21.6.4  Tax Computation / Accounting Period Changes

Manual Transmittal

September 02, 2014

Purpose

(1) This transmits a revised IRM 21.6.4, Individual Tax Returns, Tax Computation / Accounting Period Changes.

Material Changes

(1) Various editorial updates throughout the IRM.

(2) IRM 21.6.4.1 - added additional topics covered by this IRM.

(3) IRM 21.6.4.4.1.3 - add link to IRM 21.5.3-2 for CAT-A criteria related to itemized deductions.

(4) IRM 21.6.4.4.1.6 - added interest paid to IRS in (2).

(5) IPU 14U0644 issued 04-07-2014 IRM 21.6.4.4.1.7 - added Public Law 113-92 for charitable contributions for Typhoon Haiyan.

(6) IRM 21.6.4.4.1.10 - deleted information related to the Kansas Disaster area of May 2007, here and throughout.

(7) IRM 21.6.4.4.1.11 - added Examination criteria, when Form 2106 is required and a link to Pub. 529, Miscellaneous Deductions.

(8) IRM 21.6.4.4.1.12 - added link to Pub. 529, Miscellaneous Deductions.

(9) IRM 21.6.4.4.1.13 - added 2014 itemized deduction phase out.

(10) IRM 21.6.4.4.2 - deleted standard deduction information for tax years 2008 and 2009 and added 2014.

(11) IRM 21.6.4.4.7 - removed reference to one-time exclusion.

(12) IRM 21.6.4.4.8 - added tax year 2014 wage amount here and in subsequent subsections.

(13) IRM 21.6.4.4.8.1 - added a note to (2) saying to contact Entity if the taxpayer doesn't have an Employer Identification Number.

(14) IPU 14U0644 issued 04-07-2014 IRM 21.6.4.4.8.5 - added caution that Additional Medicare Tax adjustments have to be input separately.

(15) IRM 21.6.4.4.8.5.1 - added an additional check to FICA claims.

(16) IPU 14U0644 issued 04-07-2014 IRM 21.6.4.4.8.10 - updated the If/And/Then table by replacing "Line 25" with the actual question from Schedule. H.

(17) IRM 21.6.4.4.8.11 - added Discriminate Information Function score procedures to (1).

(18) IRM 21.6.4.4.8.13 - updated (5) linking to IRM 21.6.4.4.8.5 to show the Individual Master File reference numbers.

(19) IRM 21.6.4.4.9 - added 2014 base year and deleted note in (6) regarding Alternative Minimum Tax in tax years prior to 2004.

(20) IPU 14U0086 issued 01-10-2014 IRM 21.6.4.4.9.3 - Added Pigford II claims.

(21) IPU 13U1601 issued 10-31-2013 IRM 21.6.4.4.10.1 - Added to (2)(b) to update the entity to add minor "if the child is still a minor" .

(22) IPU 14U0086 issued 01-10-2014 IRM 21.6.4.4.10 - Changed title of Form 8615 to Tax for Certain Children Who Have Unearned Income throughout the sub-section, updated dollar amount to $2,000, and added new (6) saying child may be liable for Net Investment Income Tax.

(23) IRM 21.6.4.4.12 - added 2014 Alternative Minimum Tax amounts.

(24) IRM 21.6.4.4.14.5 - deleted references to Schedule U here and in subsequent sections.

(25) IPU 14U0086 issued 01-10-2014 IRM 21.6.4.4.18.4 - Added note to reason code 112 saying reason code 112 can be used when no other reason code works and added caution saying to send a correspondex letter if the reason code used will not provide the taxpayer with a clear understanding of the action taken.

(26) IRM 21.6.4.4.18.4 (5) - updated FTHBC disposition E (divorce) procedures to move the entire credit and repayment amounts to gaining spouse instead of the remaining amounts.

(27) IPU 14U0547 issued 03-24-2014 IRM 21.6.4.4.18.4 - clarified conflicting dispositions due to divorce in (6).

(28) IRM 21.6.4.4.18.4 - clarified math error responses in (4) and added new (10) addressing statute year dispositions.

(29) IPU 14U0086 issued 01-10-2014 IRM 21.6.4.4.18.4.1 - Added new (3) addressing math errors for a missing Form 5405 reporting a disposition.

(30) IPU 14U0547 issued 03-24-2014 IRM 21.6.4.4.18.4.1 - added new (7) addressing math error responses with divorce papers.

(31) IPU 14U0644 issued 04-07-2014 IRM 21.6.4.4.19 - added caution that Additional Medicare Tax adjustments have to be input separately.

(32) IRM 21.6.4.4.20 - added clarification to Net Investment Income Tax and caution about adjustments.

Effect on Other Documents

IRM 21.6.4 dated Oct. 1, 2013, is superseded. This IRM also incorporates the following IRM Procedure Updates (IPUs): 13U1601 (dated 10-31-2013), 14U0086 (dated 01-10-2014), 14U0547 (dated 03-24-2014) and 14U0644 (dated 04-07-2014).

Audience

All employees performing account/tax law work related to tax computation

Effective Date

(10-01-2014)

Signed by
James P. Clifford
Director, Accounts Management
Wage and Investment Division

21.6.4.1  (10-01-2014)
Tax Computation/Accounting Period Changes Overview

  1. This section provides information on computing tax and determining deductions allowed before the tax is computed. The following subjects are covered in this chapter:

    • Itemized and Standard Deductions

    • Tax Computation

    • Capital Gains

    • Schedule H, Household Employment Taxes

    • Farmers and Fishermen

    • Tax on Children

    • Parents Election to Report Child's Income

    • Alternative Minimum Tax

    • Self-Employment Income and Tax

    • Accounting Period Changes

    • First-Time Homebuyer Credit Recapture

    • Additional Medicare Tax

    • Net Investment Income Tax

21.6.4.2  (10-01-2013)
What Are Tax Computation and Accounting Period Changes

  1. Various schedules/forms are used in computing tax. The schedules/forms and their purposes covered in this section are:

    • Schedule A, Itemized Deductions

    • Schedule D, Capital Gains and Losses

    • Schedule H, Household Employment Taxes

    • Schedule J, Income Averaging for Farmers and Fishermen

    • Schedule L, Standard Deduction for Certain Filers

    • Form 8615, Tax for Certain Children Who Have Unearned Income

    • Form 8814, Parents' Election to Report Child's Interest and Dividends

    • Form 6251, Alternative Minimum Tax - Individuals

    • Schedule SE, Self-Employment Tax

    • Form 4137, Social Security and Medicare Tax on Unreported Tip Income

    • Form 8919, Uncollected Social Security and Medicare Tax on Wages

    • Form 1128, Application to Adopt, Change, or Retain a Tax Year

    • Form 5405, First-Time Homebuyer Credit and Repayment of the Credit

    • Form 8959, Additional Medicare Tax

    • Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts

21.6.4.3  (10-01-2009)
Tax Computation/Accounting Period Changes Research

  1. Refer to IRM 21.5.1, General Adjustments, IRM 21.5.2, Adjustment Guidelines, and each topic in this section for research requirements.

  2. Refer taxpayers to the Taxpayer Advocate Service (TAS) when the contact meets TAS criteria (IRM 13.1.7, Taxpayer Advocate Service (TAS) Case Criteria) and you can't resolve the taxpayer's issue the same day. The definition of "same day" is within 24 hours. "Same day" cases include cases you can completely resolve in 24 hours, as well as cases in which you have taken steps within 24 hours to begin resolving the taxpayer's issue. Do not refer these cases to TAS unless they meet TAS criteria and the taxpayer asks to be transferred to TAS. When referring cases to TAS, use Form 911, Request for Taxpayer Advocate Service Assistance (and Application for Taxpayer Assistance Order), and forward to TAS in accordance with your local procedures.

21.6.4.4  (02-08-2013)
Working Tax Computation/Accounting Period Changes

  1. This section contains procedures for computing tax and for accounting period changes.

  2. Refer to IRM 21.5.1, General Adjustments, IRM 21.5.2, Adjustment Guidelines, IRM 21.5.3, General Claims Procedures, for specific guidance on adjustment input and claim processing.

  3. If a fraudulent claim is identified that does not have an existing treatment stream, see IRM 21.5.3–7, Fraud Referral Claims.

21.6.4.4.1  (10-01-2013)
Itemized and Standard Deductions

  1. The taxpayer may claim Schedule A, Itemized Deductions, as limited, or the standard deduction, whichever is larger, on Form 1040, U.S. Individual Income Tax Return.

  2. Taxpayers must file Schedule A when the filing status is married filing separately and their spouse itemizes.

21.6.4.4.1.1  (10-01-2008)
Procedures for Schedule A Itemized Deductions

  1. This section provides procedures for checking Schedule A, Itemized Deductions. Schedule A changes affect the taxable income amount.

    Note:

    Do not decrease taxable income below zero. This causes an unpostable 189 condition. See IRM 21.5.5, Unpostables, for additional information on unpostables.

    1. Math verify the Schedule A.

    2. Input the appropriate increase or decrease.

    3. Use Reason Code (RC) 076, the appropriate Blocking Series (BS) and Source Code (SC).

  2. Update the Return Processable Date (RPD) if the Schedule A is a late reply to a "U" coded return. The RPD is the received date of the Schedule A.

  3. Refer to IRM 21.5.1.4.2.10, Late Replies, for more information.

21.6.4.4.1.2  (10-01-2003)
Information on Itemized Deductions Required Research

  1. Determine if itemized deductions are permissible. The following states do not permit taxpayers to itemize deductions on the state return unless they itemize on the federal return.

    • Georgia

    • Kansas

    • Maine

    • Maryland

    • Missouri

    • Nebraska

    • New York

    • North Dakota

    • Oklahoma

    • Rhode Island

    • Virginia

  2. Idaho requires taxpayers to itemize if excluding income from:

    • Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa

    • Form 2555, Foreign Earned Income

21.6.4.4.1.3  (10-01-2014)
Schedule A Itemized Deductions

  1. Schedule A, Itemized Deductions, must be attached to Form 1040, U.S. Individual Income Tax Return, if the taxpayer itemizes deductions, or Form 1040X, Amended U.S. Individual Income Tax Return, if the taxpayer is amending the return and Schedule A was not previously filed with the original return. Schedule A is divided into eight sections.

    • Medical and Dental Expenses

    • Taxes You Paid

    • Interest You Paid

    • Gifts to Charity

    • Casualty and Theft Losses

    • Job Expenses and Certain Miscellaneous Deductions

    • Other Miscellaneous Deductions

    • Total Itemized Deductions

  2. When correcting a previously filed Schedule A, taxpayers are advised to attach a corrected Schedule A in the Form 1040X instructions. Do not reject the claim for a missing Schedule A unless you are unable to verify the change.

  3. See IRM 21.5.3–2, Examination Criteria (CAT-A) — General, for specific CAT-A criteria related to itemized deductions.

21.6.4.4.1.4  (01-03-2013)
Medical and Dental Expenses

  1. An individual reports medical and dental expenses on Schedule A, Itemized Deductions. For tax years prior to 2013, an individual can deduct medical and dental expenses to the extent the expenses exceed 7.5% of the Adjusted Gross Income (AGI).

  2. Effective tax year 2013, the threshold for a medical and dental expense deduction increased to 10% of the AGI. However, an individual is temporarily exempt from the increase through 2016 if the individual or individual's spouse is age 65 or older by the end of the year.

  3. See Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit), for deductible expenses.

21.6.4.4.1.5  (02-08-2013)
Taxes and Fees-Deductible and Nondeductible

  1. The following taxes paid are deductible:

    • Income taxes—state, local, or foreign
      Taxpayers are allowed to deduct state and local sales tax in lieu of state and local income tax for tax years 2004 - 2013.

    • Real property taxes—state, local, and foreign

    • Personal property taxes—state and local

    • Taxes paid as an expense of carrying on a trade or business or an income producing activity - state, local, and foreign

    • Generation Skipping Transfer ("GST" ) tax imposed on income distributions

    • Environmental tax imposed by IRC § 59A

    • Excess profits and war profits taxes - state, local, and foreign

  2. Taxes and fees cannot be deducted unless they fall into one of the specifically allowable categories stated above. Nondeductible taxes and fees include, but are not limited to:

    • Federal income taxes

    • Social security taxes

    • Estate, inheritance, legacy, or succession taxes

    • Fines (e.g., parking and speeding)

    • Tax on gasoline, car inspection fees, etc.

    • Gift taxes

    • License fees for personal purposes (e.g., marriage, driver's, dog, etc.)

21.6.4.4.1.6  (10-01-2014)
Deductible and Nondeductible Interest Paid

  1. The types of deductible interest are:

    • Home mortgage interest on up to two residences.

    • Points paid for a home. Points may be reported on Form 1098, Mortgage Interest Statement, but not all points reported on Form 1098 are deductible. Additional information can be found at Tax Topic 504 - Home Mortgage Points

    • Home refinancing interest and home equity loan interest is restricted. Refer to Publication 17, Your Federal Income Tax for Individuals, and Publication 936, Home Mortgage Interest Deduction, for details.

    • Qualified mortgage insurance premiums you paid under a mortgage insurance contract issued after December 31, 2006, in connection with home acquisition debt that was secured by your first or second home. Premiums must have been paid or accrued on or before Dec. 31, 2013.

    • Investment interest—limited to the amount of net investment income, Form 4952, Investment Interest Expense Deduction, may be required.

    • Periodic rental payments on a redeemable ground rent.

  2. The following types of interest are NOT deductible:

    • Points—if you are a seller paying points for the benefit of the buyer

    • Non-redeemable ground rent

    • Service charges

    • Annual fees for credit cards

    • Loan fees

    • Credit investigation fees

    • Interest relating to tax-exempt income

    • Interest to purchase or carry certain straddle positions

    • Finance charges on personal credit cards and interest on personal car loans

    • Interest paid to IRS

21.6.4.4.1.7  (04-07-2014)
Gifts to Charity

  1. A charitable contribution is only deductible if it:

    • Is a donation or gift to, or for the use of, a qualified organization.

    • Is voluntarily made without receiving, or expecting to receive, anything of equal or greater value in return. If something of value is received in return and is of lesser value than the amount given to charity, a deduction may be allowed for the excess of the amount given over the value of what was received.

    • Is properly substantiated. For any cash donation made, taxpayers must obtain and keep either a bank record showing the name of the charity, the date and amount of the contribution (including, for example, a cancelled check), or a receipt from the charity showing the name of the charity, the date and amount of the contribution. For cash or non-cash gifts of $250 or more, taxpayers must obtain a written acknowledgement on or before the earlier of the date the return is filed or the due date.

    • Does not exceed the percentage limitations specified in IRC § 170(b).

    • Meets all other charitable contribution requirements.

  2. PL 113-92 allows taxpayers who made cash contributions for relief of victims of Typhoon Haiyan in the Philippines, to claim a tax deduction for their contribution on their 2013 return instead of their 2014 return. To qualify, the contribution must have:

    • Been made after March 25, 2014 and before April 15, 2014

    • Been a contribution made for the relief of victims in areas affected by Typhoon Haiyan

    • Been made by text message, cash, check, credit card or debit card


    Taxpayers must keep a record of any donation made.

    • For donations by text message, a telephone bill will meet the record requirement if it shows the name of the organization, the date and the amount of the contribution.

    • For cash contributions, a bank record (such as a cancelled check) or a receipt from the charity showing the name of the charity, the date and the amount of the contribution will meet this requirement.

  3. PL 111-126 allows taxpayers who made cash contributions to charities providing earthquake relief in Haiti, to claim a tax deduction for the contribution on their 2009 tax return instead of their 2010 tax return. To qualify, the contribution must have:

    • Been made after January 11, 2010, and before March 1, 2010

    • Benefited victims in areas affected by the earthquake in Haiti on January 12, 2010

    • Be made by text message, cash, check, credit card or debit card

    Taxpayers must keep a record of any donation made.

    • For donations by text message, a telephone bill will meet the record requirement if it shows the name of the organization, the date and the amount of the contribution.

    • For cash contributions, a bank record (such as a cancelled check) or a receipt from the charity showing the name of the charity, the date and the amount of the contribution will meet this requirement.

  4. See Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas, for additional information on relief provisions enacted by KETRA and the GO Zone legislation. See Publication 526, Charitable Contributions, for more information on reporting and claiming charitable contribution deductions.

21.6.4.4.1.8  (10-01-2011)
Non-Cash Charitable Contributions

  1. The substantiation requirements for non-cash charitable contributions were increased by the American Jobs Creation Act of 2004 (PL 108-357) and the Pension Protection Act of 2006 (PL 109-280).

  2. For non-cash charitable contributions over $500, taxpayers must complete and submit Section A of Form 8283, Noncash Charitable Contributions.

  3. For non-cash charitable contributions over $5,000, taxpayers generally must obtain a qualified appraisal and must complete Section B of Form 8283. Except for contributions of publicly traded securities and certain other readily valued property, the Declaration of Appraiser (Part III) must be signed by the appraiser, and the Donee Acknowledgement (Part IV) must be completed and signed. The appraisal date must NOT be:

    • Earlier than 60 days before the date of the contribution of the property, or

    • Later than the due date of the return, including extensions, unless the deduction is first claimed on an amended return, in which case the appraisal date must not be later then the date the amended return is filed. See Treas. Reg. § 1.170A-13(c)(3)(i)(A).

  4. For contributions over $500,000, a qualified appraisal must be attached to the return. See IRC § 170 (f)(11)(D).

  5. Taxpayer inquiries may be received regarding balances due and disallowance notices relating to missing or incomplete Forms 8283, Noncash Charitable Contributions. The following procedures should be followed:

    1. Determine the reason for issuance of the notice.

    2. Inform the taxpayer the issue will be given further consideration if the IRS receives an accurately and fully completed Form 8283, Noncash Charitable Contributions, within 90 days of the request.

      Exception:

      If a deduction over $5,000 is disallowed because the appraisal was not completed within the time frames stated in (3) above, receipt of a Form 8283 within 90 days will not be sufficient to allow the deduction.

    3. Recompute the tax if a properly completed Form 8283 is received.

21.6.4.4.1.9  (10-01-2012)
Standard Mileage Rate for Charitable Services

  1. For tax years 2005 through 2013, the standard mileage rate for use of the taxpayer's car in providing services to a charitable organization is 14 cents per mile.

  2. See Publication 526, Charitable Contributions, for more information on reporting and claiming standard mileage rates for charitable services.

21.6.4.4.1.10  (10-01-2014)
Casualty and Theft Losses

  1. A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual, such as a fire, shipwreck or storm, not compensated for by insurance or otherwise. Taxpayers must file Form 4684, Casualties and Thefts, to support the deduction.

  2. A theft is the unlawful taking and removing of property or money with the intent to deprive the owner of it. The loss is allowable to the extent not compensated for by insurance or otherwise; the loss must be supported by Form 4684.

  3. Taxpayers filing or amending tax returns with additional casualty and theft losses must complete Form 4684 following normal procedures.

  4. See Publication 547, Casualties, Disasters, and Thefts; and Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) for additional information.

21.6.4.4.1.11  (10-01-2014)
Job Expenses and Other Miscellaneous Itemized Deductions Subject to 2% Floor

  1. Certain expenses (e.g., unreimbursed employee expenses) can be claimed as miscellaneous itemized deductions on lines 21–23 of Schedule A, Form 1040, and are deductible to the extent that such expenses exceed 2% of AGI. Attach Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, if required.

  2. Credit card convenience fees related to the payment of tax can be deducted on Schedule A, line 23.

  3. Added expenses from Form 2106 resulting in a decrease in total tax of ≡ ≡ ≡ ≡ ≡ ≡ or more, route to Examination as CAT-A.

  4. Form 2106 is required for unexplained, new or existing changes of ≡ ≡ ≡ ≡ ≡ ≡ . If Line 21 of Schedule A has an entry and there is an indication it is from travel, transportation, meal, or entertainment expenses, Form 2106 is required.

  5. See Pub 529, Miscellaneous Deductions, for more information about miscellaneous deductions subject to the 2% limitation.

21.6.4.4.1.12  (10-01-2014)
Other Itemized Deductions Not Subject to 2% Reduction

  1. Some other expenses that are miscellaneous deductions are not subject to the 2% limit. These expenses include, but are not limited to:

    • Gambling losses (to the extent of gambling winnings)

    • Impairment-related work expenses of a disabled individual

  2. See Pub 529, Miscellaneous Deductions, for more information about miscellaneous deductions not subject to the 2% limitation.

21.6.4.4.1.13  (10-01-2014)
Limitation on Itemized Deductions

  1. There may be an overall limitation on itemized deductions which applies to individuals whose income from line 38 (AGI) of the Form 1040 , U.S. Individual Income Tax Return, exceeds the amounts listed below. These taxpayers must reduce the amount of their otherwise allowable itemized deductions by the lesser of:

    • 3% of the excess of AGI over the applicable amount, or

    • 80% of the amount of otherwise allowable itemized deductions


    SCHEDULE A Phase-Out
    FILING
    STATUS
    2014 2013 2010, 2011 and 2012
    Married Filing Joint or Qualifying Widow(er) $305,050 $300,000 No limitation
    Head of Household $279,650 $275,000 No limitation
    Single $254,200 $250,000 No limitation
    Married Filing Separate $152,525 $150,000 No limitation

    Note:

    When determining the overall limitation, the term itemized deduction does not include the deduction under:

    IRC Section Deduction For
    IRC § 213 Medical Expenses
    IRC § 163(d) Investment Interest
    IRC § 165(a),
    IRC § 165(c)(2) or (3)
    Casualty or Theft Losses from property held for investment or personal use
    IRC § 165(d) Gambling losses to the extent of gambling winnings

21.6.4.4.2  (10-01-2014)
Standard Deduction

  1. The amount of standard deduction depends on the year of the return and taxpayer's filing status.

  2. A taxpayer and/or spouse who is over 65 (for tax year 2014, born before January 2, 1950) and/or blind is entitled to a higher standard deduction. The taxpayer checks a box on the Form 1040 to indicate the reason for the additional standard deduction(s). Refer to the table below to determine the correct standard deduction amount.

    Note:

    Certain individuals are not eligible to claim the Standard Deduction. See Form 1040 instructions for additional information.

    FILING STATUS for # of Boxes Checked The Standard Deduction for 2014 is The Standard Deduction for 2013 is The Standard Deduction for 2012 is The Standard Deduction for 2011 is
    SINGLE 0 6,200 6,100 5,950 5,800
    1 7,750 7,600 7,400 7,250
    2 9,300 9,100 8,850 8,700
    MARRIED FILING JOINTLY 0 12,400 12,200 11,900 11,600
    1 13,600 13,400 13,050 12,750
    2 14,800 14,600 14,200 13,900
    3 16,000 15,800 15,350 15,050
    4 17,200 17,000 16,500 16,200
    MARRIED FILING SEPARATE 0 6,200 6,100 5,950 5,800
    1 7,400 7,300 7,100 6,950
    2 8,600 8,500 8,250 8,100
    3 9,800 9,700 9,400 9,250
    4 11,000 10,900 10,550 10,400
    HEAD OF HOUSEHOLD 0 9,100 8,950 8,700 8,500
    1 10,650 10,450 10,150 9,950
    2 12,200 11,950 11,600 11,400

21.6.4.4.3  (10-01-2010)
Tax Computation

  1. Compute tax on the taxable income.

    1. Use the Tax Table to compute tax on taxable income under $100,000.

    2. Use the Tax Computation Worksheet to compute tax on taxable income of $100,000 or over.

  2. Consider the following when computing tax:

    • Schedule D, Capital Gains and Losses

    • Schedule D, Tax Worksheet

    • Qualified Dividends and Capital Gain Tax Worksheet

    • Form 8615, Tax for Certain Children Who Have Unearned Income

    • Form 8814, Parents' Election to Report Child's Interest and Dividends

    • Form 6251, Alternative Minimum Tax—Individuals

    • Schedule J, Income Averaging for Farmers and Fishermen

    • Foreign Earned Income Tax Worksheet

    • Tax Computation Worksheet for Certain Dependents

    • Form 4972, Tax on Lump Sum Distributions

  3. Self-Employment Tax rules usually apply if taxpayer had net earnings from self-employment of $400.00 or more. See Publication 17 , Your Federal Income Tax, and Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ), for exceptions.

    Note:

    Use the Capital Gains work sheet from Form 1040, US. Individual Income Tax Return, instructions if applicable.

  4. The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerates the reduction for the marginal tax rates for individuals originally scheduled for a 5 year phase-in under the Economic Growth and Tax Relief Reconciliation Act of 2001.

    If Then ...
    Taxpayer does not elect to itemize deductions Taxable income is:
    AGI minus the Standard Deduction, and the deduction for personal exemptions provided in § 151.
    Taxpayer elects to itemize deductions Taxable income is
    AGI minus excess itemized deductions and the deduction for personal exemptions provided in § 151.

21.6.4.4.4  (04-29-2013)
Applying Capital Gains and Losses Provisions for Sales

  1. For sales:

    • The capital gain tax rates vary from 0% to 28%, depending on the year of gain, holding period, type of property sold, and the taxpayer's taxable income. See Publication 544, Sales and Other Dispositions of Assets, and Publication 550, Investment Income and Expenses, for more information.

    • Generally, the property must have been held for more than one year for the lower 20/10% capital gain tax rates to apply.

    • Taxpayers receiving capital gain distributions from mutual funds or real estate investment trust may be able to use the Capital Gain Tax Worksheet ( Form 1040, U.S. Individual Income Tax Return Instructions).

    • If a taxpayer has more than five entries on line 1 or 8 of the Schedule D,for tax years prior to 2011, additional items are listed on Schedule D–1, combined, and then carried to Schedule D.

    • Beginning with tax year 2011, Schedule D filers will use Form 8949, Sales and Other Dispositions of Capital Assets, as a continuation sheet and record sales and other dispositions of capital assets. Schedule D-1 is obsolete.

  2. Command Code TRDBV may not display Schedule D in its entirety. If the complete schedule is needed, use Return Request Display (RRD).

  3. The IRS issued Notice 2005–51 on July 11, 2005, addressing the federal tax treatment of payments from the Department of Agriculture to tobacco quota holders.

  4. Use RC 013 for changes to Schedule D, investment gains/losses. Use RC 043 for changes to Schedule D tax computation.

21.6.4.4.5  (02-08-2013)
Taxes on Dividends and Capital Gains

  1. The American Taxpayer Relief Act of 2012 raised the top rate for capital gains and dividends to 20%. The rate applies to taxpayers whose income exceeds the thresholds set for the 39.6% tax rate ($400,000 for single, $450,000 for married filing joint, $425,000 for head of household and $225,000 for married filing separate. The 20% rate is for tax year 2013 and subsequent. All other taxpayers will continue to be taxed at the rates below.

  2. The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the 10 and 20% rate on adjusted net capital gains to 5 and 15% respectively. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended the dates of this provision. This is effective in taxable years ending on or after May 6, 2003, and beginning before January 1, 2013. For tax years 2008 and subsequent, the 5% rate is reduced to zero.

  3. For taxable years that include May 6, 2003, the lower rates apply to adjusted net capital gains properly taken into account for the portion of the year on or after that date. Generally, this has the effect of applying the lower rates to capital assets sold or exchanged on or after May 6, 2003.

  4. Reporting capital gains (including capital gain distributions) on Form 1040 , U.S. Individual Income Tax Return:

    1. For tax year 2004 and subsequent years, taxpayers with 25% or 28% rate gain are required to use the Schedule D, Tax Worksheet in the Schedule D instructions.

    2. For tax year 2004 and subsequent years, taxpayers with a capital loss carryover must use the Capital Loss Carryover Worksheet in the Schedule D instructions to compute their capital loss carryover.

    3. See Schedule D instructions for more information on when the Schedule D must be attached to Form 1040. Additional information is available in Publication 544, Sales and Other Disposition of Assets, and Publication 550, Investment Income and Expenses.

  5. Under The Jobs and Growth Tax Relief Reconciliation Act of 2003, dividends received by an individual shareholder from domestic and qualified foreign corporations are generally taxed at the same rates that apply to net capital gains. This provision applies to dividends received in taxable years beginning after 2002.

  6. Generally, for the dividends to qualify for capital gains rates, the shareholder must own the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. There is a different holding period requirement for certain preferred stock. See Publication 550, Investment Income and Expenses.

21.6.4.4.5.1  (10-01-2009)
Election to Establish New Holding Period For Certain Assets

  1. Taxpayers (other than corporations) can make an election to treat certain assets held on 01/01/2001, as sold and then reacquired on the same date. Gain resulting from the election must be included in gross income for the year that includes 01/01/2001. This election is made to give the asset a new holding period and to make any future gain on the asset eligible for the 18% rate.

  2. Property qualifying for the election is:

    • Readily tradable stock that is a capital asset that the taxpayer held on 01/01/2001, and did not sell prior to 01/02/2001. If the taxpayer makes this election, the stock is treated as sold (deemed sale) on 01/02/2001, at its closing market price on that date. The stock is then treated as acquired on that same date for the same amount.

    • Any other capital asset or property used in a trade or business that the taxpayer held on 01/01/2001. This property is treated as sold on 01/01/2001, for its fair market value, then treated as if acquired on the same date at the same price.

    • Any gain on a deemed sale is included in gross income. A loss is not allowed.

    • The deemed sale is reported on the taxpayer's return for the year that includes the date of the sale. To make the election, the taxpayer attaches a statement to the return stating, that they are making an election under §311 of the Taxpayer Relief Act of 1997 and specifying the assets for which they are making the election. Once made, the election is irrevocable.

  3. Per Notice 2002-58, if the taxpayer has already filed their return without making an election under §311, the election can still be made by filing an amended return within six months of the due date of the original return (excluding extensions). One of the following statements must be written across the top of the amended return: "Election Under Section 311 of the Taxpayer Relief Act of 1997" or "Filed Pursuant to Section 301.9100-2" . Once made, an election for any asset is irrevocable. Follow normal procedures in IRM 21.5.3, General Claims Procedures.

  4. Per Notice 2002-58, if a taxpayer did not timely file an original return on which a §311 (e) election could have been made, as described above, or failed to make a §311 (e) election with respect to one or more eligible assets on a timely filed original return and failed to make the §311 (e) election on an amended return, then the taxpayer may apply for relief under section 301.9100-3, in accordance with the provisions of Rev. Proc. 2012-1, I.R.B. 1 (or any successor).

21.6.4.4.6  (10-01-2005)
Allowing Constructive Sales

  1. Constructive Sales — Generally, taxpayers must recognize a gain (but not loss) on the date taxpayers entered into a constructive sale of any appreciated Financial position (in stock, a partnership interest, or certain debt instruments) as if the position were disposed of at fair market value on that date. A constructive sale generally arises with regard to an appreciated financial position where the taxpayer enters into one of three listed transactions, including a short sale of the same or substantially identical property.

21.6.4.4.7  (10-01-2014)
Sale of Your Home

  1. The sale of a home is reported only if there is a gain, and the taxpayer either does not qualify to exclude all the gain or elects not to exclude any gain. The gain is reported on Schedule D.

    Reminder:

    Refer to Publication 17, Your Federal Income Tax, and Publication 523, Selling Your Home, for specific information.

  2. Different tax rules apply to personal residence sales:

    • All taxpayers, regardless of age, can exclude up to $250,000 ($500,000 on certain joint returns) from capital gains taxation, Schedule D

    • The provision only applies to one sale or exchange every two years:

    If And Then
    Taxpayer owned the home for two out of five years Used it as a principal residence for two out of five years Taxpayer qualifies for exclusion.
    Taxpayer sold home due to job move, health problems, or unforeseen circumstances.   A reduced maximum exclusion may be available more often than every two years. Refer to Publication 523 for ratio to figure exclusion.
    Taxpayer was / is in the military does not / did not meet the ownership and use test Taxpayer may qualify to make an election to suspend the running of the 5 year period for testing ownership and use. See paragraph (7) below.

    Note:

    Special rules apply in cases of transfer due to divorce, joint filers not sharing a principal residence, and deceased spouse. See IRC § 121(d) for more information.

21.6.4.4.8  (10-01-2014)
Schedule H, Household Employment Taxes

  1. Employment taxes for household employees are reported annually on Schedule H (Form 1040), Household Employment Taxes, filed with Form 1040, with exceptions noted below. For a full explanation of the rules regarding reporting on Schedule H, see IRM 4.23.10.12.6, Household Employment Taxes, and Publication 926, Household Employer's Tax Guide.

    • For tax year 2014, if an employee receives less than $1,900 in cash wages, the wages paid by the employer are not subject to FICA taxes ($1,800 in 2012 and 2013 and $1,700 in 2009 - 2011)

    • There are no provisions for employees to make voluntary contributions to the social security system if FICA taxes do not apply

  2. Schedule H calls are considered employment tax calls and should be referred to the appropriate extension using the Telephone Transfer Guide.

  3. Household employers must file Schedule H, Household Employment Taxes, to report wages paid.

    • Schedule H may be filed by either the primary or secondary taxpayer, but must be filed with Form 1040, U.S. Individual Income Tax Return, if the taxpayer is required to file a return .

      Note:

      Schedule H may be filed with Form 1040NR, U.S. Nonresident Alien Income Tax Return, Form 1040–SS, U.S. Self-Employment Tax Return, or Form 1041, U.S. Income Tax Return for Estates and Trusts.

    • Household employers not required to file an income tax return must still file a Schedule H by itself.

    • If an employer has other employees besides household employees, the employer may report their household employment taxes on Form 941, Employer's QUARTERLY Federal Tax Return, (or Form 943, Employer's Annual Tax Return for Agricultural Employees, or Form 944, Employer's ANNUAL Federal Tax Return) and Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.

  4. When a loose Schedule H is received, Code and Edit prepares a "dummy" Form 1040 with Return Processing Code (RPC) "Y" entered.

    • A posted "dummy" Form 1040 with RPC "Y" sets the Filing Requirements (FR) to "0" .

    • Establish the FR if the taxpayer files a subsequent return.

  5. The household employment tax is reported on the Form 1040 and included in the transaction code (TC) 150 amount.

  6. A Schedule H carries its own Assessment Statute Expiration Date (ASED) that is NOT based on the filing requirements of the taxpayer's Form 1040. See IRM 25.6.1.9.4.3, Forms Reporting More Than One Item of Tax, for additional information.

  7. If the Schedule H was not filed with the original return, Schedule H taxes can be assessed even if the original return's ASED has expired. Priority Code 1 must be entered on the TC 29X adjustment with reference numbers 003/903, 004/904, 007/907, 073/973, 074/974 and/or 993/994 to bypass Unpostable code 150, reason code 3.

21.6.4.4.8.1  (10-02-2009)
Schedule H, Household Employment Taxes, - Employer Identification Numbers

  1. An Employer Identification Number (EIN) is required to be present on Schedule H, Household Employment Taxes.

    If Then
    Adjusting a previously filed Schedule H (no EIN change) Input of the EIN is not required.
    Schedule H was not filed with the original return. The EIN must be input on the adjustment record.
    Caution: An EIN from Schedule C may be displayed in the "XREF—TIN" field. This does not prevent an unpostable condition.
  2. To establish, change, or correct the primary or secondary EIN, use CC ADJ54 — "XREF-TIN " field.

    • The correct Schedule H EIN must be entered in this field, when a change is needed, along with the appropriate reference code

    • For the primary taxpayer's EIN enter 993 .00

    • For the secondary taxpayer's EIN enter 994 .00

    Note:

    If the taxpayer does not have an EIN, contact Entity and request an EIN be assigned.

21.6.4.4.8.2  (11-26-2008)
Schedule H, Household Employment Taxes, - EIN Corrections

  1. All EIN changes on Schedule H, Household Employment Taxes, reporting social security and/or Medicare tax, must be processed manually to prevent erroneous Combined Annual Wage Reporting (CAWR) records. Individual Master File (IMF) systemically forwards a record to the Business Master File (BMF) containing the Schedule H social security and Medicare tax information.

    Note:

    A telephone employee will make changes to Schedule H only if the Schedule H was previously filed and processed.

    1. Zero out the social security/Medicare tax fields posted under the incorrect EIN.

    2. Use the appropriate reference number(s).

    3. Use hold code "4" to prevent refund of the credit.

    4. Input a subsequent adjustment, with posting delay code "1" to change the EIN and adjust the appropriate Schedule H tax and reference number fields to the correct value.

  2. The reference number 993/994 .00 is input in the item reference code field on (CC) ADJ54.

    • The EIN and reference numbers are visible as pending transactions.

    • The Taxpayer Information File (TIF) does not show the EIN, however, MF records the EIN.

21.6.4.4.8.3  (10-01-2011)
Schedule H, Household Employment Taxes, - Fiscal Year Filers

  1. Fiscal year filers must report wages paid to household employees on a calendar year basis.

    • Schedule H must be filed for the calendar year during which the employer's fiscal year begins.

    • The due date for Schedule H for fiscal year filers is the due date of the fiscal year return, including extensions.

21.6.4.4.8.4  (11-26-2008)
Schedule H, Household Employment Taxes, - Components

  1. Schedule H, Household Employment Taxes, has four parts:

    • Part I — social security, Medicare, and Federal Income Taxes

    • Part II — Federal Unemployment (FUTA) Tax

    • Part III — Total Household Employment Taxes

    • Part IV — Address and signature

    Note:

    Part IV is completed only if the employer is not required to file Form 1040, U.S. Individual Income Tax Return, Form 1040NR, U.S. Nonresident Alien Income Tax Return, Form 1040–SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico), or Form 1041, U.S. Income Tax Return for Estates & Trusts.

21.6.4.4.8.5  (10-01-2014)
Schedule H, Household Employment Taxes, - Social Security, Medicare, and Income Taxes Part 1

  1. Schedule H, Household Employment Taxes, may be filed by either the primary or secondary taxpayer. The Form 1040 program allows the input and adjustment of either or both taxpayer's employment taxes.

  2. The reference numbers for adjusting Schedule H, Part I are:

    TITLE PRIMARY taxpayer SECONDARY taxpayer
    Total Social Security Wages 004 904
    Total Medicare Wages 073 973
    Federal Income Tax Withheld (if requested by employee) 003 903
    Social Security and Medicare Tax 007 907
    Additional Medicare Tax (AdMT) 074 974

    Caution:

    Programming does not allow IRN 074 or 974 to be input with any other IRN. Until the programming can be updated Apr. 1, 2015, AdMT adjustments have to be input separately.

    Note:

    Refer to IRM 21.7.2.3.3, FICA Taxes (including Additional Medicare Tax), for the applicable wage limitations and tax rates.

    Note:

    Refer to the Social Security Tax Rate Table in Document 6209, IRS Processing Codes and Information, for the monetary limitations for each tax year.

  3. The employer is instructed not to report social security and Medicare wages, with respect to any single household employee, for an amount less than $1,900 for 2014, ($1,800 in 2012 and 2013 and $1,700 for 2009 - 2011). Delete total social security and Medicare wages if less than those amounts.

    If total cash wages subject to And Then
    Social security taxes (line 1, reference number 004/904) are not present social security taxes (line 2) are entered Divide the line 2 amount by .124 (12.4%). (Divide the line 2 amount by .104 (10.4%) for 2011 and 2012.)
    Medicare taxes (line 3, reference number 073/973) are not present Medicare taxes (line 4) are entered Divide the line 4 amount by .029 (2.9%).
    Additional Medicare Tax withholding (line 5, reference number 074/974) are not present Additional Medicare Tax withholding (line 6) is entered Divide the line 6 amount by .009 (0.9%).
    Social security taxes (line 1) is greater than total cash wages subject to Medicare taxes (line 3)  
    1. Attempt to determine the correct amounts.

    2. Increase the Total cash wages subject to Medicare taxes (line 3) to equal the Total cash wages subject to social security taxes, if unable to determine the correct amounts.

    3. Treat as a "math error" if the tax is more than the taxpayer reported.

    Note:

    PL 111-312, Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, implemented a 4.2% rate for employee social security tax during 2011, which reduces the social security tax from 12.4% to 10.4%.

    Note:

    PL 112-96, Middle Class Tax Relief Act of 2012, extended the reduction to Dec. 31, 2012.

21.6.4.4.8.5.1  (10-01-2010)
FICA Tax Erroneously Withheld - Employee Claims for Refund — Schedule H

  1. IRC § 6402 and Reg. 31.6402(a)-2(b) provide that employees may file claims for refund of excess FICA tax collected in error when:

    • The employer has not reimbursed the employee

    • The employee has not authorized the employer to file a claim for refund

    • The employee has not taken the overcollection into account in claiming a credit against or refund of income tax

    • The claim has been rejected

    See IRM 21.6.3.4.2.4, Excess Social Security and RRTA Tier I Tax Credits. Upon receipt of a claim:

    1. Review the employer's Schedule H (Form 1040) account for the last year in which FICA wages were paid to the employee. If necessary, secure the household employee's individual Form 1040, to verify claim information.

    2. Check for a signed statement from the employer indicating household employee had not authorized employer to file a claim, nor had household employee been reimbursed for amount over withheld.

    3. Check for a signed statement from the employee with an explanation of why he or she was unable to obtain a statement from his or her employer.

  2. Continue processing the claim using the table below:

    If ... Then ...
    No statement is received Return claim to taxpayer using Letter 916C, Claim Incomplete for Processing; No Consideration, requesting they submit required statement. See (1) step (2) above.
    No indication household employee has contacted employer Instruct household employee to ask for refund from employer.
    Household employee is unable to obtain statement from employer Household employee must make a statement to the best of their knowledge and belief.

    Note:

    Statement must include explanation of household employee's inability to obtain the statement from employer.

    Claim is correctly filed with statement attached
    1. Input TC 291 with HC 2 on employer's Schedule H (Form 1040) account for amount of decrease using IRN's 004/904 for wages and 007/907 for tax.

    2. Prepare Form 5792,Request for IDRS Generated Refund, and compute interest from the Schedule H ( Form 1040) due date or payment date, whichever is later. Enter TC 770 for amount of allowable interest. See IRM 21.4.4.4.1, Preparation of Form 5792, IDRS Generated Refund, for additional information.

      Reminder:

      Form 5792 will be made out to the household employee filing the claim.

    3. Attach a copy of claim to refund document and route to Accounting Function.

    4. Attach taxpayer's claim to adjustment document.

    Claim must be disallowed
    1. Input TC 290 .00 in BS 98/99 (99 if electronically filed with an IMFOLR or TRPRT print) on household employee's IMF account which contains period for which claim is filed.

    2. Send appropriate disallowance letter.

    Claim must be disallowed and return has not yet posted Write claim disallowance letter. Push code document and copy of denial letter using TC 930. After return posts, the disallowance claim and original return is returned to the originator for input of the TC 290 .00, BS 98/99 (99 if electronically filed with an IMFOLR or TRPRT print).

21.6.4.4.8.6  (01-19-2011)
Schedule H, Household Employment Taxes, - Interest - Free Provisions - Underpayments

  1. The interest-free provisions for underpayment adjustments on BMF taxes (IRC § 6205 ) apply to errors discovered on IMF, Schedule H, Household Employment Taxes.

    • Taxes imposed under the Federal Unemployment Tax Act (FUTA) are not eligible for the interest-free adjustment provision.

  2. Household employers who discover (ascertain) they have reported and paid less FICA tax or income tax withholding than was due on an original tax return may qualify for an interest-free tax adjustment under IRC § 31.6205-1(a).

  3. To qualify for an interest-free tax adjustment, the employer must file the appropriate amended return reporting the correction by the due date of the tax return for the tax period in which the error was ascertained. An error is considered ascertained when the employer has sufficient knowledge of the error to be able to correct it.

    Example:

    On June 1, 2009, an employer discovers an error made on Schedule H filed with his 2008 Form 1040. The employer must file an amended return by April 15, 2010 in order to qualify for an interest-free tax adjustment.

  4. Although employers have until the due date of the tax return for the tax period in which the error was ascertained to file the appropriate amended return reporting an underpayment adjustment, regulations require employers to pay any underpayment of tax by the time the amended return is filed. Otherwise, the correction will not qualify for a completely interest-free tax adjustment. See the table below for more information.

    If And Then
    The employer does not file the appropriate amended return by the due date of the tax return for the tax period in which the error was ascertained.   Input a TC 290 with the appropriate reference number for the amount of the increase. Interest will be due as per normal underpayment interest rules.
    The employer files the appropriate amended return by the due date of the tax return for the tax period in which the error was ascertained. Fully pays the underpayment owed when the amended return is filed. Input a TC 298 with the appropriate reference number for the amount of the increase. No interest will be due on the amount of the underpayment reported and paid with the amended return.
    The employer files the appropriate amended return by the due date of the tax return for the tax period in which the error was ascertained. Does not fully pay the underpayment owed when the amended return is filed. Input a TC 298 with the appropriate reference number for the amount of the increase. Interest will be due on the amount of the underpayment reported from the interest computation date to the date the payment is made.
  5. When inputting a TC 298, the interest computation date is the IRS received date of the amended return ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ for all errors ascertained after December 31, 2008.

  6. Income tax withholding is not required on amounts paid to household employees unless the employee asks and the employer agrees.

  7. Generally, adjustments to income tax and Additional Medicare Tax withholding errors may only be made for errors discovered during the calendar year in which wages were paid. Since household employees' employment taxes are reported annually on Schedule H, no quarterly adjustments are necessary. Adjustments to amounts reported as income tax or Additional Medicare Tax withheld in a prior calendar year may only be made to correct an administrative error or if section 3509 applies. An administrative error occurs if the amount entered on Schedule H is not the amount the employer actually withheld. An example of an administrative error is an erroneous mathematical computation or a transposition error. See IRM 21.6.4.4.8.13, Schedule H, Household Employment Taxes, Claims Citing IRC 3509, for provisions regarding use of Section 3509 when the taxpayer misclassified the worker.

  8. When an adjustment includes a Schedule H (FICA or Income Tax Withholding; not FUTA) assessment AND another IMF issue(s), assure ONLY the FICA tax and any income tax withholding (not FUTA) of the Schedule H assessment receives the interest-free treatment.

    1. To input the Schedule H adjustment, IRM 21.6.4.4.8.5, Schedule H, Household Employment Taxes , - Social Security, Medicare, and Income Taxes Part 1. Attach the Schedule H and a copy of the Form 1040X / DUP / Correspondence noting the original signature is available by pulling the subsequent adjustment.

    2. Input the adjustment for the other IMF issue(s) following normal procedures. Attach Form 1040X / DUP / Correspondence and a copy of the Schedule H noting the adjustment was input separately.

  9. A corrected Schedule H may be filed with a Form 1040X or an amended Form 1041. In such case, the correction on the Schedule H should be explained in Part II of the Form 1040X or on the required attached statement with the amended Form 1041. If a corrected Schedule H is filed by itself, the corrected Schedule H should include the date the error was discovered in the top margin. See Publication 926, Household Employer's Tax Guide, for more information.

21.6.4.4.8.7  (10-01-2010)
Schedule H, Household Employment Taxes - Overpayments

  1. The interest-free provisions for overpayment adjustments on BMF taxes (IRC § 6413) apply to errors discovered on IMF, Schedule H, Household Employment Taxes.

    • Taxes imposed under the Federal Unemployment Tax Act (FUTA) are not eligible for the interest-free adjustment provision. See IRM 20.2.12.11, Federal Unemployment Tax, for special rules for reductions in FUTA tax due to increased state credits.

  2. Process an overpayment of social security and Medicare taxes (and any overpayment of income tax or Additional Medicare Tax withholding made (repaid or reimbursed to the employer) as an administrative error) on a corrected Schedule H as an interest-free adjustment if there is any indication that the taxpayer wants the overpayment applied as a credit to the period in which the Schedule H reporting the overpayment is filed.

    Example:

    Taxpayer files a Form 1040X, Amended U.S. Individual Income Tax Return, with an accompanying corrected Schedule H indicating on the appropriate line on the Form 1040X that he wants the overpayment applied to his estimated tax for the current year. In this case the overpayment on the Schedule H will be treated as an interest-free adjustment.

  3. Process an overpayment of social security and Medicare taxes (and any overpayment of income tax or Additional Medicare Tax withholding made as an administrative error) on Schedule H as a refund with interest if there is no indication that the taxpayer wants the overpayment applied as a credit.

    Note:

    Refer to the Employment Taxes section in IRM 20.2.12, Employment Taxes, for additional information on the application of interest and interest-free provisions under Treasury Regulation 31.6413(a)-2.

  4. Interest-free adjustments to overpayments of social security and Medicare taxes may be made at any time after the error is ascertained within the applicable period of limitations for the period in which the error occurred.

  5. A corrected Schedule H may be filed with a Form 1040X or an amended Form 1041. In such case, the correction on the Schedule H should be explained in Part II of the Form 1040X or on the required attached statement with the amended Form 1041. If a corrected Schedule H is filed by itself, the corrected Schedule H should include the date the error was discovered in the top margin. See Publication 926, Household Employer's Tax Guide, for more information.

  6. Interest-free adjustments to overpayments for the employee share of social security and Medicare tax may only be made once the employer has repaid or reimbursed the employee in the amount of the over collection of employee tax. An employer reimburses an employee by applying the over withheld amount against taxes to be withheld on future wages. Publication 926 instructs the employer to include a statement in their explanation in Part II of Form 1040X, or in the attached statement to an amended Form 1041, that it has repaid or reimbursed its employee, except where taxes were not withheld from the employee or where, after reasonable efforts, the employer cannot locate the employee.

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. As part of the claim process, the employer must repay or reimburse the employee in the amount of the over collection or secure the employee's consent to the allowance of the claim for refund. Publication 926 instructs the employer to include a statement in their explanation in Part II of Form 1040X, or in the attached statement to an amended Form 1041, that it has repaid or reimbursed its employee or has secured the employee's written consent to the allowance of the filing of the claim, except to the extent that the taxes were not withheld from the employee.

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    A claim for refund of income tax and Additional Medicare Tax withholding may not be made if the income tax overpaid was actually withheld from the employee.

  8. Generally, interest-free adjustments to income tax or Additional Medicare Tax withholding errors may only be made for errors discovered during the same calendar year. Since household employees' employment taxes are reported annually on Schedule H, no quarterly adjustments are necessary. Interest-free adjustments to amounts reported as income tax or Additional Medicare Tax withheld in a prior calendar year may only be made to correct an administrative error. An administrative error occurs if the amount entered on Schedule H is not the amount the employer actually withheld. An example of an administrative error is an erroneous mathematical computation or a transposition error.

  9. When a Form 1040X, Amended U.S. Individual Income Tax Return, includes an overpayment on the Schedule H (FICA or Income Tax Withholding; not FUTA) AND another IMF issue(s), and indicates that it wants the overpayment applied as a credit, assure ONLY the Schedule H overpayment receives interest-free treatment.

21.6.4.4.8.8  (10-01-2012)
Schedule H, Household Employment Taxes, Part II Federal Unemployment Tax Act (FUTA)

  1. The FUTA tax rate is 6% of the employee's FUTA wages. However, the employer may be able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.6%. The 5.4% credit is reduced for wages paid in a credit reduction state.

  2. Prior to July 1, 2011, the FUTA tax rate was 6.2%. The employer can still take the credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.8%.

  3. Taxpayers are subject to FUTA tax on the first $7000 of wages paid to each household employee if wages of $1000 or more are paid to all household employees in any calendar quarter of the prior year or current year.

  4. For more information on FUTA tax and FUTA wages, see Publication 926, Household Employer's Tax Guide.

  5. FUTA State Codes must be input for adjusting both the primary and secondary taxpayer information.

  6. The FUTA State Code is a three character code comprised of a single Alpha letter followed by the two character state code used by the U.S. Postal Service.

  7. The FUTA State Code Alpha is used as follows:

    • "T" — Primary taxpayer (refers to tax)

    • "Y" — Secondary taxpayer (refers to tax)

    • "W" — Primary taxpayer (refers to wages)

    • "Z" — Secondary taxpayer (refers to wages)

  8. The three character code is systemically converted to the applicable item reference number (IRN) for MF.

    • "T" converts to IRN 997

    • "Y" converts to IRN 995

    • "W" converts to IRN 998

    • "Z" converts to IRN 996

  9. The reference number is not displayed on tax modules.

    Example:

    The primary taxpayer reports $1,000 unemployment tax paid to Ohio. State code input is "TOH" — 1,000. The computer converts to TC 997 at Master File.

21.6.4.4.8.9  (10-01-2006)
Schedule H, Household Employment Taxes, Unpostables

  1. Following is a list of Unpostable Codes (UPC) applicable to Schedule H, Household Employment Taxes.

    UPC 189 RC 1 Reference codes 003, 004, 007, 073, 903, 904, 907, 973, 995, 996, 997, and 998 are valid for MFT 30. This UPC occurs if the input reference number attempts to reduce the related field below zero.
    UPC 291 RC 3-1 Input must be for a significant money amount. This unpostable occurs if the input attempts to post without a significant money amount.
    UPC 290 RC 4 j Tax period must be 9512 or subsequent. This UPC occurs if the input attempts to post to an invalid period (prior to 9512).
    UPC 169 RC 8 This UPC occurs if reference numbers 903, 904, 907, 973, 994, 995, or 996 are input to a module not controlled by a joint name line or not containing a spousal TIN.
    UPC 169 RC 0 This UPC occurs if an adjustment is input to Schedule H and no EIN is present for the primary/secondary taxpayer.
    UPC 150 RC 3 This UPC occurs if a Schedule H tax assessment is input to a module where the ASED is expired and Priority Code 1 is not used.

21.6.4.4.8.10  (04-07-2014)
Schedule H, Household Employment Taxes, Received Without Form 1040, U.S. Individual Income Tax Return

  1. Schedules H, Household Employment Taxes, received in Receipt and Control must be routed to the Code and Edit function.

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

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

    Caution:

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

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

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

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

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

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

21.6.4.4.8.11  (10-01-2014)
Duplicate Filing Conditions (Dummy Form 1040, U.S. Individual Income Tax Return, with Schedule H, Household Employment Taxes)

  1. Schedules H, Household Employment Taxes, received without Form 1040, U.S. Individual Income Tax Return, are processed with a "dummy" Form 1040. A duplicate filing condition results if the taxpayer files an original return.

    If And Then
    The "dummy" Form 1040 posted as an original (TC 150) The taxpayer's original return posted as a duplicate and by-passed Discriminant Function (DIF) scoring
    1. Math verify the taxpayer's original return.

    2. Adjust the account to reflect the income and tax shown on the taxpayer's original return.

    3. Refer to IRM 21.5.2.4.23.6, DIF SCORE or CLASSIFICATION "Send Return(s) to Examination for Review" . Route to Examination if appropriate. Use local routing procedures.

    The taxpayer's original return posted as the TC 150 Schedule H, processed with a "dummy" Form 1040, posted as a duplicate Adjust the account, using the appropriate EIN and reference numbers.

21.6.4.4.8.12  (11-26-2008)
BMF Form 941, Employer's QUARTERLY Federal Tax Return, Filed Instead of IMF Schedule H, Household Employment Taxes

  1. If the taxpayer filed Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return, instead of Schedule H, Household Employment Taxes, (with or without Form 1040, U.S. Individual Income Tax Return), the tax must be eliminated from the BMF Form 941 (or Form 944) account and assessed on the IMF Form 1040 account.

    Reminder:

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

    Note:

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

  2. Take the following action on the Form 941 (MFT 01) account, the Form 944 (MFT 14) account, or Form 943 (MFT 11).

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

    2. Transfer payments to the IMF account.

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

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

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

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

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

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

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

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

      Reminder:

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

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

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

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

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

      Note:

      Employers whose total liability was $1,000 or less may be required to file Form 944, Employers ANNUAL Federal Tax Return, if they were notified to do so and did not opt out of the Form 944 filing requirement as permitted under certain conditions. See IRM 21.7.2.4.9, Form 944, Employers ANNUAL Federal Tax Return, for additional filing information.

21.6.4.4.8.13  (10-01-2014)
Schedule H, Household Employment Taxes, Claims Citing IRC § 3509

  1. IRC § 3509 provides for reduced rates for calculating employer liability for employment tax if a worker is reclassified from an independent contractor to an employee.

  2. The taxpayer may submit an amended return, Form 1040X, U.S. Amended Individual Income Tax Return, with a Schedule H, if he/she discovers the worker was misclassified. If the taxpayer does not have a Form 1040 filing requirement, they may file the Schedule H by itself.

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

  4. To process the claim, refer to and use BMF instructions in IRM 21.7.2.5.4, IRC 3509.

  5. Use IMF reference numbers, as shown in IRM 21.6.4.4.8.5, Schedule H, Household Employment Taxes, - Social Security, Medicare, and Income Taxes Part 1.

  6. If the ascertained date is not given, contact the taxpayer. If no answer is received, input a TC 290 for the amount of the increase. IRM 21.6.4.4.8.6, Schedule H, Household Employment Taxes - Interest - Free Provisions - Underpayments.


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