railroad retirement (tier 1) tax. There is no income limit when computing Medicare tax.

  4. When self-employment income exceeds the yearly limitation, or when Medicare is less than the self-employment income, the adjustment will result in an unpostable condition 189, reason code 8.

    If ... Then ...
    Tax Year 2013 Item reference number 878 or 879 cannot exceed $113,700.
    Tax Year 2012 Item reference number 878 or 879 cannot exceed $110,100.
    Tax Year 2009, 2010 and 2011 Item reference number 878 or 879 cannot exceed $106,800.
    Tax Year 2008 Item reference number 878 or 879 cannot exceed $102,000.
    Tax Year 2007 Item reference number 878 or 879 cannot exceed $97,500.
  5. PL 111-312, Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, created a payroll / self-employment tax holiday period during 2011 which reduces the social security tax from 12.4% to 10.4%.

  6. PL 112–96, Middle Class Tax Relief Act of 2012, extended the reduced social security tax from 12.4% to 10.4% to Dec. 31, 2012.

21.6.4.4.14.3  (10-02-2009)
Self-Employment Tax Not Reported

  1. DO NOT assess self-employment tax unless a taxpayer reports it on an amended, superseding or supplemental return or a late reply to a Submission Processing Error Resolution request is received, such as a Schedule SE.

    1. Math error authority is not applicable to unreported SE tax.

    2. Self-employment tax may ONLY be assessed by Examination through statutory notice of deficiency procedures.

      Exception:

      Self-employment tax may be assessed up to the amount of EITC claimed on original returns. For more information see IRM 21.6.3.4.2.7.7, EITC and SE Tax.

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    The Examination function will determine if the income is subject to SE Tax and take the following action:

    If the income is Then
    not subject to SE tax The case will be returned to you.
    subject to SE tax The case is selected by examination and not returned to originator.

21.6.4.4.14.4  (12-29-2009)
Self-Employment Tax Adjustment Records Sent to Social Security Administration

  1. Data from adjustments to self employment (SE) tax is sent to Social Security Administration (SSA) electronically. SSA notifies the Internal Revenue Service if there are discrepancies in adjustment data. Examples of possible discrepancies are:

    • SE tax incorrectly computed on SE tax earnings limit, less the taxpayer's net profit, rather than on the net profit.

    • SE tax reported on net earnings under $400.

    • Reportable tax year incorrect.

    • Money amounts incorrect.

    • Invalid, insufficient, or missing data.

  2. If a taxpayer contacts the IRS about SSA not having record of self employment income, the taxpayer must be able to provide proof of the income and proof of timely filing to SSA. A transcript of the year in question will provide the required information. The taxpayer must take the transcript to their local SSA office for the records to be updated.

21.6.4.4.14.5  (10-01-2013)
Form 4137, Social Security and Medicare Tax on Unreported Tip Income

  1. Taxpayers earning $20 or more in tips in a calendar month:

    1. Are required to report the income to their employer.

    2. Must file Form 4137, Social Security and Medicare Tax on Unreported Tip Income, if the tips are not reported to their employer or they have tips allocated to them by the employer.

    Note:

    The $20 rule applies separately to tips received while working for more than one employer.

  2. Taxpayer files an amended return reporting tip income and tax, without a Form 4137 :

    If Then
    Sufficient information is provided Prepare Form 4137, Social Security and Medicare Tax on Unreported Tip Income, and Schedule U, U.S. Schedule of Unreported Tip Income, for 2006 and earlier years.
    Insufficient information is provided Follow procedures in IRM 21.5.3, General Claims Procedures.

  3. Line 2, Schedule U, addresses unreported tip income subject to social security and Medicare tax. Beginning in 2007, Schedule U has been eliminated. Information relating to the social security record is based on the information shown on Form 4137.

  4. If a loose Form 4137 is received and it cannot be determined if the tips and tax were included on the original return:

    1. Research Command Code (CC) RTVUE.

    2. Obtain the original return, if necessary.

  5. Math verify the Form 4137 and Schedule U, for 2006 and earlier years, (either received from the taxpayer or a dummy prepared by Internal Revenue Service).

  6. For tax year 2013 and subsequent, taxpayers may be subject to an additional .9% Medicare tax. See IRM 21.6.4.4.19, Additional Medicare Tax, for more information.

21.6.4.4.14.6  (03-22-2013)
Form 4137, Social Security and Medicare Tax on Unreported Tip Income, Adjustments

  1. Input the following to adjust the account:

    1. TC 29X to adjust the tax.

    2. Item reference number 891 to increase or decrease primary unreported tip income (PRIM–UNRPRTD–TIP–INC).

    3. Item reference number 892 to increase or decrease secondary unreported tip income (SECND–UNREPRTED–TIP–INC).

      Note:

      The smaller of line 6 or 10, Form 4137, Social Security and Medicare Tax on Unreported Tip Income, is the item reference number 891 or 892 amount.

    4. Item reference number 898 to increase or decrease primary Medicare tip income (PRIM–MEDICARE–INC).

    5. Item reference number 899 to increase or decrease secondary Medicare tip income (SECND-MEDICARE-INC).

    Note:

    Line 6, on Form 4137, is the item reference number 898 or 899 amount.

  2. When tip income exceeds the yearly limitation, or when Medicare is less than the tip income, the adjustment will result in an unpostable condition 189, reason code 8.

    If ... Then ...
    Tax Year 2013 Item reference number 891 or 892 cannot exceed $113,700.
    Tax Year 2012 Item reference number 891 or 892 cannot exceed $110,100.
    Tax Year 2009, 2010 and 2011 Item reference number 891 or 892 cannot exceed $106,800.
    Tax Year 2008 Item reference number 891 or 892 cannot exceed $102,000.

  3. For tax year 2006 and prior, detach Schedule U, U.S. Schedule of Unreported Tip Income, and route to the Social Security Administration (SSA) using local procedures.

21.6.4.4.15  (10-01-2010)
Workers Whose Employers Qualify Under the Revenue Act of 1978, Section 530

  1. Certain employers who qualify under the Revenue Act of 1978, Section 530, are allowed to treat their workers as other than employees (such as independent contractors).

    Note:

    A taxpayer's qualification for Section 530 treatment is determined irrespective of whether the workers are employees under common law rules.

    1. An employer that must issue any required information forms (such as Form 1099–MISC) must issue this form instead of a Form W-2 for the employer to continue to qualify.

    2. The workers could be employees under the common law rules. If the workers are employees, the workers are not liable for self employment (SE) tax on their earnings from the employer but are liable for the employee's portion of social security and Medicare Taxes.

    3. Workers may apply to determine their status as employees or independent contractors under the common law by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

21.6.4.4.15.1  (10-01-2013)
Misclassified Workers to File Form 8919, Uncollected Social Security and Medicare Tax on Wages

  1. Generally, a worker who receives a Form 1099-MISC for services provided as an independent contractor must report the income on Schedule C and pay self-employment tax on the net profit, using Schedule SE. However, sometimes the worker is incorrectly treated as an independent contractor when he or she is actually an employee. When this happens, Form 8919, Uncollected Social Security and Medicare Tax on Wages, will be used beginning tax year 2007 where the employer did not withhold the worker's share of social security and Medicare taxes.

  2. Employees who were mis-classified by their employers as an independent contractor should use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report their share of uncollected social security and Medicare taxes due on their compensation.

  3. In addition, the worker must meet one of several criteria indicating they were an employee while performing the services. The criteria include:

    • The worker has filed Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating they are an employee of the firm.

    • The worker has been designated as a section 530 employee by their employer or by the IRS prior to January 1, 1997.

    • The worker has received other correspondence from the IRS that states they are an employee.

    • The worker has filed Form SS-8 with the IRS and has not yet received a reply.

    • The worker received a Form W-2 and a Form 1099-MISC from his employer. The amount on Form 1099-MISC should have been included as wages on the Form W-2.


    See Form 8919, Uncollected Social Security and Medicare Tax on Wages, for a complete list of reasons that may apply.

  4. By using Form 8919, the worker's social security and Medicare taxes will be credited to their social security record. To facilitate this process, the IRS will electronically share Form 8919 data with the Social Security Administration.

  5. In the past, mis-classified workers often used Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report their share of social security and Medicare taxes. Mis-classified workers should no longer use this form for 2007 and subsequent years. Instead, Form 4137 should now only be used by tipped employees to report social security and Medicare taxes on allocated tips and tips not reported to their employers.

  6. For tax year 2013 and subsequent, taxpayers may be subject to an additional .9% Medicare tax. See IRM 21.6.4.4.19, Additional Medicare Tax, for more information.

21.6.4.4.15.2  (05-21-2008)
Processing Claims for Refund of Self-Employment Tax by Individual Claiming to Be an Employee

  1. Claims for refund of Self-Employment (SE) Tax by an individual claiming to be an employee who was treated as an independent contractor must include either:

    1. A determination letter from the Internal Revenue Service holding that the taxpayer is an employee, or

    2. A Form W-2 (or corrected Form W-2).

      Note:

      The claim should include Form 8919, Uncollected Social Security and Medicare Tax on Wages, for tax year 2007 and subsequent and for 2006 and prior, Form 4137, Social Security and Medicare Tax on Unreported Tip Income.

      If And Then
      An incomplete claim is received with a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding  
      1. Forward the form to the appropriate function (follow local procedures).

      2. Advise taxpayer the Form SS-8 was forwarded for consideration and to resubmit the claim if a favorable determination is received.

      3. Close IDRS control base.

      An incomplete claim is received without substantiation The claim indicates taxpayer received a favorable determination or a corrected Form W-2. Correspond for the missing information.
      An incomplete claim is received without substantiation The claim does not indicate taxpayer received a favorable determination or corrected Form W-2.
      1. Do not consider the claim. Refer to IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns .

      2. Enclose a blank Form SS-8.

      3. Advise Taxpayer to file Form SS-8 and forward to the address on the form.

    3. See IRM 21.7.2.5.3, Employee-Employer Status Determinations, for additional information.

21.6.4.4.15.3  (10-01-2004)
Adjustment Considerations

  1. Compensation paid by the payer shown in the determination letter, or by the payer shown in the corrected Form W-2 and was previously reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), must be included as wages.

  2. The corrected Form W-2 may or may not show any federal income tax withholding, social security or Medicare taxes withheld.

  3. The deduction for the self employment (SE) tax must be added back to the adjusted gross income.

  4. Social security and Medicare tax must be computed on the compensation.

  5. Some previously deducted Schedule C expenses may be claimed as employee business expenses on Form 2106, Employee Business Expenses, and carried to Schedule A, Itemized Deductions, subject to the 2% limitation.

  6. Refer the case to Exam as Category A if the Schedule C deductions included any of the following:

    • Cost of goods

    • Wages

    • Office in home expenses

21.6.4.4.15.4  (01-29-2009)
Processing Complete Claims — Revenue Act of 1978, Section 530

  1. For 2007 and subsequent, process complete claims (with the necessary substantiation) as follows:

    If Then
    Self employment (SE) tax was previously assessed
    1. Math verify Form 8919, Uncollected Social Security and Medicare Tax On Wages.

    2. Prepare a dummy Form 8919, if not attached to the claim.

    3. Use the SE tax to offset the employee share of FICA now due (unless withheld by the employer via an adjustment and shown on corrected Form W-2) and input TC 29X to net the difference.

    4. Decrease the SE income (SE–INC and MEDICARE–INC to zero) and use item reference numbers 873 / 874, 878 / 879, 893 / 894 and 895 / 896.
      Note: Do not input item reference number 891 / 892 or 898 / 899.

    5. Use item reference number 889 to decrease SE tax to zero.

    6. Use Reason Code 024.

    SE tax was not previously assessed
    1. Follow procedures 1 and 2 above.

    2. Adjust taxpayer's account with TC 29X.

    3. Use item reference numbers 873 / 874 and 893 / 894 as appropriate.

    4. Use Reason Code 024.
      CAUTION: Do not input item reference numbers 889, 878 / 879 or 895 / 896.

  2. For 2006 and prior, process complete claims (with necessary substantiation) as follows:

    If ... Then ...
    Self employment (SE) tax was previously assessed
    1. Math verify Form 4137, Social Security and Medicare Tax on Unreported Tip Income.

    2. Detach Schedule U, U.S. Schedule of Unreported Tip Income, and route to Social Security Administration (SSA) using local procedures.

    3. Prepare a dummy Form 4137 and Schedule U, if not attached to the claim. Change the word " Tip" to the word "Wage " in the Form 4137 title.

    4. Use the SE tax to offset the employee share of FICA now due (unless withheld by the employer via an adjustment and shown on corrected Form W-2). Input TC 29X to net the difference.

    5. Decrease the SE income (SE-INC and MEDICARE-INC to zero) using item reference numbers 878 / 879 and 895 / 896.

      Note:

      Do not input item reference number 891 / 892 or 898 / 899.

    6. Use item reference number 889 to decrease SE tax to zero.

    SE tax was not previously assessed
    1. Follow procedures 1 through 3 above.

    2. Adjust taxpayer's account with TC 29X.

      Caution:

      Do not input item reference numbers 889, 878 / 879 or 895 / 896.

21.6.4.4.15.5  (03-22-2013)
Form 8919, Uncollected Social Security and Medicare Tax on Wages - Adjustments

  1. Input the following to adjust the account:

    1. TC 29X to adjust the tax.

    2. Credit reference number 873 to increase or decrease Primary Social Security Wages.

    3. Credit reference number 874 to increase or decrease Secondary Social Security Wages.

      Note:

      The smaller of line 6 or 9, Form 8919, Uncollected Social Security and Medicare Tax on Wages, is the credit reference number 873 or 874 amount.

    4. Credit reference number 893 to increase or decrease the Primary Total Wages Amount (Medicare).

    5. Credit reference number 894 to increase or decrease the Secondary Total Wages Amount (Medicare).

      Note:

      Line 6, Form 8919 is the credit reference number 893 or 894 amount.

    Caution:

    When adjusting accounts posted prior to Jan. 1, 2009, you must access CC RTVUE and look at Form 8919 to verify the amounts previously transmitted to SSA.

  2. When social security income exceeds the yearly limitation, or when Medicare is less than the social security income, the adjustment will result in an unpostable condition 189, reason code 8.

    If ... Then ...
    Tax Year 2013 Item reference number 873 or 874 cannot exceed $113,700.
    Tax Year 2012 Item reference number 873 or 874 cannot exceed $110,100.
    Tax Year 2009, 2010 and 2011 Item reference number 873 or 874 cannot exceed $106,800.
    Tax Year 2008 Item reference number 873 or 874 cannot exceed $102,000.

  3. Use Reason Code 024.

  4. The information from the input of the credit reference numbers is transmitted to Social Security Administration.

21.6.4.4.16  (10-01-2002)
Accounting Period Change

  1. Individual income tax returns cover an accounting period of either a:

    • Calendar year — January 1 through December 31

    • Fiscal year — 12 month period ending on the last day of any month except December or a period of 52 or 53 weeks (always ending on the same day of the week)

  2. A taxpayer chooses an accounting period when filing the first tax return.

    • It may never be longer than 12 months

    • Approval must be obtained from the Internal Revenue Service to change the established accounting period

    • Taxpayer must file Form 1128, Application to Adopt, Change, or Retain a Tax Year, to request a change

  3. Forward original Form 1128, Application to Adopt, Change, or Retain a Tax Year, requests to the Entity function. The Entity function will determine whether a referral to Headquarters is required (e.g., fiscal year changes).

  4. The taxpayer's return may post to an incorrect period because of a processing error, such as:

    • A calendar year return posting as a fiscal year return

    • A fiscal year return posting as a calendar year return

    • A deceased taxpayers short year return posting as a calendar year return

  5. The tax year ending for a final short year return is the month and year of death. Enter computer condition code "Y" on the return to prevent unpostable condition 162.

21.6.4.4.16.1  (10-01-2006)
Resolving Accounting Period Changes

  1. Take the following action:

    1. Request IMFOL/BMFOL to determine taxpayer's correct filing period.

    2. Request the return posted to the incorrect period(s).

    3. Back out the tax information posted on the incorrect period.

    4. Input TC 170.00 if adjusting withholding and/or transferring timely payments from the module and no TC 17X is on the module.

    5. If TC 17X is present on the module, input TC 171 to reduce to zero or, if applicable, adjust to the amount reported by the taxpayer on the return.

    6. Transfer payments to the correct period, if necessary.

    7. Reprocess the return(s) to the correct tax period.

      Caution:

      DO NOT zero out the tax on Statute years. Refer claims to the Statute function for clearance, if they involve adjusting accounts and reprocessing return on Statute years. See IRM 21.5.2.4.23.4, Statute Imminent Documents.

    8. Input an entity transaction to change the Fiscal Year Month (FYM) when taxpayer includes a copy of a previously approved Form 1128, Application to Adopt, Change, or Retain a Tax Year.

21.6.4.4.17  (10-01-2010)
COBRA Premium Assistance

  1. The American Recovery and Reinvestment Act of 2009 (PL 111-5), provides certain individuals who have been involuntarily terminated a 65% reduction in the premium otherwise payable for Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage for themselves and their families for up to fifteen months (as extended by PL 111-118). Eligible workers have to pay 35% of the coverage premium.

  2. To qualify, a worker must have been involuntarily terminated from employment between September 1, 2008, and May 31, 2010.

  3. The premium assistance is not included in gross income. However, the eligibility for premium assistance phases out and is recaptured as an increase in the individual's income tax liability. The phase-out impacts individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. The premium assistance is totally phased out for taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for joint filers, and the full amount must be repaid as an additional tax.

  4. For more information on the COBRA premium subsidy and recapture, see Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit).

21.6.4.4.17.1  (10-01-2010)
Repayment / Recapture of COBRA Premium Assistance

  1. The American Recovery and Reinvestment Act (ARRA) of 2009 (PL 111-5) provides for the repayment / recapture of COBRA premium assistance for high income taxpayers whose modified adjusted gross income exceeds $125,000, or $250,000 for joint filers.

  2. Tax liability is increased, to achieve repayment of a portion of the premium assistance, for those taxpayers whose modified adjusted gross income is between $125,000 and $145,000, or $250,000 and $290,000 for those filing joint returns. If the modified adjusted gross income is $145,000 or more, or $290,000 or more for joint filers, the full amount of the premium assistance (the 65% reduction of the COBRA premium the employer paid under ARRA) must be repaid as an additional tax. See Publication 502, Medical and Dental Expenses, for information on how modified adjusted gross income is determined for purposes of the recapture.

  3. To determine the amount of additional tax, divide the amount of modified adjusted gross income over $125,000 by $20,000, or the amount over $250,000 by $40,000 for joint filers. The percentage calculated, multiplied by the amount of premium assistance, is the amount required to be repaid. Worksheet F in Pub 502 can also be used.

    Example:

    single taxpayer with a modified adjusted gross income of $135,000 :
    $135,000 minus $125,000 equals $10,000. $10,000 divided by $20,000 equals 50%. If the employer provided the taxpayer with premium assistance of $1500 under ARRA, the taxpayer must repay $750 (50% of the $1500).

    Example:

    joint filer with a modified adjusted gross income of $275,000:
    $275,000 minus $250,000 equals $25,000. $25,000 divided by $40,000 equals 62.5%. If the employer paid $1200 of the taxpayer’s premiums as a subsidy under ARRA, the taxpayer must repay $750 (62.5% of the $1200).

    Note:

    Taxpayers must contact their former employers for the amount of COBRA premium assistance, if unknown.

  4. To report the increase in tax from the recapture of the COBRA premium assistance, the taxpayer must write "COBRA" on Form 1040, U.S. Individual Income Tax Return, line 60, and include the repayment in the total tax amount.

  5. To adjust an account for COBRA premium assistance, input Transaction Code 29X with reason code 107.

21.6.4.4.18  (07-14-2010)
First-Time Homebuyer Credit

  1. The Housing and Economic Recovery Act of 2008 (PL 110-289), enacted on July 30, 2008, allows a taxpayer who is a first time homebuyer a refundable tax credit of the lesser of $7,500 ($3,750 for Married Filing Separate) or 10% of the purchase price. The law is effective for qualifying homes purchased on or after Apr. 9, 2008, and on or before Dec. 31, 2008.

  2. The American Recovery and Reinvestment Tax Act of 2009 (ARRA) (PL 111-5), enacted on Feb. 17, 2009, allows a refundable tax credit of the lesser of $8,000 ($4,000 for Married Filing Separate) or 10% of the purchase price. The credit is available for first time homebuyers who purchased a home after Dec. 31, 2008, and before Dec. 1, 2009.

  3. The Worker, Homeownership and Business Assistance Act of 2009 (PL 111-92), enacted on Nov. 6, 2009, extends the eligibility period to purchases before May 1, 2010. Taxpayers who have entered into a written binding contract before May 1, 2010, must close on the home before Oct. 1, 2010 to qualify. This bill also establishes a credit for long-time residents who purchase a new home and sets out special rules for members of the Armed Services, Foreign Service officers and the intelligence community.

  4. For homes purchased in 2008, the credit is treated as a no-interest loan. The credit is recaptured over fifteen years beginning the second year after the home is purchased.

  5. For homes purchased in 2009 and 2010, the taxpayer must repay the credit only if the home ceases to be the taxpayer’s main home within the 36 month period beginning on the purchase date.

  6. For more information about claiming the First-Time Homebuyer Credit, see IRM 21.6.3.4.2.11, First-Time Homebuyer Credit.

21.6.4.4.18.1  (04-20-2012)
Recapture of First-Time Homebuyer Credit

  1. For homes purchased in 2008, the First-Time Homebuyer Credit is recaptured over a period of 15 years. The tax imposed is 6 2/3% of the credit taken. The additional tax is reported on Line 59b of Form 1040, U.S. Individual Income Tax Return. The recapture begins with the 2010 tax return.

    Example:

    John purchased a home in 2008 and received a $7500 First-Time Homebuyer Credit (FTHBC). John must report his first repayment of $500 on his 2010 return.

    If a taxpayer does not report the required 6 2/3% recapture amount ($500 when a $7500 credit is taken) on Form 1040, additional tax will be assessed using math error procedures. If the home is disposed of or ceases to be the taxpayer's main home at any time during the 15 years, see IRM 21.6.4.4.18.2, Acceleration of Recapture.

  2. For homes purchased in 2009, 2010 or 2011, the credit does not have to be paid back unless the home is disposed of or ceases to be the taxpayer’s main home within 36 months of the purchase date. See IRM 21.6.4.4.18.2, Acceleration of Recapture.

  3. Command Code (CC) ENMOD and CC IMFOL with definer code F will display the amount of credit taken and the amount of credit recaptured. The recapture amount field starts at zero and increases to the amount of credit taken.

    Note:

    When a joint Form 5405, Repayment of First-Time Homebuyer Credit, is filed, the credit and recapture amount will be split between the primary and secondary taxpayer.

  4. Taxpayers must file Form 5405, Repayment of First-Time Homebuyer Credit, with Part IV completed when repaying the credit on their 2010 return.

  5. Form 5405 is not required to be filed with the 2011 and subsequent returns unless the taxpayer reports a disposition.

  6. Form 5405, Repayment of First-Time Homebuyer Credit, can be viewed using CC TRDBV or CC RTVUE with definer HC.

21.6.4.4.18.2  (03-22-2013)
Acceleration of Recapture

  1. For homes purchased in 2008, if the home is disposed of or ceases to be the taxpayer's main home before the end of the recapture period, taxpayers generally must report all remaining annual installments in the year the event occurred. If the home is sold to an unrelated person, the repayment in the year of sale is limited to the amount of gain on the sale. When figuring the gain, reduce the adjusted basis of the home by the amount of credit.

    Example:

    A taxpayer purchased a home in June 2008, and received a $7,500 credit. The home was sold in 2012 for a $10,000 gain. Since $500 was recaptured on each of the 2010 and 2011 returns, $6,500 would have to be reported on the 2012 return.

    Example:

    Fred purchased a home in September 2008 for $100,000 and received a $7500 FTHBC. He sold the home to an unrelated person in October 2009 for $95,000. The adjusted basis for the home is $92,500 ($100,000 - $7,500). Fred is required to repay $2,500 ($95,000 - $92,500). The remaining $5000 is forgiven.

    Example:

    A taxpayer purchased a home in 2008 and received a $7500 credit. The taxpayer moved in 2010 and continued to own the home until 2011 when it was sold for a loss. Since the intent was to sell the home rather than convert the home to a rental property or some other use, the sale of the home is the disposition. The taxpayer must repay $500 in 2010. In 2011, the taxpayer is subject to accelerated recapture. Since the home was sold for a loss, the remaining $7000 is waived.

  2. For homes purchased in 2009, 2010 or 2011, if the home is disposed of or ceases to be the taxpayer's main home within 36 months of the purchase date, taxpayers generally must repay the credit in the year the event occurred. If the home is sold to an unrelated person, the repayment in the year of sale is limited to the amount of gain on the sale. When figuring the gain, reduce the adjusted basis of the home by the amount of credit.

    Example:

    Sarah purchased a home in 2009 and received a FTHBC of $8,000. She sold the home in 2011 for a gain of $8,500. Sarah must report the entire $8,000 repayment on her 2011 tax return.

    Example:

    David purchased a home in 2009 and received a $6,000 FTHBC. He converted the home to a rental property in 2010. David is required to report the entire $6,000 repayment on his 2010 return.

  3. Dispositions referenced above include:

    • the home was sold

    • the entire home was converted to business or rental property

    • the home was abandoned

    • the lender foreclosed on the mortgage

    • the home is no longer the taxpayer's main home

      Note:

      A gift of a home to a relative or non-relative, including a part-sale / part-gift, triggers full repayment of the credit. The gain limitation does not apply to the taxpayer's repayment liability.

  4. Exceptions to the acceleration rule:

    • Death of a taxpayer - the repayment is waived for the deceased taxpayer

    • Involuntary conversion - taxpayers have 2 years to purchase a new home. See the table below for repayment requirements.

      Transaction Gain on sale No gain on sale
      2008 purchase Year of conversion - installment payment of 1/15 of the lesser of the gain or allowed credit

      1st year after conversion - installment payments (1/15 of the lesser of the gain or allowed credit) continue

      2nd year after conversion -
      1. Replacement home - installment payments (1/15 of the lesser of gain or allowed credit) continue through end of 15 year term

      2. No replacement home - acceleration of lesser of remaining gain or remaining credit amount

      No repayment is required.
      2009, 2010 or 2011 purchase Year of conversion and 1st year after - no repayment requirement

      2nd year after conversion -
      1. Replacement home - no repayment required at this time (must still meet the remainder of the 36 month own and use period)

      2. No replacement home - recapture the lesser of the gain or allowed credit

      No repayment is required

    • Transfers between spouses / divorce - the spouse gaining the home is responsible for any repayment

    • Qualified official extended duty for members of the Armed Services, members of the Foreign Service of the United States, or members of the intelligence community (dispositions or cessations after Dec. 31, 2008 only)

  5. Taxpayers must file Form 5405, Repayment of First-Time Homebuyer Credit, with the appropriate box checked in Part III with their Form 1040, U.S. Individual Income Tax Return.

21.6.4.4.18.3  (06-02-2011)
Systemic Adjustments to the Recapture Amount

  1. When a Form 5405, Repayment of First-Time Homebuyer Credit, is filed with a Form 1040, U.S. Individual Income Tax Return, the taxpayer's account is adjusted during processing. Transaction Code (TC) 971 Action Codes (AC) are systemically generated when the First-Time Homebuyer Credit (FTHBC) and total recapture amounts are moved or eliminated.

    • AC 511 - used to transfer the FTHBC entity and total recapture amount from one account to another

    • AC 512 - used to zero out the FTHBC entity and total recapture amount

  2. The 971 action codes generate with indicators, shown on CC TXMOD as "XREF MFT" , which provide descriptions of the systemic actions taken. See the table below.

    TC 971 Action Code XREF MFT Indicator
    511 00 - used to transfer the FTHBC and total recapture amount from an account to the primary SSN of another account.
    01 - used to transfer the FTHBC and total recapture amount from the primary SSN to the spouse's SSN in the same amount and make the spouse responsible for the entire credit.
    02 - used to transfer the FTHBC and total recapture amount from the spouse's SSN to the primary SSN in the same account. 02 will also be used to zero out the spouse FTHBC and total recapture amount and make the primary responsible for the entire credit.
    03 - used to add the recapture amount to the primary total recapture amount.
    04 - used to add the recapture amount to the spouse's total recapture amount.
    05 - used to indicate the recapture amount was credited to the original account and should generate and post in the same cycle as the return.
    512 00 - used to generate a TC 290 for zero with reference numbers 875 / 876 / 975 / 976 for the credit amount posted in the entity.
    01 - used to generate a TC 290 for zero with reference numbers 875 / 876 for the primary credit amount posted in the entity.
    02 - used to generate a TC 290 for zero with reference numbers 975 / 976 for the secondary credit amount.
    03 - used to generate a TC 290 for zero with reference numbers 875 / 876 / 975 / 976 for the credit amount posted in the entity.
    04 - used to generate a TC 290 for zero with reference numbers 875 / 876 / 975 / 976 for the credit amount posted in the entity.

    Note:

    See IRM 21.6.4.4.18.4, Manually Adjusting the Recapture Amount, for a description of the reference numbers listed above.

  3. When the FTHBC is systemically moved from one spouse to another, a TC 290 will be generated containing all 8s in the blocking series and serial number of the Document Locator Number (DLN).

    Example:

    Brian and Pam, both single taxpayers, purchased a home together in 2009 and split the $8000 FTHBC 50/50 on their individual returns. In 2010, they file a joint return with Brian as the primary taxpayer. The FTHBC entity under Pam's SSN will be systemically moved to Brian's SSN. A TC 290 with all 8s in the blocking series and serial number will be found on Pam's SSN.

  4. When taxpayers claim the FTHBC on a joint return and then file separate returns in later years, the FTHBC entity will not be moved to the spouse. The appropriate tax will be captured on the spouse's account but the update to the FTHBC entity will be reflected on the xref account.

    Exception:

    When a Form 5405 with box 13e checked (transferred the home to my spouse or ex-spouse as part of a divorce settlement) is filed, the entity is moved to the gaining spouse.

21.6.4.4.18.4  (06-04-2013)
Manually Adjusting the Recapture Amount

  1. When manually adjusting the FTHBC recapture amount, specific Reason Codes (RC) must be used with each adjustment. The table below lists the reason codes associated with the recapture.

    Reason Code Description
    109 First-Time Homebuyer Credit (2008)

    Note:

    RC 109 can be used when adjusting tax if no other FTHBC reason codes apply or can be used due to systemic limitations.

    110 First-Time Homebuyer Credit (2009 / 2010)
    112 Requirement to repay the FTHBC waived. This is forgiveness for taxpayers who had a loss when the house was sold, foreclosed, repossessed or abandoned, or who are only required to pay back part of the credit.
    113 Requirement to repay the FTHBC waived. This is forgiveness for taxpayers whose home was destroyed, condemned, or disposed of under threat of condemnation, and had a loss.
    114 Repayment of FTHBC. Systemic use only. This is for taxpayers who converted their home to rental or business use.
    115 FTHBC transferred to spouse. Transfer to spouse requested on Form 5405, First-Time Homebuyer Credit and Repayment of the Credit.
    116 Repayment of the FTHBC waived. This is forgiveness if the primary taxpayer is deceased.
    117 Repayment of the FTHBC waived. This is forgiveness if the secondary taxpayer is deceased.
    118 Requirement to repay the FTHBC waived. This is forgiveness when both taxpayers are deceased.
    119 Repayment of FTHBC. Used when updating the primary entity section.
    120 Repayment of FTHBC. Used when updating the spouse's entity section.

    Note:

    When updating CC IMFOLF, if the current return is other than married filing jointly, use reference number 976 to update the spouse's recapture amount.

    121 Internal use only. Used to adjust the primary FTHBC year.

    Note:

    When adjusting both the primary and secondary year, use RC 000. When the adjustment posts to Masterfile, RC 000 drops off.

    122 Internal use only. Used to adjust the spouse's FTHBC year. See the note in RC 121 above.
    123 Repayment of FTHBC. This updates the joint entity section.
    125 First-Time Homebuyer Credit - This is for the repeat home owners.
    126 First-Time Homebuyer Credit - This is for the military / foreign service / intelligence community.
    127 Requirement to repay the FTHBC waived. This is for members of the military, foreign service or intelligence community.
    132 Updates the FTHBC Recapture field on TXMOD when:
    • Joint First-Time Homebuyer Credit repaid via separate returns

    • Separate credits repaid via joint return

    • Updating TXMOD only (IMFOLF Recapture field is correct)

    Example:

    John and Mary file joint in 2008 and claim the FTHBC. In 2010, they file separate. CC IMFOLF is under John's SSN. To assess Mary a $250 recapture, input RC 132 to adjust Mary's 2010 account. A second adjustment is required under Jonh's SSN to update CC IMFOLF (RC 120).

    133 Repayment of the FTHBC. This is for taxpayers whose home was destroyed, condemned, or disposed of under threat of condemnation, and had a gain. See IRM 21.6.4.4.18.2(4), Acceleration of Recapture.

    Note:

    The entity referred to in this table is CC ENMOD and IMFOLF.

  2. The table below lists the reference numbers associated with the recapture and the reason codes associated with them.

    Note:

    These reference numbers are valid for MFT 30 only.

    Reference Number Description
    875 Adjusts the primary credit amount field. Indicates the primary FTHBC in the entity field was transferred to the spouse or used to correct the primary credit amount. Input for the unpaid recapture amount. You must use one credit RC (109, 110, 125 or 126). The system will allow the input of one additional disposition RC (112 - 118 and 127).

    Note:

    Adjustments to the FTHBC (CRN 258) will update the credit amount field.

    876 Adjusts the primary total recapture amount field in the entity. RC 112 - 118 and 127. Use this when a disposition has occurred and all or part of the recapture amount is being waived.
    877 Adjusts the repayment amount in the posted return section (TXMOD) and the total repayment field in the entity (IMFOLF). Used to update the recapture amount when a repayment has been made. RC 119, 120, 123, 132 and 133

    Note:

    RC 132 can be input with reference number 877 but does not update the recapture amount field. RC 133 requires the input of RC 119, 120 or 123.

    Caution:

    When decreasing the recapture amount, do not exceed the amount reported on the original return or previously adjusted.

    880 Adjusts the year indicator in the entity. Input as .08, .09, .10 or .11 to indicate the year the home was purchased. RC 121 and 122
    975 Adjusts the secondary credit amount field. Indicates the secondary's FTHBC in the entity field was transferred to the primary or used to correct the secondary credit amount. Input for the unpaid recapture amount. You must use one credit RC (109, 110, 125 or 126). The system will allow the input of one additional disposition RC (112 - 118 and 127).

    Note:

    Adjustments to the FTHBC (CRN 258) will update the credit amount field.

    976 Adjusts the spouse's total recapture amount field in the entity. RC 112 - 118, 120 and 127. Use this when a disposition has occurred and all or part of the recapture amount is being waived.

    Caution:

    Since the FTHBC entity can move from one account to another depending on how taxpayers file, always check CC IMFOLF before adjusting any account. If IMFOLF is blank, the FTHBC entity has been moved to the spouse's SSN. If separate returns are later filed to repay the credit, or the joint return was filed under the spouse's SSN, multiple adjustments may need to be input.


    Caution:

    Failure to use the above reference numbers when adjusting the account will result in IMFOLF being incorrect and could cause possible harm to the taxpayer in the future.


    Reminder:

    When considering a recapture issue, in addition to reviewing the entity on IMFOLF, ensure the recapture field on TXMOD is correct.


    Example:

    Jack and Jill file a joint return in 2008 claiming a $7500 FTHBC. In 2010, they file as Married Filing Separate. Since the FTHBC entity is under Jack's SSN, if a recapture needs to be input on Jill's account, two adjustments will be required. A TC 29X with reference number 877 and RC 132 would be used on Jill's account. A TC 290 .00 with reference number 877 and RC 120 will be input on Jack's account.

    Note:

    The above example should be followed any time tax is being adjusted on an account where IMFOLF is blank. RC 132 does not update IMFOLF. Be sure to adjust the xref account to update the IMFOLF data.

  3. When adjusting the recapture amount, the adjustment is generally input on the year the recapture or disposition should have been reported, not the year the credit was claimed. The recapture amount starts at zero and builds up to the amount of credit taken. Annual installments and dispositions are captured in the recapture amount field.

    Example:

    Noah, a single taxpayer, purchased a home in 2008 and received a $7500 FTHBC. He sold the home in 2009 to an unrelated person for a $4000 gain. Noah files an amended return in 2010 to report the sale. CC IMFOLF shows $7500 in the primary credit amount field. When processing the amended return, the adjustment is input on the 2009 tax year using a TC 290 for $4000, RC 112 and 119, reference numbers 877 for $4000 and 876 for $3500.

    Example:

    Joe and Marie purchased a home in 2008 and received a $7500 FTHBC. They sold the home to an unrelated person for a $6000 gain in 2009. CC IMFOLF shows $3750 in the primary credit amount and secondary credit amount fields. When adjusting the account, input the adjustment on 2009 as follows: TC 290 $6000, RC 112 and 123, 877 $6000, 876 $750 and 976 $750.

    Example:

    Jennifer purchased a home in 2008 and received a $7500 FTHBC. She was unable to pay her mortgage and her home was foreclosed on in September, 2009. Jennifer files an amended return in 2010 to report the loss due to foreclosure. When adjusting the account, input the adjustment on 2009 as follows: TC 290 .00, RC 112 and 876 $7500.

    Example:

    David purchased a home in 2009 and received a $6,000 FTHBC. He converted the home to a rental property in 2010. David did not report the disposition on his 2010 return. He later files an amended return to report the disposition. To adjust the account, input a TC 290 $6000, RC 119 and reference number 877 $6,000 on the 2010 tax year.

  4. When reporting a disposition, taxpayers are instructed to file Form 5405 with their original Form 1040 or Form 1040X, no other documentation is required. If an amended return is received and the Form 5405 is not attached, see IRM 21.5.1.5.6, Incomplete CIS Claims. A Form 5405 received without a Form 1040X can be processed if it does not result in a change to tax, or if the form is received in response to a math error notice. If a return was not filed for the period in which the disposition occurred, see IRM 21.5.1.4.4, Processing of Loose Forms or Schedules.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. When transferring the FTHBC from one account to another, the primary account must be zeroed out before the entity field can be established on the cross reference (xref) account. When creating the xref entity field, use the appropriate reason code and reference number 880 to indicate the year the home was purchased. When creating the FTHBC entity, if the recapture amount field needs to be updated, the entity must post first. Use a posting delay code (PDC) 1 with the reference number 877 adjustment.

    Example:

    John and Mary file Married Filing Jointly in 2008 and claim a $7500 First-Time Homebuyer Credit. The couple gets divorced in 2016 and Mary gets the house as part of the divorce settlement. Neither John nor Mary reported the transfer or the recapture on their 2016 return. Mary is now filing an amended return reporting a tax increase of $500. The recapture started with the 2010 tax return so John and Mary have made six payments totaling $3000. The entity field currently reflects a primary and secondary credit amount of $3750 and primary and secondary total recapture amount of $1500. To remove the credit from John’s account, input a TC 290 .00 with reference number 875 and 975 for $2250- ($3750 original credit - $1500 repaid = unpaid recapture amount of $2250), RC 115. On Mary’s account, input a TC 290 $500, reference numbers 875 (since she is now the primary) for $4500, and 880 for .08 (to show the home was purchased in 2008), RCs 109 and 121. Input a second adjustment consisting of a TC 290 .00, 877 for $500 (to show a $500 payment has been made in the entity section), PDC 1.

  6. When a taxpayer files an amended return reporting a disposition e (divorce) on Form 5405 which conflicts with the cross-referenced spouse's disposition e, disallow the claim. See IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures. If the taxpayer responds to the disallowance and clearly shows the cross-referenced spouse continues to have joint ownership of the home, use math error authority to assess the full amount of the spouse's remaining share of the credit.

    Example:

    John reported a divorce on his 2010 return and the FTHBC was transferred to Mary. Mary provided documentation showing John continues to have ownership in the home after the divorce. 1/2 of the credit should be transferred back to John's account. Because John had a disposition of the home in 2010 when it ceased to be his primary residence, use math error procedures to assess John the entire repayment, not just the 1/15 repayment. Mary still lives in the home and is only liable for her annual repayment (if the home was purchased in 2008).

    Example:

    Using the same example above, if neither spouse lives in the home, both taxpayers would be subject to recapture of the entire credit depending on when the home ceased being the principal residence and if the home was sold.

  7. For amended returns claiming the original First-Time Homebuyer Credit after the first installment was due, follow procedures in IRM 21.6.3.4.2.11, First-Time Homebuyer Credit, to allow the credit. After allowing the credit, math error procedures must be used to assess a recapture on any return the taxpayer would have been liable for had the credit been claimed on a timely filed return, unless amended returns were filed to do so.

  8. When the FTHBC entity has been moved to a cross reference account and needs to be updated but no returns have been filed since at least 2008, a TC 290 with the above reference numbers cannot be input. To update these accounts, the entity has to be systemically updated. To trigger the systemic update:

    1. Input CC MFREQD to create a TXMOD for the current processing year.

    2. Input CC REQ77.

    3. Input "971" in the "TC" field.

    4. Input "512" in the "TC971/151-CD" field.

    5. Input the spouse's SSN in the "XREF-TIN" field.

    6. Input the appropriate 2 digit MFT indicator in the "MISC" field. See IRM 21.6.4.4.18.3, Systemic Adjustments to the Recapture Amount. Use MFT 00, 01 or 02 only.


    Once the TC 971 is input, manually move the entity back to the originating SSN and post it as the secondary's entity. When the cross reference taxpayer does file a return, the entity will again be systemically moved.

    Example:

    John and Mary have filed joint since 2008. In 2011 John died so Mary's portion of the entity was transferred to her SSN. Unfortunately the recapture amount on Mary's account is incorrect. To correct her account, input the TC 971 action 512 on Mary's SSN, then update the entity on John's SSN to show the correct amount in the secondary entity field.

  9. Taxpayers can elect to pay the entire recapture amount all at once rather than pay it over the 15 year period. Taxpayers should report this on the Form 5405, Repayment of First-Time Homebuyer Credit, filed with their Form 1040, U.S. Individual Income Tax Return. However, taxpayers may send in a payment rather than reporting the recapture on a return. If this happens, taxpayers must file an amended return for the last return filed. When the amended return is received, assess tax for the amount of repayment using a TC 298, reference number 877 for the same amount and RC 119, 120 or 123. Use the received date as the interest computation date.

    Example:

    Jim filed his 2008 tax return and received a $7,500 FTHBC. He reported $500 recapture on his 2010 and 2011 tax returns. In Oct. 2012, Jim decides to repay the remainder of his credit. He needs to file an amended 2011 tax return, with Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, to report an additional $6,500 in tax.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

21.6.4.4.18.4.1  (10-01-2013)
First-Time Homebuyer Credit Recapture Math Errors

  1. When a taxpayer fails to report a recapture, or reports an incorrect amount, a math error notice will be issued during original processing. One of the following taxpayer notice codes will be assigned:

    • 648 - According to our records a repayment installment for the First-Time Homebuyer Credit received when filling your 2008 tax return is due. This repayment installment should have been claimed as an addition to tax and claimed on the Individual Federal Tax Return, Form 1040. We have calculated the repayment installment due and adjusted your total tax on page 2 of your tax return.

    • 649 - We changed the amount of First-Time Homebuyer Credit Repayment included in the total for total tax on page 2 of your tax return. The error was in: 1. the computation of First-Time Homebuyer Credit Repayment line 16, Form 5405, and/or 2. the addition of the amount from line 16, Form 5405 onto Line 60 of your Form 1040.

  2. The Service has math error authority to assess or abate the 1/15 recapture amount, see IRM 21.5.4.4, Math Error Procedures Processing, for the appropriate actions. If the taxpayer's reported recapture amount is systemically refunded in error, assess up to the amount that was required to be reported. Erroneous refund procedures should not be followed.

  3. The Service also has math error authority to assess or abate a repayment when a disposition has occurred.

    Example:

    A taxpayer reported the home was sold for a $5000 gain but during processing only $1000 was assessed. Math error authority can be used to assess the additional $4000.

  4. If a taxpayer reports a repayment and the original FTHBC claimed on their previous return is later disallowed or reversed, the same math error procedures can be used to correct the repayment.

  5. Math errors may impact more than one tax year. Be sure to perform thorough account research and if needed, address all account issues, not just the taxpayer's issue.

    Example:

    A taxpayer reported a military disposition on his 2011 return. A $500 math error was assessed on his 2012 return. CC IMFOLF currently reflects a $7,500 credit and $1,000 recaptured. To correctly update this account, the recapture math error on 2012 should be reversed and then the disposition on 2011 should be recorded.
    To illustrate, on tax year 2012, input a TC 291 $500-, 877 $500- RC 119. On tax year 2011, input a TC 290 .00, 876 $7,000, RC 127, PDC 1.

21.6.4.4.18.5  (10-01-2013)
Original Returns Claiming the First-Time Homebuyer Credit Filed After the RSED Expired

  1. These procedures are designed to be used by Statute unit employees processing STEX transcripts.

  2. When processing an STEX transcript, review the module to determine if the taxpayer claimed the First-Time Homebuyer Credit (FTHBC).

  3. Since the FTHBC is subject to repayment or recapture, depending on when the home was purchased, the account must be reviewed in order to determine if the taxpayer benefited from the credit, and if so, how much. Any portion of the credit that did not benefit the taxpayer must be disallowed.

  4. To determine if the taxpayer benefited from the FTHBC, take the following steps:

    1. Review CC TXMOD or IMFOLT to see how much credit the taxpayer was allowed. The credit can be identified by a TC 766, reference number 258.

    2. Determine the total tax shown on the module. Combine the TC 150 with any TC 290 or 291.

    3. Subtract any refundable credit from the total tax.

      Note:

      Refundable credits are applied in the order shown on the Form 1040.

      Example:

      For tax year 2008, the order of credits is withholding, ES payments / credit elect, EIC, excess social security, ACTC, extension payment, credits from Form 2439 / 4136 / 8801 / 8885, FTHBC and RRC.

  5. If the tax is paid prior to applying the FTHBC, the taxpayer did not benefit from the credit and the entire credit is disallowed.

  6. If the tax is not paid prior to applying the FTHBC, the taxpayer did benefit from the credit and a portion of the credit may be disallowed.

    Example:

    The total tax on the module is $5000, withholding $2000 and FTHBC $7500. After subtracting the withholding from the tax, $3000 of the FTHBC is applied to the tax. The taxpayer has a $3000 benefit. $4500 would be disallowed.

  7. To disallow the credit:

    • Input a TC 290 .00

    • Input a RC 109 (for a 2008 purchase) or RC 110 (for a 2009 or later purchase)

    • Input reference number 258 (negative) for the amount of the credit being disallowed

    • Input blocking series 05, source code 2, hold code 2 and posting delay code 1

    • Include language in the 105c letter regarding the amount of credit disallowed.

      Example:

      Partial disallowance- Since $2,500 of the $7,500 First-Time Homebuyer Credit claimed was applied to the tax reported on your return, we have disallowed the $5,000 that could not be refunded you. Your annual repayment is 1/15 of the $2,500.

21.6.4.4.18.6  (10-01-2013)
First-Time Homebuyer Credit Soft Notices and Web Tool

  1. Soft notices were developed to educate taxpayers about their FTHBC repayment responsibilities. The notices were sent August - December of 2010, just in time for the upcoming filing season. The soft notices were:

    • CP 03a, Repaying your First-Time Homebuyer Credit, sent to taxpayers who purchased a home in 2008. The notice explains the credit is like an interest free loan and has to be repaid over 15 years.

    • CP 03b, Important information for your records, sent to taxpayers who purchased a home in 2009 or 2010. The notice informs taxpayers their credit does not have to be repaid as long as the home is not disposed of or does not cease to be the taxpayer's main home for at least 3 years from the purchase date.

    • CP 03c, Important message about your First-Time Homebuyer Credit, sent to taxpayers when our records indicate a change to their property (converted to a rental or business use, sold, destroyed or condemned).

    Note:

    CP 03a and CP 03b were made obsolete in 2011.

  2. For inquiries about these notices:

    If And Then
    Taxpayer's contact is in regards to CP 03c Needs clarification of tax law Refer to Form 5405 Instructions, Publication 523 or Publication 17, as appropriate.
    Agrees with the notice
    • Advise the taxpayer to report the disposition on his / her 2010 Form 1040

    • Tell the taxpayer how to complete Form 5405, First-Time Homebuyer Credit and Repayment of the Credit

    Disagrees with the notice Advise the taxpayer no action is required on their part at this time but the IRS may contact them at a later date and they can provide additional information at that time.

  3. If a notice is returned as undelivered:

    • research IDRS for a better address or use the yellow address change sticker provided by the U.S. Postal Service

    • compare the yellow label entity to the name on Command Code ENMOD or IMFOLE to verify it is the same taxpayer

    • remail the notice if you have a more current address

    • include a Form 8822, Change of Address, with the mailing

    • destroy as classified waste if a better address is not found

  4. Effective January, 2012, a new web tool called the First-Time Homebuyer Credit Account Look-up is available on the IRS web site. The tool replaces the need to issue the CP 03a and CP 03b.

  5. The web application provides account information that will assist taxpayers to accurately self report their FTHBC repayment obligations on their tax returns.

  6. Taxpayers are required to self authenticate to access their account information. Self authentication consists of inputting their SSN, date of birth and complete address.

  7. The account information screen will display the last 4 digits of the taxpayer's SSN, original credit amount, annual repayment amount, total amount paid and the total balance left to be paid.

  8. Taxpayers are directed to contact the Service by calling 800-919-0352 if the following occurs:

    If Then
    Authentication Failure Research the account(s) and provide the requested data.
    No Data / Duplicate Record Research the primary and secondary SSN and provide the requested data. If a duplicate condition exists on CC IMFOLF, correct the duplicate condition. See IRM 21.6.4.4.18.4, Manually Adjusting the Recapture Amount, for the appropriate RC and reference numbers to use.

    Example:

    The FTHBC was originally claimed on a joint return. The primary taxpayer is deceased. CC IMFOLF on the primary SSN shows the a $7500 credit split 50/50 between the husband and wife. The primary recapture amount is $3750, the secondary recapture amount is $250. On the wife's SSN, CC IMFOLF shows a primary credit of $3750 and a $250 recapture. The secondary credit and recapture amount on the primary account (the deceased taxpayer's SSN) should be zeroed out to correct the duplicate condition.

    Technical Difficulties / System Unavailable Research the account(s) and provide the requested data.

21.6.4.4.19  (10-01-2013)
Additional Medicare Tax

  1. The Affordable Care Act added an Additional Medicare Tax (AdMT) for tax years 2013 and subsequent. The 0.9% tax applies to income subject to the Federal Insurance Contributions Act (FICA), the Railroad Retirement Tax Act (RRTA) and/or the Self-Employment Contributions Act (SECA).

  2. The 0.9% tax applies to individuals' wages (which includes Form 4137, Social Security and Medicare Tax on Unreported Tip Income, and Form 8919, Uncollected Social Security and Medicare Tax on Wages), RRTA compensation and self-employment income above a threshold based on their filing status. Unlike traditional Medicare tax, AdMT is only imposed on earnings that exceed a certain threshold and employers only withhold AdMT on wages that exceed $200,000.

  3. A taxpayer is subject to AdMT on any wages, self-employment income and RRTA compensation above the following thresholds:

    • Married Filing Jointly - $250,000

    • Married Filing Separately - $125,000

    • All other filing statuses - $200,000

  4. AdMT is calculated on Form 8959, Additional Medicare Tax, and is carried over to the "Other Taxes" section of Form 1040.

  5. Form 8959, Additional Medicare Tax, is broken down into 5 parts:

    • Part I - Additional Medicare Tax on Medicare Wages

    • Part II - Additional Medicare Tax on Self-Employment Income

    • Part III - Additional Medicare Tax on Railroad Retirement Tax Act (RRTA) Compensation

    • Part IV - Total Additional Medicare Tax

    • Part V - Withholding Reconciliation

  6. Although AdMT is figured separately for each type of income, the threshold amount for self-employment income in Part II is reduced by the total wages in Part I (but not below zero), which results in the total wage and self-employment income being subject to the 0.9% AdMT. However, the threshold for railroad retirement compensation is not reduced by other income, which can result in a taxpayer with total earnings that are over the threshold but not subject to the 0.9% tax.

    Example:

    J and K are married and file jointly. J has $190,000 in wages subject to Medicare tax and K has $150,000 in compensation subject to RRTA taxes. J and K do not combine their wages and RRTA compensation to determine whether they are in excess of the $250,000 threshold for a joint return. J and K are not liable to pay AdMT because J's wages are not in excess of the $250,000 threshold and K's RRTA compensation is not in excess of the $250,000 threshold.

  7. Additional Medicare Tax withheld from wages will be reported on Form W-2, box 6. Additional Medicare Tax withheld from RRTA compensation will be reported in box 14. These amounts will be carried to Form 8959 and included with the federal income tax withholding on Form 1040.

  8. Before adjusting AdMT, verify the Additional Medicare Tax posted in the "SSA AdMT" and "RRB AdMT" fields on Command Code (CC) TXMOD or IMFOLR.

    Note:

    The "SSA AdMT" field combines lines 7 and 13 of Form 8959, the "RRB AdMT" field is line 17 only.

  9. To adjust AdMT:

    • Input a Transaction Code 29X for the tax amount

    • Input Item Reference Number 863 to update the "SSA AdMT" amount

    • Input Item Reference Number 864 to update the "RRB AdMT" amount

    • Input Credit Reference Number 806 for the additional Medicare tax withholding

    • Input Reason Code 136.




    Reference: PL 111-148

21.6.4.4.20  (10-01-2013)
Net Investment Income Tax

  1. The Health Care and Education Reconciliation Act of 2010 (PL 111-152) added a Net Investment Income Tax (NIIT) under section 1411 of the Internal Revenue Code for tax years 2013 and subsequent. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts. Although section 1411 falls with Chapter 2A of the Code, entitled "Unearned Income Medicare Contribution" , the tax is not a payroll tax.

  2. In general, net investment income includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities and income from businesses in which the taxpayer is not an active participant. Investment expenses, such as brokerage fees and rental property expenses, related to the net investment income are allowed. IRA distributions and employer pension annuities are not subject to the tax.

  3. Some common types of income that are not net investment income include wages, unemployment compensation, self-employment income, Social Security Benefits, alimony, tax-exempt interest, operating income from a non-passive business, IRAs and distributions from certain Qualified Plans.

  4. The 3.8% tax applies when taxpayers have investment income and also have modified adjusted gross income (MAGI) above the following thresholds:

    • Single / Head of Household - $200,000

    • Married Filing Jointly / Qualifying Widow(er) - $250,000

    • Married Filing Separately - $125,000

  5. Non-resident aliens (NRA) are not subject to the Net Investment Income Tax. However, if a NRA is married to a U.S. citizen or resident and has made, or is planning to make, an election under IRC section 6013(g) to be treated as a resident alien for purposes of filing as Married Filing Jointly, the regulations provide these couples special rules and a corresponding IRC section 6013(g) election for NIIT.

  6. The 3.8% tax is assessed on the lesser of the net investment income or the excess amount (if any) of MAGI over the threshold amount.

    Example:

    A single taxpayer has wages of $180,000 and $15,000 of interest and dividends. The taxpayer’s MAGI of $195,000 is less than the $200,000 threshold, thus no NIIT is due.

    Example:

    A single taxpayer has wages of $180,000 and received $90,000 from a passive partnership interest, which is considered net investment income. The taxpayer’s total income is $270,000. The taxpayer’s total income exceeds the threshold of $200,000 by $70,000. Since the Net Investment Income Tax is based on the lesser of $70,000 or $90,000, the taxpayer owes NIIT of $2,660 ($70,000 X 3.8%).

  7. Net investment income and net investment income tax are reported on Form 8960, Net Investment Income Tax – Individuals, Estates and Trusts. Tax from Form 8960 is carried over to the “Other Taxes” section of Form 1040.

  8. Before adjusting NIIT, verify the net investment income and the net investment income tax posted in the “NI Income” and “NI Income Tax” fields on Command Code (CC) TXMOD or IMFOLR.

    Note:

    The “NI Income” field is the lesser of the net investment income or the excess of MAGI over the applicable filing status threshold amount.

  9. The amount of income which is subject to the Net Investment Income Tax is captured on line 16 and net investment income tax is captured on line 17 of Form 8960.

    Note:

    If the income amount cannot be determined, divide the NIIT tax amount by .038.

  10. To adjust NIIT:

    • Input a Transaction Code 29X for the tax amount

    • Input Item Reference Number 861 to update the NIIT income amount

    • Input Item Reference Number 862 to update the NIIT tax amount

    • Input Reason Code 137


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