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Caldwell-Married Working Taxpayer�Tax Year 2025

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Click here for the latest version of this document.

FOR USE BY AARP FOUNDATION TAX-AIDE VOLUNTEERS ONLY

The instructor should introduce themselves to the class.
Prior to the class or at the beginning of the class, arrange for each new counselor to have at least one experienced counselor sitting next to them.
Prior to the class, be sure to go to https://ta-nttc.tiny.us/Workbook-Answers for the answers to this exercise.
The intent is to have this exercise completed step by step, keeping the class together.
Tools needed for this exercise: (Can put on Chalkboard):

Caldwell Exercise in Workbook page 64.
Chromebook with TaxSlayer open. Counselors will need to have passwords out to log into Practice Lab.
Qualifying Child or Relative Resource Tools (Quad-Fold and Colorado Resource Toolbox).
The Training Resource Links Sheet contains a link to the NTTC 4012. Instructors may have already had counselors bookmark the NTTC 4012.

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Learning Objectives

Demonstrate a typical tax return for a married couple with a child
Discuss qualifying relative as a dependent
Incorporate additional forms of income into a return
Locate and apply exceptions to additional tax for early IRA distribution
Discuss additional adjustments to income and credits

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Young Married Couple With Dependents - �Tax topics

Filing Statuses: Married (MFJ and MFS) and Qualifying Surviving Spouse (QSS)
Dependent: Qualifying Relative
Income: Wages, Dividends, Early IRA Distribution, Business Income, and Other Income
Adjustments to income: Educator Expenses
Credits: Foreign Tax Credit, Education Credit and Credit for Other Dependents

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Exercise Overview

Ray Caldwell and Mallory Hughes are married with one child, Jason, who attends college; Mallory’s mother began living with them last year
They have multiple sources of income:

Wages, Early Distribution from an IRA, Income from Storytelling, Award, State Tax Refund

They provide several college expenses for Jason
Ray and Mallory list some expenses and ask if they should itemize

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Step	Description	Tax Form	Adjusted Gross Income (AGI)	Federal Tax Refund or Amount Due	Comment
	Basic Information
1	Wages	W-2
2	Dividends	1099-Div
3	IRA	1099-R
4	HSA	1099-SA
5	Business Income	1099-NEC
6	Award and Educator Expenses
7	Education expenses	1098-T

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Five Filing Statuses NTTC 4012 Tab B

Single (S)
Married filing jointly (MFJ)
Married filing separately (MFS)
Head of household (HoH)
Qualifying Surviving Spouse (QSS)

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Filing Status: Married Filing Jointly (MFJ)

Married on last day of year

Includes common law marriage

Spouse died during current tax year/taxpayer not remarried
Generally, most advantageous filing status

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Filing Status: Married Filing Separately (MFS)

Taxpayer chooses to file MFS
Spouse already filed MFS
Married, filing separate taxes and not filing MFJ

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Married Filing Separately - Disadvantages

Highest tax rate/lower standard deduction
85% of social security taxable if lived with spouse at all during the year
Cannot claim most tax credits (notably EIC)
Cannot deduct student loan interest
Cannot use standard deduction if spouse itemizes‏

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Filing Status: Qualifying Surviving Spouse (QSS)

Qualifies for same deductions and tax rates as MFJ:

MFJ the year spouse dies then QSS following two years
Must not be remarried
Paid more than half the cost of keeping up home
Must have a qualifying child for all current year

Must be child or stepchild
Child must live in taxpayer’s home all year except for temporary absences

Exception: Taxpayer may be claimed as a dependent

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Filing Status Decision Tree NTTC Tab B

Review NTTC 4012 Tab B Decision Tree

Don’t miss the footnotes

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Dependent Exemption

Person who entitles taxpayer or spouse to tax exemption:

Qualifying child (includes adult with disability)

OR

Qualifying relative (includes qualifying non-relatives)

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Intake and Interview

Counselor answers the five grey boxes on page 1
Ask: Who else �lived with you?
Who else did �you support?

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Dependent Tests For All Dependents NTTC 4012 Tab C�

Dependent Taxpayer Test
Joint Return Test
Citizen or Resident Test��

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�Dependent Tests For Qualifying Relative

Not a Qualifying Child Test
Member of Household or Relationship Test
Gross Income Test
Support Test

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The instructor should direct the counselors to open their Quadfolds and work through all of the relevant boxes for the mother. They can also open the Colorado Resource Toolbox and enter the details in the Dependent Qualification Calculator. Counselors should become comfortable with both these tools for the various scenarios they will encounter.
Review the Dependency Charts in NTTC 4012 Tab C.

For the benefit of the instructor, complete information on the dependent tests for a Qualifying Relative are included below.

Dependent Tests:

Not a Qualifying Child Test

A child is not considered a taxpayer’s qualifying relative if the child is the taxpayer’s qualifying child or is the qualifying child of another taxpayer. However, there is an exception to this statement. A child may qualify as the taxpayer’s dependent under the tests for qualifying relative, even if that child is the qualifying child of another taxpayer. This is allowed only when the child’s parent (or other person for whom the child is a qualifying child) is not required to file an income tax return and either:

• Does not file a return, or

• Only files to get a refund of income tax withheld or estimated tax paid.

Member of Household or Relationship Test

To meet this test, the person must either:

• Live as a member of the taxpayer’s household all year, or

• Be related to the taxpayer in one of the following ways:

o Child, stepchild, foster child or a descendant of any of them

o Brother, sister, half-brother, half-sister, stepbrother or stepsister

o Father, mother, grandparent or other direct ancestor, but not foster parent

o Stepfather or stepmother

o Son or daughter of the taxpayer’s brother or sister (nephew or niece)

o Son or daughter of the taxpayer’s half-brother or half-sister

o Brother or sister of the taxpayer’s father or mother (uncle or aunt)

o Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

An adopted child is treated as the taxpayer's own child for the purposes of the relationships described above.

For example, an adopted brother or sister is a brother or sister of the taxpayer. An adopted child includes a child who was lawfully placed with a person for legal adoption.

Any of these relationships that were established by marriage are not ended by death or divorce. An unrelated person who lived with the taxpayer for the entire year can also meet the member of household or relationship test. If the relationship violates local laws, this test is not met. For example, if the taxpayer’s state prohibits cohabitation, then that person cannot be claimed, even if all other criteria are met.

Note that:

• A person is still considered living with the taxpayer as a member of the household during periods when that person or the taxpayer is temporarily absent due to special circumstances such as illness, education, business, vacation, military service, and placement in a nursing home.

• Cousins can meet the relationship test for qualifying relative only if they live with the taxpayer for the entire year.

• Qualifying relatives can be unrelated, as long as they lived with the taxpayer all year.

• A taxpayer may not claim a housekeeper or other household employee as a dependent.

Gross Income Test

To meet this test, the dependent’s gross income for the tax year must be less than the threshold amount. Refer to the Important Changes lesson for the current year threshold amount. Gross income is all income in the form of money, property, and services that is not exempt from tax. Specific examples are found in the Volunteer Resource Guide, Tab D, Income. Remember this test does not apply to qualifying children, only qualifying relatives. For purposes of this test, the gross income of an individual who is permanently and totally disabled does not include income from a sheltered workshop.

Support Test

To meet this test, the taxpayer must have provided more than 50% of the person’s total support for the tax year. Note that this support test is different from the one for a qualifying child, which tests whether the child provided more than one half of their own support. When calculating the amount of total support, taxpayers should compare their contributions with the entire amount of support the person received from all sources (such as taxable income, tax-exempt income, and loans). Review the list of valid support expenses and the Worksheet for Determining Support in the Volunteer Resource Guide, Tab C, Dependents, or in Publication 17.

Social Security benefits received by a child and used toward support are considered to have been provided by the child.

A scholarship received by a child who is a student isn’t taken into account in determining whether the child provided more than half of his or her own support.

Refer to the Worksheet for Determining Support in the Volunteer Resource Guide, Tab C, Dependents, or the Dependents chapter of Publication 17.

Multiple Support Agreements (Form 2120)

Sometimes no one provided more than half the support of a person. Multiple support means that two or more people who could claim the person as a dependent (except for the support test) together provide more than half the dependent’s support. In this situation, the individuals who provide more than 10% of the person’s total support, and who meet the other tests for a qualifying relative, can agree that one of them will claim the person as a dependent for any applicable tax benefits.

• The taxpayer claiming the dependent must file Form 2120, Multiple Support Declaration or similar statement, with the tax return.

• The other taxpayers providing over 10% of the person’s support must provide a written and signed statement agreeing not to claim the dependent for that year. The person who claims the dependent must keep a copy of this written statement as a record. A list of the statement requirements can be found in Form 2120 Instructions.

Multiple Support Agreements apply only to a qualifying relative, not to a qualifying child.

If you can claim a person as a dependent only because of a multiple support agreement, that person isn’t a qualifying person for Head of Household status.

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Credit for Other Dependents

$500 non-refundable Credit
For dependents who do not qualify for the Child Tax Credit; examples are:

Dependent parent
Sibling
Unrelated dependent

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TaxSlayer: Preparing the Return

Start a new tax return for Ray Caldwell
Enter Filing Status
Enter Personal Information (How many months did Jason live with his parents? Any refund yet?)
Enter the W-2
Note AGI and refund

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Credits automatically calculated

Review the return now. What credits are already part of the return?
Check the amount of any credit for retirement contributions. What code on the W-2 was associated with contributions to a retirement account?

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Dividend Income

Ordinary dividend income, not qualified

Taxed at regular tax rates

“Qualified dividend” income

A subset of ordinary dividends
Must meet special IRS requirements
Taxed at long-term capital gain rates

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Dividend Income

Dividends reported on:

Form 1099-DIV
Substitute 1099-DIV (brokerage or mutual fund statement)
Schedule K-1

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Dividend Income - Form 1099-DIV

Examine Ray Caldwell’s 1099-DIV
Which boxes are out-of-scope?

Box 2c Section 1202 gain
Box 2d Collectibles (28%) gain
Box 2e Sec 897 ordinary dividends
Box 2f Section 897 capital gain
Box 9-10 (Liquidation Distributions)
Nominee Dividend
FATCA filing requirement

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Dividends - Capital Gain Distributions

1099-DIV Box 2a Capital Gain Distributions
Represent share of profit from sale of assets within mutual fund

Always long-term
Taxed at long-term capital gain rates
TaxSlayer carries the entry to Schedule D

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IRA- Early Distribution

Distributions before 59½ are “early distribution”
Form 1099-R with Code 1 (or 2) in Box 7
10%* additional tax unless exception
Exceptions require Form 5329, Part I

� * 25% for SIMPLE IRAs

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Additional Tax on IRAs - NTTC 4012 Tab H - Form 5329

Common exceptions:*

03 - Due to total and permanent disability
05 - The amount paid for unreimbursed medical expenses

minus 7.5% of AGI

08 -The amount paid during the year for qualified education expenses (including room and board)
23 – New in TY24!! Eligible emergency expenses- with restrictions

*Distributions do not have to be specifically for stated expenses

Specific exceptions may have additional requirements

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1099-R IRA with Box 7 Code 1: Early Distribution

with no known exception

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Code 1 is usually for an early IRA distribution prior to age 59½
During Taxpayer interview discuss if there is an exception to eliminate the 10% additional tax

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IRA Distribution - Interview

If early distribution, is there exception to avoid additional tax?

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IRA Distributions affect Retirement Savings Contributions Credit

Distributions from IRA or employer retirement accounts received during a testing period generally reduce eligibility for the retirement contributions credit
Testing period:

The tax year
The two preceding tax years
The period between the end of the tax year and the due date of the return, including extensions

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TaxSlayer – Enter Dividends

Go to NTTC 4012 Tab O, chart Where to Find in TaxSlayer, Form 1040, and 4012 Resource Guide, and locate “1099-DIV,” then follow the link for Dividend Income. Note the three methods for entering the 1099-DIV
Enter information for the 1099-DIV
Note AGI and refund

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TaxSlayer - Enter IRA Distribution

Go to NTTC 4012 Tab O, chart Where to Find in TaxSlayer, Form 1040, and 4012 Resource Guide, and locate “1099-R,” then follow the link for IRA Distributions. Note the three methods for entering the 1099-R
Enter Ray’s 1099-R
Note AGI and refund

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TaxSlayer - Complete Form 5329 Additional Taxes on Qualified Plans

NTTC 4012 Tab H Form 5329 pages for additional information
Enter the information for Form 5329
Note AGI and refund

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Taxable state refund? NTTC 4012 Tab D

The Caldwells received a $358 state income tax refund. Under what circumstances is this refund taxable?

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Less Common Tax Topics

Health Savings Account (HSA)

Self-Employment Income

Educator Expenses

Foreign Tax Credit

Education Credits

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Health Savings Account (HSA) NTTC 4012 Tab E

Several requirements for eligibility, including that taxpayer must be covered by high-deductible health plan
Contributions are deductible as adjustment to gross income
Distributions are nontaxable if offset by qualified medical expenses
Annual contribution limits ($4,300 for individual coverage and $8,550 for family coverage, with an additional $1,000 catch-up contribution available for individuals aged 55 or older)

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Health Savings Account (HSA) NTTC 4012 Tab E

Contributions are reported on Form 5498-SA, may come from employer or taxpayer, can be made up to the due date of the return
Distributions are reported on 1099-SA

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TaxSlayer: Enter the HSA Distribution

Enter the distribution Ray received from his HSA
Note AGI and refund

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Business/Self Employment Income

Reported on Schedule C

Appears on Form 1040 Schedule 1 line 3
Is included in AGI
Self employment tax calculated on net profit

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Income

Expenses

Net Profit or Loss (OOS)

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Schedule C: Does the activity qualify as a business?

Determining factors of a business

Primary business purpose for income or profit (not a hobby)
Activity has continuity and regularity

May be sole proprietor or independent contractor
May be part time or full time

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The taxpayer interview is key to determining whether an activity is a business.

The taxpayer must engage in the activity primarily to generate a profit.
The activity must be one that the taxpayer engages in with continuity or routinely.

Continuity doesn’t mean all the time; a seasonal activity, such as lawn mowing or snow removal, might only operate for part of the year, but operate every year and qualify as a business.

If this is an issue for your district here are the business vs. hobby criteria:

1. The manner that a taxpayer carries on an activity.

2. The expertise of a taxpayer or advisor(s) involved in the business activity.

3. The time and effort a taxpayer allocates to the activity.

4. Has the taxpayer had success with similar or dissimilar activities in the past?

5. The history of income/loss for the activity.

6. Are there occasional profits and, if so, how much are they?

7. The financial status of the taxpayer, and does the taxpayer rely on this business activity or does the taxpayer have other sources of income?

8. Is there an expectation of asset appreciation for any assets involved in the business activity?

9. Are there elements of personal pleasure or recreation?

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Knowledge Check #1

Do these activities qualify as a business?

Income from recycling (conducted regularly)
One-time clinical trial payment
Teenager mowing neighbors’ lawns all summer

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Yes

No

Yes

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Self-Employment Income - Scope NTTC 4012 Tab D

Out of Scope - businesses with:

Inventory, employees, contract labor, or depreciation
Expense for business use of the home
Business expenses over $50,000 or a net loss
Taxpayer has purchased Marketplace Insurance

Must use “cash accounting” method
Must “materially participate” in business operation

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Business Income Forms

Business income can be reported on:

Form 1099-NEC (Nonemployee Compensation)
Form 1099-K (Payment Card and Third-Party Network Transactions)
Form 1099-MISC (Miscellaneous Income)
Not reported on tax form (cash or tip income)

Note: The same company may issue multiple forms to taxpayer

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Self-Employment Expenses

“Ordinary and necessary”
Report on Schedule C
Consider the Self-Employed Health Insurance Deduction
Report and itemize most costs as other business expense

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Car and truck expenses

Based on actual mileage
Not commuting or other miles
Include interest expense for business use of vehicle
Standard mileage rate includes depreciation, gas/oil, repairs, insurance, normal car washes, and nontax portion of registration
Taxpayer should have a written record

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IRS Deductible Business Mileage Chart

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Home:

Place where you reside

Regular or main job: � Principal place of business� (not your home)
Temporary work location:

(one year or less)

Second job:

(another worksite)

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TaxSlayer - Enter Business Income

Enter Mallory’s income and expenses
Note AGI and refund

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Other Income NTTC 4012 Tab D

Other Income includes miscellaneous income
Examples: Prizes or awards, honorarium, Jury Duty Pay, Poll Worker Income
May not be on an IRS Form (e.g. 1099-MISC)
Income may be taxable, even if no tax form is received

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TaxSlayer - Enter Award Money

Enter Ray’s award as Other Income
Note AGI and refund

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Educator Expenses NTTC 4012 Tab E

Up to $300 per educator
Classroom materials, professional development expenses
K–12 teacher, counselor, principal, or aide
Work at school at least 900 hours in school year

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TaxSlayer: Enter Educator Expenses

Enter Ray’s educator expenses as an adjustment to income
Note AGI and refund

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Itemized Deductions?

The Caldwells had property tax of $1,700. They also donated $3,115 to various charities. What do you tell them about itemizing?

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Foreign Tax Credit (FTC)

Foreign taxes paid reported on 1099-INT, 1099-DIV, Schedule K-1, and Broker statements
Nonrefundable credit

No income tax, no benefit

Simplified Method with Form 1116 is in scope� if total foreign tax is ≤ $300 ($600 MFJ)

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TaxSlayer automatically calculates FTC based on relevant information entered for tax return

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Two Education Credits

American Opportunity (AOC)

Covers four years of postsecondary education, etc.

Lifetime Learning (LLC)

Covers the rest of your life

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Education Credits NTTC 4012 Tab J

Highlights of Education Tax Benefits
Student can be taxpayer, spouse, or dependent

Not claimed as dependent on any other return

Student enrolled at eligible postsecondary school
Taxpayer cannot file “Married Filing Separate”

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Education Credits �Highlights Chart

NTTC 4012, Tab J

Compare AOC to LLC
Note who can claim the credit
Note what expenses qualify

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Qualified Education Expenses

Tuition and certain related expenses required for enrollment or attendance
Student activity fees paid to institution as condition of enrollment or attendance
Expenses paid by student (dependent) considered paid by taxpayer
Costs paid by 3rd party, treated as paid by student

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American Opportunity Credit - AOC

Up to $2,500 per student

100% of first $2,000 of expenses
25% of second $2,000 of expenses
Generally, 40% refundable*
Can be taken only four tax years
Student must be a candidate for a degree** �

*Not refundable if student under age 24 and meets certain restrictions

**Includes certificate or other credential

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American Opportunity Credit

Minimum of half-time workload as set by school for at least one term
No felony drug convictions
Phase out based on AGI

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Qualified Education Expense

Course-related books

AOC rules allow purchase anywhere

Required supplies and equipment

Can be purchased anywhere
Computer generally considered qualified expense

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Lifetime Learning Credit (LLC)

Up to $2,000 per return (20% of first $10,000)
Nonrefundable credit
No disqualifier for felony drug conviction
Unlimited number of years
Available for one or more courses
Courses to acquire or improve job skills or degree

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Lifetime Learning Credit (LLC)

Qualified education expenses include

Tuition and fees
Only required books purchased from the school
Phase out based on AGI

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TaxSlayer: Enter Education Expenses

Enter the information from Jason Caldwell’s 1098-T and additional education expenses
Note AGI and refund

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Review Return - TaxSlayer Summary and Print

Review - Income and Adjustments entries:

Standard Deduction for MFJ
Is there a Retirement Savings Credit?
Foreign Tax, Education, and Other Dependent Credits
Additional tax on the IRA distribution
Amount of Earned Income Credit

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Review of Today’s Class

Practiced completing a typical tax return for a married couple with a child
Learned about a qualifying relative as a dependent
Incorporated additional forms of income into a return
Learned about and applied exceptions to additional tax for early IRA distribution
Discussed additional adjustments to income and credits
Observed changes in AGI and refund as income items were added and credits were computed by TaxSlayer and entered by counselor

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Celebrate!

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