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1040 Ez 2010

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1040 Ez 2010

1040 ez 2010 7. 1040 ez 2010   Filing Information Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: What, When, and Where To FileResident Aliens Nonresident Aliens Amended Returns and Claims for Refund Other Forms You May Have To File PenaltiesCivil Penalties Criminal Penalties Introduction This chapter provides the basic filing information that you may need. 1040 ez 2010 Topics - This chapter discusses: Forms aliens must file, When and where to file, Penalties, and Amended returns and claims for refund. 1040 ez 2010 Useful Items - You may want to see: Forms (and Instructions) 1040 U. 1040 ez 2010 S. 1040 ez 2010 Individual Income Tax Return 1040A U. 1040 ez 2010 S. 1040 ez 2010 Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1040NR U. 1040 ez 2010 S. 1040 ez 2010 Nonresident Alien Income Tax Return 1040NR-EZ U. 1040 ez 2010 S. 1040 ez 2010 Income Tax Return for Certain Nonresident Aliens With No Dependents See chapter 12 for information about getting these forms. 1040 ez 2010 What, When, and Where To File What return you must file as well as when and where you file that return, depends on your status at the end of the tax year as a resident or a nonresident alien. 1040 ez 2010 Resident Aliens Resident aliens should file Form 1040EZ, 1040A, or 1040 at the address shown in the instructions for that form. 1040 ez 2010 The due date for filing the return and paying any tax due is April 15 of the year following the year for which you are filing a return (but see the Tip, later). 1040 ez 2010 Under U. 1040 ez 2010 S. 1040 ez 2010 immigration law, a lawful permanent resident who is required to file a tax return as a resident and fails to do so may be regarded as having abandoned status and may lose permanent resident status. 1040 ez 2010 Extensions of time to file. 1040 ez 2010   You are allowed an automatic extension to June 15 to file if your main place of business and the home you live in are outside the United States and Puerto Rico on April 15. 1040 ez 2010 You can get an extension of time to October 15 to file your return if you get an extension by April 15 (June 15 if you qualify for the June 15 extension). 1040 ez 2010 Use Form 4868 to get the extension to October 15. 1040 ez 2010 In addition to this 6-month extension, taxpayers who are out of the country (as defined in the Form 4868 instructions) can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers). 1040 ez 2010 To request this extension, you must send the IRS a letter explaining the reasons why you need the additional 2 months. 1040 ez 2010 Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address:  Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215   You will not receive any notification from the IRS unless your request is denied for being untimely. 1040 ez 2010   The discretionary 2-month additional extension is not available to taxpayers who have an approved extension of time to file on Form 2350 (for U. 1040 ez 2010 S. 1040 ez 2010 citizens and resident aliens abroad who expect to qualify for special tax treatment). 1040 ez 2010    If the due date for filing falls on a Saturday, Sunday, or legal holiday, the due date is the next day which is not a Saturday, Sunday, or legal holiday. 1040 ez 2010 You may be able to file your return electronically. 1040 ez 2010 See IRS e-file in your form instructions. 1040 ez 2010 Nonresident Aliens Nonresident aliens who are required to file an income tax return should use Form 1040NR or, if qualified, Form 1040NR-EZ. 1040 ez 2010 If you are any of the following, you must file a return. 1040 ez 2010 A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during 2013. 1040 ez 2010 (But see Exceptions , later. 1040 ez 2010 ) You must file even if: Your income did not come from a trade or business conducted in the United States, You have no income from U. 1040 ez 2010 S. 1040 ez 2010 sources, or Your income is exempt from income tax. 1040 ez 2010 A nonresident alien individual not engaged in a trade or business in the United States with U. 1040 ez 2010 S. 1040 ez 2010 income on which the tax liability was not satisfied by the withholding of tax at the source. 1040 ez 2010 A representative or agent responsible for filing the return of an individual described in (1) or (2). 1040 ez 2010 A fiduciary for a nonresident alien estate or trust. 1040 ez 2010 You must also file if you want to: Claim a refund of overwithheld or overpaid tax, or Claim the benefit of any deductions or credits. 1040 ez 2010 For example, if you have no U. 1040 ez 2010 S. 1040 ez 2010 business activities but have income from real property that you choose to treat as effectively connected income (discussed in chapter 4), you must timely file a true and accurate return to take any allowable deductions against that income. 1040 ez 2010 For information on what is timely, see When to file for deductions and credits under When To File, later. 1040 ez 2010 Exceptions. 1040 ez 2010   You do not need to file Form 1040NR or Form 1040NR-EZ if you meet either of the following conditions. 1040 ez 2010 Your only U. 1040 ez 2010 S. 1040 ez 2010 trade or business was the performance of personal services, and Your wages were less than $3,900, and You have no other need to file a return to claim a refund of overwithheld taxes, to satisfy additional withholding at source, or to claim income exempt or partly exempt by treaty. 1040 ez 2010 You were a nonresident alien student, teacher, or trainee who was temporarily present in the United States under an “F,” “J,” “M,” or “Q” visa and you have no income that is subject to tax, such as wages, tips, scholarship and fellowship grants, dividends, etc. 1040 ez 2010 Even if you have left the United States and filed a Form 1040-C, U. 1040 ez 2010 S. 1040 ez 2010 Departing Alien Income Tax Return, on departure, you still must file an annual U. 1040 ez 2010 S. 1040 ez 2010 income tax return. 1040 ez 2010 If you are married and both you and your spouse are required to file, you must each file a separate return. 1040 ez 2010 Form 1040NR-EZ You can use Form 1040NR-EZ if all of the following conditions are met. 1040 ez 2010 You do not claim any dependents. 1040 ez 2010 You cannot be claimed as a dependent on someone else's U. 1040 ez 2010 S. 1040 ez 2010 tax return. 1040 ez 2010 If you were married, you do not claim an exemption for your spouse. 1040 ez 2010 Your taxable income is less than $100,000. 1040 ez 2010 The only itemized deduction you can claim is for state and local income taxes. 1040 ez 2010 Note. 1040 ez 2010 Residents of India who were students or business apprentices may be able to take the standard deduction instead of the itemized deduction for state and local income taxes. 1040 ez 2010 See chapter 5. 1040 ez 2010 Your only U. 1040 ez 2010 S. 1040 ez 2010 source income is from wages, salaries, tips, taxable refunds of state and local income taxes, scholarship or fellowship grants, and nontaxable interest or dividends. 1040 ez 2010 (If you had taxable interest or dividend income, you cannot use this form. 1040 ez 2010 ) You are not claiming any adjustments to income other than the student loan interest deduction or scholarship and fellowship grants excluded. 1040 ez 2010 You are not claiming any tax credits. 1040 ez 2010 This is not an “expatriation return. 1040 ez 2010 ” See Expatriation Tax in chapter 4. 1040 ez 2010 The only taxes you owe are: The income tax from the Tax Table. 1040 ez 2010 The social security and Medicare tax from Form 4137 or Form 8919. 1040 ez 2010 You are not claiming a credit for excess social security and tier 1 RRTA tax withheld. 1040 ez 2010 You are not filing Form 8959, to figure the amount of Additional Medicare Tax you owe and/or the amount of Additional Medicare Tax withheld by your employer, if any. 1040 ez 2010 If you do not meet all of the above conditions, you must file Form 1040NR. 1040 ez 2010 When To File If you are an employee and you receive wages subject to U. 1040 ez 2010 S. 1040 ez 2010 income tax withholding, you will generally file by the 15th day of the 4th month after your tax year ends. 1040 ez 2010 For the 2013 calendar year, file your return by April 15, 2014. 1040 ez 2010 If you are not an employee who receives wages subject to U. 1040 ez 2010 S. 1040 ez 2010 income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. 1040 ez 2010 For the 2013 calendar year, file your return by June 16, 2014 (because June 15 is a Sunday. 1040 ez 2010 ) Extensions of time to file. 1040 ez 2010   If you cannot file your return by the due date, file Form 4868 or use one of the electronic filing options explained in the Form 4868 instructions. 1040 ez 2010 For the 2013 calendar year, this will extend the due date to October 15, 2014 (December 15, 2014, if the regular due date of your return is June 16, 2014). 1040 ez 2010 You must file the extension by the regular due date of your return. 1040 ez 2010   In addition to the 6-month extension to October 15, taxpayers whose main place of business is outside the United States and Puerto Rico and who live outside those jurisdictions can request a discretionary 2-month extension of time to file their returns (to December 15 for calendar year taxpayers). 1040 ez 2010 To request this extension, you must send the IRS a letter explaining the reasons why you need the additional 2 months. 1040 ez 2010 Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address: Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215   You will not receive any notification from the IRS unless your request is denied for being untimely. 1040 ez 2010 When to file for deductions and credits. 1040 ez 2010   To get the benefit of any allowable deductions or credits, you must timely file a true and accurate return. 1040 ez 2010 For this purpose, a return is timely if it is filed within 16 months of the due date just discussed. 1040 ez 2010 However, if you did not file a 2012 tax return and 2013 is not the first year for which you are required to file one, your 2013 return is timely for this purpose if it is filed by the earlier of: The date that is 16 months after the due date for filing your 2013 return, or The date the IRS notifies you that your 2013 return has not been filed and that you cannot claim certain deductions and credits. 1040 ez 2010 The allowance of the following credits is not affected by this time requirement. 1040 ez 2010 Credit for withheld taxes. 1040 ez 2010 Credit for excise tax on certain uses of gasoline and special fuels. 1040 ez 2010 Credit for tax paid by a mutual fund (or other regulated investment company) or a real estate investment trust on undistributed long-term capital gains. 1040 ez 2010 Protective return. 1040 ez 2010   If your activities in the United States were limited and you do not believe that you had any gross income effectively connected with a U. 1040 ez 2010 S. 1040 ez 2010 trade or business during the year, you can file a protective return (Form 1040NR) by the deadline explained above. 1040 ez 2010 By filing a protective return, you protect your right to receive the benefit of deductions and credits in the event it is later determined that some or all of your income is effectively connected. 1040 ez 2010 You are not required to report any effectively connected income or any deductions on the protective return, but you must give the reason the return is being filed. 1040 ez 2010   If you believe some of your activities resulted in effectively connected income, file your return reporting that income and related deductions by the regular due date. 1040 ez 2010 To protect your right to claim deductions or credits resulting from other activities, attach a statement to that return explaining that you wish to protect your right to claim deductions and credits if it is later determined that the other activities produced effectively connected income. 1040 ez 2010   You can follow the same procedure if you believe you have no U. 1040 ez 2010 S. 1040 ez 2010 tax liability because of a U. 1040 ez 2010 S. 1040 ez 2010 tax treaty. 1040 ez 2010 Be sure to also complete item L on page 5 of Form 1040NR. 1040 ez 2010 Waiver of filing deadline. 1040 ez 2010   The IRS may waive the filing deadline if you establish that, based on the facts and circumstances, you acted reasonably and in good faith in failing to file a U. 1040 ez 2010 S. 1040 ez 2010 income tax return (including a protective return) and you cooperate with the IRS in determining your U. 1040 ez 2010 S. 1040 ez 2010 income tax liability for the tax year for which you did not file a return. 1040 ez 2010 Where To File If you are not enclosing a payment, file Form 1040NR-EZ and Form 1040NR at the following address. 1040 ez 2010  Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215 If enclosing a payment, mail your return to:  Internal Revenue Service  P. 1040 ez 2010 O. 1040 ez 2010 Box 1303 Charlotte, NC 28201-1303 Aliens from the U. 1040 ez 2010 S. 1040 ez 2010 Virgin Islands. 1040 ez 2010    If you are a bona fide resident of the U. 1040 ez 2010 S. 1040 ez 2010 Virgin Islands during your entire tax year and work temporarily in the United States, you must pay your income taxes to the U. 1040 ez 2010 S. 1040 ez 2010 Virgin Islands and file your income tax returns at the following address. 1040 ez 2010 Virgin Islands Bureau of Internal Revenue 6115 Estate Smith Bay Suite 225 St. 1040 ez 2010 Thomas, VI 00802   Report all income from U. 1040 ez 2010 S. 1040 ez 2010 sources, as well as income from other sources, on your return. 1040 ez 2010 For information on filing U. 1040 ez 2010 S. 1040 ez 2010 Virgin Islands returns, contact the U. 1040 ez 2010 S. 1040 ez 2010 Virgin Islands Bureau of Internal Revenue. 1040 ez 2010   Chapter 8 discusses withholding from U. 1040 ez 2010 S. 1040 ez 2010 wages of U. 1040 ez 2010 S. 1040 ez 2010 Virgin Islanders. 1040 ez 2010 Aliens from Guam or the Commonwealth of the Northern Mariana Islands. 1040 ez 2010   If you are a bona fide resident of Guam or the Commonwealth of the Northern Mariana Islands (CNMI) during your entire tax year, you must file your return with, and pay any tax due to, Guam or the CNMI. 1040 ez 2010 Report all income, including income from U. 1040 ez 2010 S. 1040 ez 2010 sources, on your return. 1040 ez 2010 It is not necessary to file a separate U. 1040 ez 2010 S. 1040 ez 2010 income tax return. 1040 ez 2010    Bona fide residents of Guam should file their Guam returns at the following address. 1040 ez 2010   Department of Revenue and Taxation Government of Guam P. 1040 ez 2010 O. 1040 ez 2010 Box 23607 GMF, GU 96921    Bona fide residents of the CNMI should file their CNMI income tax returns at the following address. 1040 ez 2010   Department of Finance Division of Revenue and Taxation Commonwealth of the Northern Mariana Islands P. 1040 ez 2010 O. 1040 ez 2010 Box 5234 CHRB Saipan, MP 96950   If you are not a bona fide resident of Guam or the CNMI, see Pub. 1040 ez 2010 570, Tax Guide for Individuals With Income From U. 1040 ez 2010 S. 1040 ez 2010 Possessions, for information on where to file your return. 1040 ez 2010 Amended Returns and Claims for Refund If you find changes in your income, deductions, or credits after you mail your return, file Form 1040X, Amended U. 1040 ez 2010 S. 1040 ez 2010 Individual Income Tax Return. 1040 ez 2010 Also use Form 1040X if you should have filed Form 1040, 1040A, or 1040EZ instead of Form 1040NR or 1040NR-EZ, or vice versa. 1040 ez 2010 If you amend Form 1040NR or Form 1040NR-EZ or file the correct return, attach the corrected return (Form 1040, Form 1040NR, etc. 1040 ez 2010 ) to Form 1040X. 1040 ez 2010 Print “Amended” across the top. 1040 ez 2010 Ordinarily, an amended return claiming a refund must be filed within 3 years from the date your return was filed or within 2 years from the time the tax was paid, whichever is later. 1040 ez 2010 A return filed before the final due date is considered to have been filed on the due date. 1040 ez 2010 Other Forms You May Have To File You may be required to file information returns to report certain foreign income or assets, or monetary transactions. 1040 ez 2010 FinCen Form 105 FinCEN Form 105 (formerly Customs Form 4790), Report of International Transportation of Currency or Monetary Instruments, must be filed by each person who physically transports, mails, or ships, or causes to be physically transported, mailed, or shipped, currency or other monetary instruments in a total amount of more than $10,000 at one time from the United States to any place outside the United States, or into the United States from any place outside the United States. 1040 ez 2010 The filing requirement also applies to each person who receives in the United States currency or monetary instruments totaling more than $10,000 at one time from any place outside of the United States. 1040 ez 2010 The term “monetary instruments” means the following: Coin and currency of the United States or of any other country, Travelers' checks in any form, Investment securities or stock in bearer form or otherwise in such form that title to them passes upon delivery, Negotiable instruments (including checks, promissory notes, and money orders) in bearer form, endorsed without restriction, made out to a fictitious payee, or otherwise in such form that title to them passes upon delivery, and Checks, promissory notes, and money orders which are signed but on which the name of the payee has been omitted. 1040 ez 2010 However, the term does not include: Checks or money orders made payable to the order of a named person which have not been endorsed or which contain restrictive endorsements, Warehouse receipts, or Bills of lading. 1040 ez 2010 A transfer of funds through normal banking procedures (wire transfer) that does not involve the physical transportation of currency or monetary instruments is not required to be reported on FinCEN Form 105. 1040 ez 2010 Filing requirements. 1040 ez 2010   FinCEN Form 105 filing requirements follow. 1040 ez 2010 Recipients. 1040 ez 2010   Each person who receives currency or other monetary instruments in the United States must file FinCEN Form 105 within 15 days after receipt, with the Customs officer in charge at any port of entry or departure, or by mail at the following address. 1040 ez 2010 Commissioner of Customs  Attention: Currency Transportation Reports Washington, DC 20229 Shippers or mailers. 1040 ez 2010   If the currency or other monetary instrument does not accompany the person entering or departing the United States, FinCEN Form 105 can be filed by mail at the above address on or before the date of entry, departure, mailing, or shipping. 1040 ez 2010 Travelers. 1040 ez 2010   Travelers must file FinCEN Form 105 with the Customs officer in charge at any Customs port of entry or departure, when entering or departing the United States. 1040 ez 2010 Penalties. 1040 ez 2010   Civil and criminal penalties are provided for failing to file a report, filing a report containing material omissions or misstatements, or filing a false or fraudulent report. 1040 ez 2010 Also, the entire amount of the currency or monetary instrument may be subject to seizure and forfeiture. 1040 ez 2010 More information. 1040 ez 2010   More information regarding the filing of FinCEN Form 105 can be found in the instructions on the back of the form. 1040 ez 2010 Form 8938 You may have to file Form 8938, Statement of Specified Foreign Financial Assets, to report the ownership of specified foreign financial asset(s) if you are one of the following individuals. 1040 ez 2010 A resident alien of the United States for any part of the tax year. 1040 ez 2010 A resident alien of the United States who elects to be treated as a resident of a foreign country under the provisions of a U. 1040 ez 2010 S. 1040 ez 2010 income tax treaty. 1040 ez 2010 See Effect of Tax Treaties in chapter 1. 1040 ez 2010 A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return. 1040 ez 2010 See chapter 1 for information about this election. 1040 ez 2010 A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico. 1040 ez 2010 See Publication 570, Tax Guide for Individuals With Income From U. 1040 ez 2010 S. 1040 ez 2010 Possessions, for a definition of bona fide resident. 1040 ez 2010 You must file Form 8938 if the total value of those assets exceeds an applicable threshold (the “reporting threshold”). 1040 ez 2010 The reporting threshold varies depending on whether you live in the United States, are married, or file a joint income tax return with your spouse. 1040 ez 2010 Specified foreign financial assets include any financial account maintained by a foreign financial institution and, to the extent held for investment, any stock, securities, or any other interest in a foreign entity and any financial instrument or contract with an issuer or counterparty that is not a U. 1040 ez 2010 S. 1040 ez 2010 person. 1040 ez 2010 You may have to pay penalties if you are required to file Form 8938 and fail to do so, or if you have an understatement of tax due to any transaction involving an undisclosed foreign financial asset. 1040 ez 2010 More information about the filing of Form 8938 can be found in the separate instructions for Form 8938. 1040 ez 2010 Penalties The law provides penalties for failure to file returns or pay taxes as required. 1040 ez 2010 Civil Penalties If you do not file your return and pay your tax by the due date, you may have to pay a penalty. 1040 ez 2010 You may also have to pay a penalty if you substantially understate your tax, file a frivolous tax submission, or fail to supply your taxpayer identification number. 1040 ez 2010 If you provide fraudulent information on your return, you may have to pay a civil fraud penalty. 1040 ez 2010 Filing late. 1040 ez 2010   If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. 1040 ez 2010 The penalty is based on the tax not paid by the due date (without regard to extensions). 1040 ez 2010 The penalty is usually 5% for each month or part of a month that a return is late, but not more than 25%. 1040 ez 2010 Fraud. 1040 ez 2010   If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%. 1040 ez 2010 Return over 60 days late. 1040 ez 2010   If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. 1040 ez 2010 Exception. 1040 ez 2010   You will not have to pay the penalty if you show that you failed to file on time because of reasonable cause and not because of willful neglect. 1040 ez 2010 Paying tax late. 1040 ez 2010   You will have to pay a failure-to-pay penalty of ½ of 1% (. 1040 ez 2010 50%) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. 1040 ez 2010 This penalty does not apply during the automatic 6-month extension of time to file period, if you paid at least 90% of your actual tax liability on or before the due date of your return and pay the balance when you file the return. 1040 ez 2010   The monthly rate of the failure-to-pay penalty is half the usual rate (. 1040 ez 2010 25% instead of . 1040 ez 2010 50%) if an installment agreement is in effect for that month. 1040 ez 2010 You must have filed your return by the due date (including extensions) to qualify for this reduced penalty. 1040 ez 2010   If a notice of intent to levy is issued, the rate will increase to 1% at the start of the first month beginning at least 10 days after the day that the notice is issued. 1040 ez 2010 If a notice and demand for immediate payment is issued, the rate will increase to 1% at the start of the first month beginning after the day that the notice and demand is issued. 1040 ez 2010   This penalty cannot be more than 25% of your unpaid tax. 1040 ez 2010 You will not have to pay the penalty if you can show that you had a good reason for not paying your tax on time. 1040 ez 2010 Combined penalties. 1040 ez 2010   If both the failure-to-file penalty and the failure-to-pay penalty (discussed earlier) apply in any month, the 5% (or 15%) failure-to-file penalty is reduced by the failure-to-pay penalty. 1040 ez 2010 However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. 1040 ez 2010 Accuracy-related penalty. 1040 ez 2010   You may have to pay an accuracy-related penalty if you underpay your tax because: You show negligence or disregard of rules or regulations, You substantially understate your income tax, You claim tax benefits for a transaction that lacks economic substance, or You fail to disclose a foreign financial asset. 1040 ez 2010 The penalty is equal to 20% of the underpayment. 1040 ez 2010 The penalty is 40% of any portion of the underpayment that is attributable to an undisclosed noneconomic substance transaction or an undisclosed foreign financial asset transaction. 1040 ez 2010 The penalty will not be figured on any part of an underpayment on which the fraud penalty (discussed later) is charged. 1040 ez 2010 Negligence or disregard. 1040 ez 2010   The term “negligence” includes a failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. 1040 ez 2010 Negligence also includes failure to keep adequate books and records. 1040 ez 2010 You will not have to pay a negligence penalty if you have a reasonable basis for a position you took. 1040 ez 2010   The term “disregard” includes any careless, reckless, or intentional disregard. 1040 ez 2010 Adequate disclosure. 1040 ez 2010   You can avoid the penalty for disregard of rules or regulations if you adequately disclose on your return a position that has at least a reasonable basis. 1040 ez 2010 See Disclosure statement , later. 1040 ez 2010   This exception will not apply to an item that is attributable to a tax shelter. 1040 ez 2010 In addition, it will not apply if you fail to keep adequate books and records, or substantiate items properly. 1040 ez 2010 Substantial understatement of income tax. 1040 ez 2010   You understate your tax if the tax shown on your return is less than the correct tax. 1040 ez 2010 The understatement is substantial if it is more than the larger of 10% of the correct tax or $5,000. 1040 ez 2010 However, the amount of the understatement is reduced to the extent the understatement is due to: Substantial authority, or Adequate disclosure and a reasonable basis. 1040 ez 2010   If an item on your return is attributable to a tax shelter, there is no reduction for an adequate disclosure. 1040 ez 2010 However, there is a reduction for a position with substantial authority, but only if you reasonably believed that your tax treatment was more likely than not the proper treatment. 1040 ez 2010 Substantial authority. 1040 ez 2010   Whether there is or was substantial authority for the tax treatment of an item depends on the facts and circumstances. 1040 ez 2010 Consideration will be given to court opinions, Treasury regulations, revenue rulings, revenue procedures, and notices and announcements issued by the IRS and published in the Internal Revenue Bulletin that involve the same or similar circumstances as yours. 1040 ez 2010 Disclosure statement. 1040 ez 2010   To adequately disclose the relevant facts about your tax treatment of an item, use Form 8275, Disclosure Statement. 1040 ez 2010 You must also have a reasonable basis for treating the item the way you did. 1040 ez 2010   In cases of substantial understatement only, items that meet the requirements of Revenue Procedure 2012-51, 2012-51 IRB 719 (or later update) are considered adequately disclosed on your return without filing Form 8275. 1040 ez 2010   Use Form 8275-R, Regulation Disclosure Statement, to disclose items or positions contrary to regulations. 1040 ez 2010 Transaction lacking economic substance. 1040 ez 2010   For more information on economic substance, see section 7701(o). 1040 ez 2010 Foreign financial asset. 1040 ez 2010   For more information on undisclosed foreign financial assets, see section 6662(j) or the Instructions for Form 8938. 1040 ez 2010 Reasonable cause. 1040 ez 2010   You will not have to pay a penalty if you show a good reason (reasonable cause) for the way you treated an item. 1040 ez 2010 You must also show that you acted in good faith. 1040 ez 2010 This does not apply to a transaction that lacks economic substance. 1040 ez 2010 Filing erroneous claim for refund or credit. 1040 ez 2010   You may have to pay a penalty if you file an erroneous claim for refund or credit. 1040 ez 2010 The penalty is equal to 20% of the disallowed amount of the claim, unless you can show a reasonable basis for the way you treated an item. 1040 ez 2010 However, any disallowed amount due to a transaction that lacks economic substance will not be treated as having a reasonable basis. 1040 ez 2010 The penalty will not be figured on any part of the disallowed amount of the claim that relates to the earned income credit or on which the accuracy-related or fraud penalties are charged. 1040 ez 2010 Frivolous tax submission. 1040 ez 2010   You may have to pay a penalty of $5,000 if you file a frivolous tax return or other frivolous submissions. 1040 ez 2010 A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect. 1040 ez 2010 For more information on frivolous returns, frivolous submissions, and a list of positions that are identified as frivolous, see Notice 2010-33, 2010-17 IRB 609 available at www. 1040 ez 2010 irs. 1040 ez 2010 gov/irb/2010-17_irb/ar13. 1040 ez 2010 html. 1040 ez 2010   You will have to pay the penalty if you filed this kind of return or submission based on a frivolous position or a desire to delay or interfere with the administration of federal tax laws. 1040 ez 2010 This includes altering or striking out the preprinted language above the space provided for your signature. 1040 ez 2010   This penalty is added to any other penalty provided by law. 1040 ez 2010 Fraud. 1040 ez 2010   If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud will be added to your tax. 1040 ez 2010 Failure to supply taxpayer identification number. 1040 ez 2010   If you do not include your social security number (SSN) or individual taxpayer identification number (ITIN) or the SSN or ITIN of another person where required on a return, statement, or other document, you will be subject to a penalty of $50 for each failure. 1040 ez 2010 You will also be subject to a penalty of $50 if you do not give your SSN or ITIN to another person when it is required on a return, statement, or other document. 1040 ez 2010   For example, if you have a bank account that earns interest, you must give your SSN or ITIN to the bank. 1040 ez 2010 The number must be shown on the Form 1099-INT or other statement the bank sends you. 1040 ez 2010 If you do not give the bank your SSN or ITIN, you will be subject to the $50 penalty. 1040 ez 2010 (You also may be subject to “backup” withholding of income tax. 1040 ez 2010 )   You will not have to pay the penalty if you are able to show that the failure was due to reasonable cause and not willful neglect. 1040 ez 2010 Criminal Penalties You may be subject to criminal prosecution (brought to trial) for actions such as: Tax evasion, Willful failure to file a return, supply information, or pay any tax due, Fraud and false statements, or Preparing and filing a fraudulent return. 1040 ez 2010 Prev  Up  Next   Home   More Online Publications
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Railroad Retirement Tax Act (RRTA) Desk Guide (January 2009)

LMSB-4-0908-048

1. Preface

  • Ground Transportation Technical Advisor

2.  Introduction

  • Role of RRB

The Railroad Retirement Systems

Types of Tax

  • RRTA - Tiers and Rates

Filing Requirements, IRS
  • Forms
  • Form CT-
  • Form CT-2
  • Form 941
  • Form W-2
  • Form W-3

Filing Requirements, RRB
  • RRB Reports

Deposit Requirements

3.  Interaction Between IRS and RRB

  • Memorandum of Understanding (Coordination and Implementation Agreements)
  • On-site Information Exchange
  • IRS Reports
  • RRB Determination of Coverage
  • RRB Audit Report
  • IRS Follow-up

4.  Definitions

Employer

  • RRA vs. RRTA
  • Employer
  • Owned Company
  • Controlled Companies
  • Stock Ownership
  • Licenses
  • Agreements
  • Any Railroad Service
  • Indirect Services
  • Indirect
  • Companies
  • Casual Service
  • Receiver or Trustee as Employer
  • Railroad Associations
  • Railway Labor Organizations
  • Exclusions From "Employer"

Employee

  • In the Service of One or More Employers
  • Officer
  • Special Categories
  • Exclusions

Compensation

  • Comparison of RRTA to FICA
  • Included and Excluded
  • Earned vs. Paid

5.  Audit Techniques

Audit Plan

  • Preliminary
  • Payroll System
  • Computer Audit Specialist (CAS) Applications
  • Reconciliation of CT-1's
  • Supplemental Annuity Tax
  • RURT
  • Fringe Benefits
  • Backup Withholding
  • Conversion Issues
  • FICA vs. RRTA.

6.  Potential Issues

General

  • General Comments
  • Employee vs. Independent Contractor
  • Section 530
  • General Issues

Industry Specific Issues:

  • Severance Pay/ Termination Pay
  • Annual Productivity Fund Payments
  • Productivity Fund Buyouts
  • Employee Achievement Awards
  • Housing Allowances
  • Meals, Travel, Lodging
  • SEGREGATION
  • Excluded Companies
  • Principally Engaged in Railroad Activities
  • Separate, Identifiable Enterprise
  • Court Cases

Employer Issues

  • Common Paymaster
  • Successor Employers

Related Corporations:

  • Car Repair Shops
  • Warehousing and Warehouse Companies
  • Construction Companies
  • Real Estate Companies
  • Data Processing Companies

Examination Techniques, Related Corporations

  • Subsidiary Records
  • Parent Records
  • Contractual Relationship
  • General Inquiries
  • Other Considerations

7.  Report Writing

  • General
  • ET Version 8.0
  • Form 4665, Form 4666, Form 886A, Form 2504, Form 2297, Form 3363
  • Form 4668-RT
  • Form 4667
  • Conversion Case
  • IRC § 3509

Computation of Tax

  • Tier I 
  • Tier II

8.  Other Considerations

  • Statutory Period of Limitations
  • Form SS-1O
  • RRB Report Title
  • BA-3a Annual Report of Creditable Compensation
  • BA-4 Report of Creditable Compensation Adjustments
  • BA-9 Report of Separation Allowance or Severance Pay
  • BA-10 Report of Miscellaneous Compensation and Sick Pay
  • Form G-241 Summary Statement of Quarterly Report of Railroad Retirement
  • Supplemental Annuity Tax Liabilities
  • Form G-245 Summary Statement of Quarterly Report of Railroad Retirement
  • Supplemental Tax Credits
  • Form G-440 Report Specifications Sheet
  • Penalties, Interest Free Adjustments, Abatements


1.  Preface

This Desk Reference Guide is intended as a resource tool to assist Revenue Agents who are assigned the examination of a railroad employer. The Guide was prepared presuming that the reader has already received employment tax training. The guide will provide:

  • An overview of the Railroad Retirement System.
  • An explanation of the role of the Railroad Retirement Board (RRB).
  • An explanation of the interaction of the IRS and the RRB.
  • Definitions specific to railroad retirement terminology.
  • A suggested audit plan.
  • A list of potential issues with possible position write-ups.

We have attempted to include as many citations as possible throughout the text to relevant court cases, revenue rulings, revenue procedures, private letter rulings, etc.

Ground Transportation Technical Advisor
Technical Advisors assist the field in identifying, developing and resolving industry specific and cross-industry issues; provide educational opportunities to internal and external customers as appropriate; and maintain and develop industry and issue expertise. The Ground Transportation  Technical Advisor (TA) provides these services for the railroad and trucking industries. The TA maintains a liaison with various functions within the IRS as well as in other governmental agencies, and may also be aware of issues being raised at various other examination sites throughout the country.  As a result, the TA may be able to provide the examiner with current information to consider during the course of the audit.

The TA also maintains a web site at: http://lmsb.irs.gov/hq/pftg/railroad/index.asp

This web site may be useful in obtaining information on topics of an even more current nature The railroad industry is unique in many ways and we encourage examiners to use the web site as a means of obtaining knowledge and understanding about the industry.

It is recommended that the examiner use four hours to review the guide during the planning stages of the examination. The guide can then be used on a continuing basis during the course of the examination as a reference tool.

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2.  Introduction

Railroad employers are subject to a separate and distinct system of employment taxes from the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) systems covering most other employers.  Parts of the system are the responsibility of the IRS, and parts of the system are the responsibility of the Railroad Retirement Board, an independent governmental agency.

Because this is a separate system for railroad employers, payments subject to railroad retirement taxes are specifically excepted from FICA, FUTA, and the Self-Employment Contributions Act (SECA).

The Railroad Retirement Board (RRB) is an independent agency in the executive branch of the Federal Government.  The RRB is headed by a three member Board appointed by the President of the United States, with the advice and consent of the Senate.  One member is appointed upon the recommendation of railroad employers, one is appointed upon the recommendation of railroad labor organizations, and the third member, who is the Chairman, is appointed to represent the public interest.  The Board Members' terms of office are five years, and are scheduled to expire in different years.

The primary function of the Board is the determination and payment of benefits under the retirement-survivor and unemployment-sickness programs. To this end, the Board employs field representatives to assist railroad personnel and their families in filing claims for benefits, examiners to adjudicate the claims, and information technology staff to operate the data processing equipment and administer the automated programs needed to maintain earnings records, calculate benefits and process payments.

The Board also employs actuaries to predict the future income and outlays of the railroad retirement trust funds, statisticians and economists to provide vital data, and attorneys to interpret legislation and represent the Board in litigation. Internal administration requires a procurement staff, a budget and accounting staff, and personnel specialists. The Inspector General employs auditors and investigators to detect any waste, fraud or abuse in the benefit programs.

The Board's headquarters is located in Chicago, Illinois.  The Board maintains field offices across the United States in localities easily accessible to large numbers of railroad workers.

Role of RRB
The role of the RRB is to administer the benefits of the Railroad Retirement Act (RRA) and Railroad Unemployment Insurance Act (RUIA) systems. Thus, the RRB maintains earnings records for each railroad employee in a manner similar to those maintained by the Social Security Administration.   The RRB’s relationship with the Social Security Administration (SSA) is particularly extensive because of the coordination between the two systems.  Railroad retirement annuities may be based in part on social security credits and social security benefit amounts awarded after 1974 to railroad retirement annuitants are made through the Board as part of combined railroad retirement-social security monthly benefit payments.

The RRB and the Social Security Administration have an interagency agreement providing for system-to-system access between the two agencies.
 
The Railroad Retirement System
Railroad employment taxes consist of employer and employee taxes. The employer and employees pay certain taxes at different rates and some are only paid by one or the other, though all taxes are collected by the employer and the employer makes deposits of these taxes.

  1. Railroad Retirement Tax Act (RRTA) – RRTA taxes fund railroad worker retirement benefits.  Collection of these taxes is the responsibility of the IRS.  These taxes are imposed by chapter 22 of the Internal Revenue Code (IRC).
  2. Railroad Retirement Act (RRA) – RRA is the benefit system through which payments are made to retired railroad workers. Benefits are administered by the RRB.
  3. Railroad Unemployment Insurance Act (RUIA) - This system provides unemployment and sickness insurance benefit program for railroad workers. The system is administered, and the taxes are collected by, the RRB.
  4. Railroad Unemployment Repayment Tax (RURT) - in periods of economic downturn, when the RUIA account becomes insufficient to cover payments of unemployment benefits, funds are advanced to the RUIA account from the RRTA account.  RURT taxes are then collected as a means of repaying the advance, bringing the RUIA fund back into balance.  Thus, this tax goes into and out of effect, depending on the balance in the RUIA account.

    As of June 29, 1993, the RUIA account was fully funded and all advances from the RRTA account had been repaid.  As a result, the RURT was terminated effective with respect to wages paid on or after July 1, 1993.  This tax could be reinstated at some future date.  When in effect this tax is imposed by Chapter 23A of the IRC.
  5. Tax on Employee Representatives - Certain individuals perform services as an officer or official representative of a railway labor organization for purposes of representing employees under the Railway Labor Act.  These individuals are subject to RRTA taxes, and file a separate return to report the wage payments and RRTA taxes. Individuals subject to this tax will not be covered in detail in this desk guide due to the limited number of returns filed for this special situation.  Discussion of employee representatives will be limited to an awareness only basis.
  6. IRC 6103 (l) (1) (C) - The IRS is authorized to disclose tax information regarding RRTA taxes to the RRB for purposes of its administration of the RRA.  The RRB may not use such tax information to administer any other statutes.  Such tax information may not be disclosed to RRB contractors (in connection with the administration of the RRA).  The IRS may not disclose RURT information to the RRB.

RRTA – Tiers and Rates
Legislation was enacted in 1934, 1935, and 1937 to establish a railroad retirement system separate from the Social Security Act of 1935.  Under Railroad Retirement provisions, service was credited back to 1936 and rail workers received a somewhat higher benefit than they would have under Social Security.  Additional legislation passed in 1974 restructured railroad retirement benefits into two tiers to coordinate them more fully with social security benefits. 

Railroad retirement replaces the social security system for railroad workers. The taxes under the railroad retirement system are included in two tiers.  The first tier is based on combined railroad retirement and social security credits, using social security benefit formulas.  The second tier is based on railroad service only and is comparable to the pensions paid over and above social security benefits in other heavy industries.  These tiers and rates are as follows:

RRTA

2008

2007

2006

Tier I Wage Base/Rate *

$102,000/6.20%

$97,500/6.20%

$94,200/6.20%

Tier I Wage Base/Rate *

unlimited/1.45%

unlimited/1.45%

unlimited/1.45%

Tier II ER Wage Base/Rate

$75,900/12.1%

$72,600/12.1%

$69,900/12.6%

Tier II EE Wage Base/Rate

$75,900/3.9%

$72,600/3.9%

$69,900/4.4%

* Subject to both employer and employee

 

 


When looking at the rates for RRTA, and comparing them to the rates used for social security, it is readily apparent that a railroad employer is subject to a much higher rate of tax than a non-railroad employer.  Thus, there is a significant incentive for an employer to attempt to be classified as a non-railroad, to classify workers as independent contractors, or to classify payments as something other than wages.
 
Filing Requirements, IRS

Forms

Because railroad employers do not come under the social security system, they file different employment tax returns from those used to report FICA wages.

The forms used to report railroad employment taxes are presented below.

Form CT-1

Employer's Annual Railroad Retirement Tax Return

A railroad employer files an annual CT-1 to report RRTA taxes.  All CT-1 returns are filed with the IRS Cincinnati Campus, and must be filed by the last day of the second month following the end of the calendar year (normally, by February 28th).

The IRS Cincinnati Campus provides information to the RRB to allow the RRB to reconcile railroad employer accounts.

Note: For any year in which the RURT is applicable, a separate entry is provided in order for the RURT to be reported on the Form CT-1.

Form CT-2

Employee Representative's Quarterly Railroad Tax Return

A CT-2 is filed on a quarterly basis by individuals subject to the Tax on Employee Representatives.

Form 941

Employer’s Quarterly Federal Tax Return

Although railroad employers are not subject to FICA, they are still required to withhold income tax on behalf of their railroad employees; there is no provision on Form CT-l to report the income tax withholding, so railroad employers use Form 941 for this purpose.

It is also conceivable that an employer could have some employees covered by FICA, and other employees covered by RRTA. In this situation the employer would be reporting FICA wages on the Form 941.  (This subject will be discussed in greater detail in the “Potential Issues” section of the guide.)

Form W-2

Wage and Tax Statement

Railroad employers use Form W-2 to report wage payments to employees and to SSA.  RRTA taxes are shown in Box 14, and Boxes 3, 4, 5, 6 and 7, relating to FICA and Medicare, should be blank.

Form W-3

Transmittal of Income and Tax Statements

Railroad employers use Form W-3 to transmit Forms W-2 to SSA.  Form W-3 provides a box to indicate that the employer is a railroad, alerting SSA to the fact that the information reported reflects RRTA rather than FICA and Medicare.

If an employer has some employees covered under FICA and Medicare as well as RRTA, the Form W-2's must be segregated by type, and separate Forms  W-3 prepared for each batch.

Filing Requirements, RRB

RRB Reports

A railroad employer is also required to submit numerous reports to the RRB which can be used by the examiner as a cross check of the amounts reported on the Form CT-1. Some of the reports are as follows:

RRB Report

Title

BA-3a

Annual Report of Creditable Compensation

BA-4

Report of Creditable Compensation Adjustments

BA-9

Report of Separation Allowance or Severance Pay

BA-10

Report of Miscellaneous Compensation and Sick Pay

Form G-241

Summary Statement of Quarterly Report of Railroad Retirement Supplemental Annuity Tax Liabilities

Form G-245

Summary Statement of Quarterly Report of Railroad Retirement Supplemental Tax Credits

Form G-440

Report Specifications Sheet

Deposit Requirements

Railroads are under the same rules as any other business or employer for determining deposit requirements for all types of tax.  RRTA taxes are also subject to deposit requirements.  The “Instructions for Form CT-1”, contain a detailed discussion of deposit rules for RRTA taxes. There were major changes made to the deposit requirements in 1999.  See News Release IR-1999-27 and Notice 99-20, 1999-17 I.R.B. 16.

In general RRTA taxes are deposited with an authorized financial institution or a Federal Reserve Bank by using Form 8109, Federal Tax Deposit Coupon.  Based on a dollar threshold there is a mandatory electronic deposit requirement.  That threshold has been increased from $50,000 to $200,000. If the total Federal tax deposits made in 2006 exceed $200,000 they must use the Electronic Federal Tax Payment System (EFTPS) or RRBLINK beginning January 1,2007.   

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3.  Interaction Between IRS and RRB

Agreement Between the Railroad Retirement Board and Internal Revenue Service

The Agreement between the Railroad Retirement Board and Internal Revenue Service (Agreement)  facilitates the sharing of information between the two agencies.

The terms of the Agreement call for each agency to share the results of its investigations with the other agency and to provide supporting work papers or documentation on an as needed basis, to the extent authorized under IRC § 6103(l)(1)(c) and other applicable federal laws.

On-site Information Exchange

On occasion, the IRS and RRB may be simultaneously involved in an audit of the same employer.  In such an event, each agency may share information with the other as permitted by applicable federal laws.  The LMSB Ground Transportation Technical Advisor should be contacted before any information is shared

IRS Reports

The Agreement calls for the IRS to furnish a copy of any examination report to the RRB.  For an agreed case, the report is furnished when the examiner is closing the case. Unagreed reports are furnished after Appeals action.

It is important to note that the RRB is NOT entitled to receive any information with respect to RURT taxes and/or social security taxes. If an examination results in changes to RURT and/or social security taxes, the report should be sanitized so that RURT and/or social security information is not included in the copy being provided to the RRB.  Such sanitizing should be coordinated with the local IRS disclosure officer.
 
RRB Determination of Coverage

The RRB conducts investigations with regard to whether or not an employer is an RRA employer, the results of which are referred to as determinations of coverage.

The RRB employs a legal staff charged with the responsibility of submitting a recommendation to the Board concerning questions of coverage.  The Board then makes the final determination of coverage after analyzing the recommendation of legal counsel.

The results of a determination of coverage can fall into three categories, and are forwarded to the IRS for appropriate action, as shown below.

Note that while the Board makes the determination of coverage, the IRS must conduct any follow-up action since the assessment and collection of applicable RRTA taxes are the responsibility of the IRS.

RRB Audit Report

The RRB also conducts audits of existing RRA employers.  During the course of such audits, the RRB may identify compensation that is not being reported as wages for RRTA purposes. The RRB forwards a copy of its report to the IRS for follow-up since the IRS is responsible for the assessment and collection of applicable RRTA taxes.

IRS Follow-up

With regard to both determinations of coverage and RRB audit reports, the IRS must decide what action is appropriate relative to assessment and collection of RRTA. This decision should take into account the relative size of the potential adjustment, the year(s) involved, other workload priorities, etc.

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4.  Definitions

Employer  RRA vs. RRTA

RRTA, RRA and RUIA each contain a definition of the term "employer". The IRS has endorsed the policy of construing and applying the term "employer" for RRTA purposes in the same manner as that term is construed and applied for RRA and RUIA purposes.  See Rev. Rul. 77-445, 1977-2 C.B. 357 and Rev. Rul. 74-121, 1974-1 C.B. 300.  See also City of Galveston by and Through Board of Trustees v. United States, 33 Fed. Cl. 685 (1995); Standard Office Bldg. Corp. v. United States, 819 F.2d 1371 (7th Cir. Ill. 1987); Galveston by and Through Board of Trustees v. United States, 22 Cl. Ct. 600 (1991); Carland, Inc. v. United States, 75 A.F.T.R.2d 1234 (W.D. Mo. 1995).

Employer

A RRTA "employer" is a railroad carrier or any company that: (1) is "directly or indirectly owned or controlled by" a railroad carrier or is "under common control" with such a carrier; and (2) "operates any equipment or facility or performs any service (except trucking service, casual service, and the casual operation of equipment or facilities) in connection with the transportation of passengers or property by railroad, or the receipt, delivery, elevation, transfer in transit, refrigeration or icing, storage, or handling of property transported by railroad. (see  IRC § 3231(a))

Owned Company

The Surface Transportation Board requires companies involved in the transportation industry to file reports and to list in these reports all affiliated companies.  These reports provide information regarding the principal business activity, the form of control, the percentage of control, along with information regarding any other company that may own a portion of the affiliated company.  Any company listed in these schedules will generally be railroad employers set out in Treas. Reg. § 31.3231(a)-1.

Controlled Companies

Companies that perform railroad service and are controlled by one or more carriers are employers.  Control may be by means of:

  • Stock ownership
  • Agreements
  • Licenses.
  • Any other devices which insure that the operation of the company is in the   interest of one or more carriers

Stock Ownership

If this is the form of control used, then the examiner should be able to show that a majority of the stock owners are also stock owners of one or more companies that control a carrier.  The examiner should request from the controlled company a list of their stock owners and other companies that they own stock in.

Licenses

If this is the form of control used, then the examiner should be able to show that the licensor of the controlled company has the same licenses with those of one or more companies that control a carrier.

Agreements

This means of control may be present through a contract or agreement. For example, when a carrier enters into a cost plus contract, the carrier may step in and control management action to prevent cost overruns. Another example of this means of control may occur when the right to control is set out in an agreement even though the company is designated as an independent contractor. Look for a separate agreement, like a union agreement, that simply states that the carrier will maintain the control necessary to determine whether workers are employees. Also a contract or agreement may spell out the control over the manner and method of accomplishing results. Such control may be found in an addendum to the contract or in the form of general specifications which set out the results and the manner and method of accomplishing the results.

The examiner is looking for a situation in which a result could be accomplished by one or more different methods. When the contract spells out the results to be achieved, as well as the method of accomplishing that result, the company is not free to use its own method, and is controlled.

Any Railroad Service

In addition to being owned or controlled, a company must also be performing a railroad service.  The service may be direct or indirect.

Direct Services

Direct services are those that involve the transportation by rail of:

  • Passengers
  • Property

Indirect Services

Indirect services involve those that are connected with, or supportive of rail transportation and/or essential to its proper functioning, but which are not casual or trucking services. The following list represents examples of services that are included in indirect services:

  • Accounting services
  • Bookkeeping
  • Bridge services
  • Building services
  • Construction
  • Engineering
  • Equipment leasing and rental
  • Loading and unloading freight
  • Maintenance of way
  • Office building rental
  • Piggyback trailer ramping, deramping and repair
  • Purchasing department
  • Repair services
  • Servicing overhead trolley lines
  • Stenographic services

Listed below are the kinds of companies that may provide indirect services:

  • Communications Company - Look for those that use microwave relays such as TV antenna (Cable TV) companies or other companies that may handle the railroad's communication, signal, and switching operations.
  • Computer Company - Look for those owned by a carrier that are performing accounting services or use computers to operate signals, keep track of shipments, rolling stock; and other rail activities. See Revenue Ruling 77-445, 1977-2 C.B. 357.  See also City of Galveston by and Through Board of Trustees v. United States, 33 Fed. Cl. 685 (1995); Galveston by and Through Board of Trustees v. United States, 22 Cl.Ct. 600 (1991).
  • Concrete Company - Look for those that pour pre-stressed concrete.  Check to see if they make concrete cross ties.
  • Dock Company - Look for all types of terminal companies, including potential subdivisions of a state such as port authorities which may also be subject to RRTA tax. See Revenue Ruling 77-386, 1977-2 C.B. 356 and Revenue Ruling 82-64, 1982-1 C.B. 154.
  • Financial Companies - Look for those that own or lease rolling stock.
  • Fuel Companies - Check to see if they are fueling, heating, or cooling units on cars or piggyback trailers. See Revenue Ruling 74-552, 1974-2 C.B. 338.  But See Missouri Pacific Lines, Inc. v. United States, 3 Cl. Ct. 14 (1983).
  • Gravel Companies – Look for those that furnish ballast including crushed slag.
  • Ice Companies - Icing boxcars generally have been replaced by refrigerator cars but sometimes ice companies fuel these cars. Revenue Ruling 69-306 1969-1 C.B. 267.
  • Lumber Companies - Look for those that furnish railroad ties or plywood cut to fit in railroad boxcars.
  • Manufacturing Companies - Look for those owned by a carrier that manufacture or remanufacture railroad pans, accessories, or other equipment used by a carrier. See Revenue Ruling 85-177, 1985-2 C.B. 203.  See also Trans-Serve, Inc. v. United States, 521 F.3d 462 (5th Cir. 2008).
  • Real Estate Company - Look for those owned by a carrier that own office buildings, warehouses, terminal tracks, and furnish or lease these to or on behalf of the railroad. See Revenue Ruling 74-121, 1974-1 C.B. 300.  See also Standard Office Bldg. Corp. v. United States, 819 F.2d 1371 (7th Cir. Ill. 1987); Carland, Inc. v. United States, 75 A.F.T.R.2d 1234 (W.D. Mo. 1995).
  • Steel Companies - Look for those that repair or build rolling stock. See Despatch Shops, Inc. v. Railroad Retirement Board, 153 F.2d 644 (D.C. Cir. 1946) regarding RUIA and Despatch Shops v. Railroad Retirement Board, 154 F.2d 417 (2d Cir. 1946) regarding RRA.
  • Warehouse Company - Look at each of these very carefully. Include any produce terminal company buildings, grain elevators, etc.

Casual Service

Treas. Reg. § 31.3231(a)-1(c) states that:

"... the term casual applies when the service rendered or the operation of equipment or facilities by a controlled company or person in connection with the transportation of passengers or property by railroad is so irregular or infrequent as to afford no substantial basis for an inference that such service or operation will be repeated, or whenever such service or operation is insubstantial."

The RRB regulations define “casual service” essentially the same: “…whenever such service or operation is so irregular or infrequent as to afford no substantial basis for an inference that such service or operation will be repeated, or whenever such service or operation is insubstantial.”  As a guideline in applying the definition of “insubstantial”, the RRB uses less than 10 percent of total revenue, employees, and output. This guideline, however, is not part of the RRB regulations. 20 CFR 202.6.

When issuing its regulations, the IRS declined to implement a less than 10 percent rule.  The Service stated that situations can arise where one of the factors is less than 10 percent while the remaining factors are greater than 10 percent, (factors here refers to revenue, employees and output). It is not clear that the service or operation of equipment or facilities would be insubstantial in those situations.

Receiver or Trustee as Employer

The definition of employer, at IRC § 3231(a), also includes:

"...Any receiver, trustee, or other individual or body, judicial or otherwise, when in the possession of the property or operating all or any part of the business of any such employer;…”

This would only apply to individuals who would be employees if the property or business operation had continued in the possession of the preceding employer.  This situation could occur, for example, if a railroad sought protection through the bankruptcy court, and the bankruptcy court appointed a trustee to operate the company.  The trustee would be a railroad employer of the carrier's employees.

Railroad Associations

The definition of employer also includes railroad associations, tariff bureaus, demurrage bureaus, weighing and inspection bureaus, collection agencies, and other organizations that are:

  1. Controlled and maintained wholly or principally by two or more employers and
  2. Engaged in performing services in connection with or incidental to railroad transportation.  An organization is engaged in performing services incidental to railroad transportation when such function would normally, in the absence of the organization, be performed by the constituent employers.

Railway Labor Organizations

The term employer includes railway labor organizations that are national in scope and organized in accordance with the provisions of the Railway Labor Act. "Employer" also includes the following railway labor organization subordinate units established according to constitution and by laws:

  1. State and national legislative committees
  2. General committees
  3. Insurance departments
  4. Local lodges and divisions.

Exclusions From "Employer"

IRC § 3231(a) excludes certain companies from the definition of "employer".

  1. A street railway, or interurban or electric railway, unless it is operating as a part of a general steam-railroad system of transportation.  (This definition also includes a general rail transportation system operated by electric, diesel, or other means of power.)
  2. any company because it is engaged in mining coal, supplying coal to an employer if delivery is not beyond the mine tipple, and operating equipment or facilities therefore, or in any of these activities.

Employee

For purposes of RRTA, "employee” is defined at IRC § 3231(b), and Treas. Reg. § 31.3231(b)-1 provides that an employee includes any individual who is:

  1. In the service of one or more employers,
  2. An officer of an employer,
  3. An employee of a local lodge or division defined as an employer, or
  4. In the service of a general committee.

In the Service of One or More Employers

The definition of "employee”, for RRTA purposes, is very similar to the definition of an employee for FICA purposes.  Treas. Reg. § 31.3231(b)-1 defines a worker as an employee if he or she is:

  1. Subject to the continuing authority of the employer who supervises and directs the manner in which the employee's services are rendered,
  2. Rendering professional or technical services integrated into the staff of the employer
  3. Rendering other personal services on the property used in the operations of the employer which are an integral part of those operations.

With respect to 2 and 3 above, an individual performing services as an independent contractor may be, with regard to such services, in the service of an employer within the meaning of these paragraphs. See Treas. Reg. § 31.3231(b)-1(a)(3).

Treas. Reg. § 31.3231(b)-1 goes onto provide additional facts to be considered, including:

  • It is the right to control, not the actual exercise of this right, that is important
  • The right of the employer to discharge the worker is an important indication that the worker is subject to direction and control
  • The furnishing of tools and the furnishing of a place to work are important indications that the worker is subject to direction and control
  • If the worker is subject to control and direction merely as to the results to be achieved, and not as to the means for achieving those results, the worker would generally be considered an independent contractor
  • Whether or not a worker is an employee must be determined based upon an examination of the particular facts of the case
  • If a worker is an employee, it is of no consequence that the worker is designated as a partner, independent contractor, etc.
  • If a worker is an employee, it is of no consequence that the worker performs the services on a part-time basis.

Officer

Similar to the rules under FICA, an officer of an employer is one who performs the duties of his or her office for compensation.

Special Categories

The definition also includes provision to include as an employee those individuals performing services on behalf of a railway labor organization.  If you are involved in the examination of a labor organization, refer to the code and regulations for the rules to be applied.

Exclusions

The term "employee” excludes individuals engaged in certain coal mining operations, as follows:

  • Coal mining
  • Preparing coal
  • Loading coal at the tipple
  • Handling coal between the mine and the tipple, unless the handling consists of movement by rail with standard locomotives.

Compensation

Comparison of RRTA to FICA

The definition of compensation for RRTA purposes is found at IRC § 3231(e), and, while there are historical differences between the FICA and RRTA statutes, there are also significant similarities. Legislation enacted over the years has made the RRTA Tier I tax identical to the FICA tax as well as conforming the Tier I wage ceiling to the FICA wage ceiling.

Along with conforming the structure of the RRTA to parallel that of the FICA, the exclusions from the definition of compensation under RRTA, with few exceptions, mirror the exclusions from the definition of wages under FICA.  These exclusions from compensation include non-monetary benefits such as fringe benefits, meals and lodging excludable under IRC § 119, and employer-paid life insurance premiums for group-term life insurance under $50,000.

In amending RRTA, Congress often indicated the purpose was to provide conformity to FICA.  Congress has added references to FICA provisions in the RRTA definition of successor employer and the rules for non-qualified deferred compensation (IRC §§ 3231(e)(2)(C) and 3231(e)(8), respectively).  In addition, Tier I benefits are designed to be equivalent to social security benefits, and are subject to federal income taxation in the same manner as social security benefits.

For calendar years after December 31, 1992, Treas. Reg. § 31.3231(e)-1(a)(1) provides that "compensation" for computation of RRTA taxes has the same meaning as the term "wages" under IRC § 3121(a), except as specifically limited by the Railroad Retirement Act or regulations

Included and Excluded

The Code provides for the inclusion or exclusion of the following items:

  • IRC § 3231(e)(1) -

Include -
1. Money remuneration for services rendered 
Exclude -
2. Payment for health insurance plan
3. Tips (but see IRC 3231(e)(3) below)
4. Employee business expense advance or reimbursement

  • IRC § 321l(e)(2) - provides for the application of the Tier I and II wage base amounts
  • IRC § 3231(e)(3) -
    includes cash tips unless the amount of cash tips is less than $20 for any calendar month
  • IRC § 3231(e)(4) -
    excludes payments from Tier I taxes that are made on account of sickness or accident disability to the extent they are received under a workmen's compensation law or RUIA.
  • IRC § 3231(e)(5) -
    excludes amounts for employee achievement awards, scholarship and fringe benefits, if the employee will meet the requirements or IRC §§ 74(C), 117, and 132, respectively.
  • IRC § 3231(e)(6) -
    excludes educational assistance program payments if the employee will meet the requirements of IRC § l27,
  • IRC § 3231(e)(7) -
    excludes qualified group legal service plan if the employee will meet the requirements of IRC § 120.
  • IRC § 323l(e)(8) -
    includes amounts contributed to a 401(k) plan in general, conforms RRTA rules with FICA rules with respect to non-qualified deferred compensation.
  • IRC § 3231(e)(9) -
    excludes meals and lodging if the employee will meet the requirements of IRC § 119.

Earned vs. Paid

As a historical note, in prior years RRTA was computed at the time of payment using the tax rates in effect when the compensation was earned.  RRTA also used a monthly wage base limitation rather than an annual wage base.

The statute was eventually modified to bring RRTA into conformity with FICA. Since 1985, the tax has been computed using rates in effect at the time of payment, regardless of when the compensation was earned. In addition, RRTA uses the annual wage base limitations rather than monthly limits.

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5.  Audit Techniques

Audit Plan

This chapter provides a suggested audit plan for the examination of a railroad for employment tax purposes.  The audit plan presented would result in a fairly complete review of the employer for compliance with filing requirements, correct treatment of various types of payments, employee/independent contractor issues, etc.  Depending on the time allotted to your specific examination, or prior examination history, it may be necessary to tailor the plan to your case by eliminating certain steps.

  1. Preliminary
    • Request copies of the following reports from the taxpayer
    • ICC Form A & B
    • RRB Form BA-3a
    • RRB Form BA-4
    • RRB Form BA-9
    • RRB Form BA-10
  2. Request a listing of all payroll returns filed by company and by type (i.e. Forms CT-1, 941, 940).
  3. Establish which companies and/or employees are covered by each return.

Payroll System

  1. Ask the taxpayer the following questions:
    • Are there any known errors on the returns under examination?
    • Are there any outstanding amended/corrected returns in regard to the Forms CT-1/941 for the years under examination?
    • Are there any amended/corrected returns being prepared or contemplated by the taxpayer regarding the Forms CT-1/941?
    • Are there any work papers or summaries available reconciling the return to the books or showing the account summaries for reporting the various taxable components on the Form CT-1?
    • Are there any work papers or summaries relating to payroll from other sources, such as audits or examinations by Internal Audit, State Agencies, RRB, other internal/external sources?

      Follow-up to secure copies of any of the above information, as appropriate.
  2. Have the taxpayer explain the payroll and accounting process with regard to:
    • How the determination is made as to whether an employee is covered by RRTA or FICA.
    • Payroll payments that may be excluded from Tier I and Tier II tax.
    • Whether compensation is reported on an earned or paid basis.
    • How the work hours for the supplemental annuity tax are determined.

Computer Audit Specialist (CAS) Applications

  1. Obtain the following computer information:
    • Form W-2 tapes
    • Form 1099 tapes
    • RRB Forms BA-3a, BA-4, BA-9 and BA-10 tapes
    • Payroll master file or record layouts
  2. Have the CAS:
    • Reconcile the W-2's to the 1099's to identify the conversion of workers from employees to independent contractors and/or to identify payments being made to employees who have been excluded from RRTA taxation.
    • Reconcile the Form W-2 tape to the BA-3a tape, taking into account 401(k) contributions and group term life insurance calculations.  This may identify payments reported on the BA-3a but excluded from RRTA taxation.
    • Reconcile the W-2 tape to the BA-9 tape. Discrepancies may indicate severance or dismissal payments which have been excluded from RRTA taxation.
    • Reconcile the W-2 tape to the BA-3a tape. Discrepancies may indicate sick pay payments which have been excluded from RRTA taxation.

Reconciliation of CT-1's

Determine whether or not Tier I and Tier II wage and tax amounts have been correctly reported by conducting the following tests:

  • Reconcile CT-1, line 5, to BA-3a. (Tier I)
  • Reconcile CT-1, line 6, to BA-3a. (Tier I)
  • Reconcile CT-1, line 11, to BA-4. (Tier I)
  • Reconcile CT-1, line 11, to BA-4. (Tier II)
    Note: request all Forms BA-4 filed with the RRB during the year and identify the reason for each adjustment.  Consider only those adjustments with a RRTA tax affect.  Compare this total to the railroad’s supporting work papers for line 11 of the CT-1.  Watch for statute of limitations, cash vs. earned, correction of errors, and incorrectly reported compensation
  • Verify that the correct wage base and tax rates have been used.
  • Review the chart of accounts for account titles that are related to employee compensation.  If any are found, test to determine whether or not they were included in taxable compensation.  Be aware of payments being made through accounts payable or voucher accounts.

Supplemental Annuity Tax

Determine whether or not the Supplemental Annuity Tax (SAT) has been correctly reported.  A safe harbor method of computing SAT is available for years after 12-31-93.  See the Section on SAT in the "Definitions" section of this guide.

RURT

Railroad Unemployment Repayment Tax - This tax was terminated effective with respect to payments made on or after July 1, 1993.  However, in the event it is reinstated, the following audit techniques are suggested:

  • Ask the taxpayer how the tax was computed.
  • Reconcile CT-1 RURT wages to Form BA-3a RUIA wages.
  • Select a sample of employees from the Form BA-3a to test for proper RURT computation.
  • Determine the impact of any discrepancies found for Tier I and/or Tier II purposes for RURT purposes.

Fringe Benefits

  1. Review the chart of accounts for account titles that indicate which fringe benefits are being offered.
  2. Request policy statements for fringe benefits that are offered to employees.  The policy should describe the following:
    • The benefit.
    • Which employees or group of employees are entitled to the benefit.
    • The requirements any employee must satisfy to qualify for the benefit.
    • Any limitations that are placed on any employee or group of employees in regard to use of the benefit.
    • The accountability requirements, if any, an employee is required to follow.
    • The RRTA Tier I and Tier II treatment of the benefit.
    • The federal income tax withholding treatment of the benefit.
    • How the benefit is reported to the recipient (i.e W-2, Form 1099, no reporting, etc.).
  3. Determine whether the fringe benefits are being treated properly for RRTA Tier I, Tier II and income tax withholding purposes. Consider:
    • Is a nontaxable benefit being offered that is not covered by IRC § 3121(a)?  If so, pursue further.
    • Is a nontaxable benefit being offered that appears to discriminate in favor of highly compensated individuals?  If so, pursue further.
    • Is a nontaxable benefit being offered on a flat rate basis without proper accountability? If so, pursue further.

Backup Withholding

Backup withholding applies to a railroad employer just as to any other type of employer.

The filed 1099's should be inspected, either by hard copy or tape, to determine whether or not any were filed with missing, incomplete, or obviously incorrect taxpayer identification numbers.  Take appropriate action with respect to any discrepancies discovered.

The taxpayer’s policies and procedures for determining when a 1099 must be issued should be reviewed and tested by comparison to accounts payable vendor listings.  The agent will have to make a decision on the necessity and/or depth of this compliance check based on such factors as prior audit history with the taxpayer, completeness and accuracy of policies and procedures, availability of computerized records for conducting the compliance test, etc.

Conversion Issues

Section 530 of the Revenue Act of 1978 applies to a railroad employer just as to any other type of employer, and must be considered prior to initiating any conversion issues.  This section, as amended through the years, provides an employer with relief from Federal employment taxes with respect to workers who have been reclassified as employees.  Section 530 relieves the employer from paying and withholding any employment taxes (including withholding on income tax) with respect to these employees not only for the period covered by the audit, but for future periods as well.

The Classification Settlement Program (CSP) is also available to railroad employers in the event of a reclassification issue.

The examiner should refer to the materials relating to worker classification that are included in this desk guide.

FICA vs. RRTA.

Determine whether the taxpayer has a group of employees who are covered by FICA rather than RRTA and if this is appropriate. Consider reclassifying for RRTA coverage under IRC Section 3231(a) and (b).

Determine whether the taxpayer owns or directly controls any entities that meet the definition of a carrier under IRC Section 3231(a) and has employees that are covered for FICA rather than RRTA.  Consider reclassifying for RRTA coverage under IRC Section 3231(a) and (b).

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6. Potential Issues

General

General Comments

Almost any issue that might be present in a FICA employment tax case may also be present with respect to a railroad employer.  Therefore, the examiner should consider current issues from other types of cases whenever examining a railroad employer.

Employee vs. Independent Contractor

The method of determining a worker to be an independent contractor or an employee is the same for a railroad employer as it is for any non-railroad employer.

Reference materials concerning worker classification have been included in this guide to assist the examiner in developing these issues.

The Classification Settlement Program would also apply to a railroad employer.

Section 530

Section 530 has the same application to a railroad employer as it does to any other type of employer.  The taxpayer should be provided the handout concerning Section 530 before beginning any conversion issues.

General Issues

Consider the following during the course of the employment tax examination:

  • Treatment of severance pay as non-qualified deferred compensation
  • Treatment of bonus and award payments as other-than compensation
  • Treatment of employees as independent contractors
  • Treatment of medical reimbursement plans
  • Treatment of employee relocation expense reimbursements
  • Treatment of related entities as FICA employers

This list is not meant to be all-inclusive.  It is only meant to demonstrate the fact that issues present in non-railroad employment tax cases may also be present, and should be considered, in a railroad employer examination.

Industry Specific Issues:

Severance Pay/ Termination Pay

Railroad employers have been very aggressive in attempts to treat severance pay and/or termination pay as not subject to RRTA.

Some of the arguments for this are...

  1. Severance/termination pay represents the buyout of a contract right, and is not taxable based on Revenue Ruling 58-301, 1958-1 C.B. 23.
  2. Severance payments are not subject to RRTA tax because the payments represent supplement unemployment benefit payments (SUB pay).  See CSX Corp. et. al v. United States, 518 F.3d 1328 (Fed. Cir. 2008).  
  3. Severance payments made after the year of termination constitute nonqualified deferred compensation under IRC § 3121(v)(2) as incorporated in IRC § 3231(e)(8)(B). 

With regard to the first argument, the government takes the position that Revenue Ruling 75-44, 1975-1 C.B. 15, is controlling, and that the payments represent compensation for past services rather than the buyout of contract rights.

With regard to the employer's secondary argument, there is no statutory provision for SUB-pay under IRC § 3221(e).  SUB-pay is excluded administratively from compensation for RRTA purposes as a result of the Service’s issuance of a series of FICA and FUTA revenue rulings dating back to 1956.  Revenue Ruling 56-249, 1956-1 C.B. 488, provides a limited exception from the definition of wages for FICA, FUTA and federal income tax withholding for certain payments made upon the involuntary separation of an employee from the service of the employer.  Rev. Rul. 56-249 sets forth eight criteria for determining if payments meet the limited exception. By extending the application of this revenue ruling to the railroad employer's severance/termination plan, it can usually be demonstrated that the plan fails most, if not all, of the eight criteria. Thus the payments made to the employees are not excludable from RRTA.

The third argument is that the payments are compensation in the form of periodic severance pay and if made beyond the year of termination constitutes nonqualified deferred compensation under IRC § 3121(v)(2) as incorporated in IRC § 3231(e)(8)(B). The Service’s position is that payments made under a severance plan are not deferred compensation (see Treas. Regs. § 31.3121(v)(2)-1, and Kraft Foods v. United States, 58 Fed. Cl. 507(2003))

Annual Productivity Fund Payments

In order to reduce costs, some railroad employers have negotiated agreements with their employees to reduce the size of the crew operating the train. In return for agreeing to reduce the size of the crew, the employees receive additional payments from the employer.

The employer agrees to set aside a certain amount of money throughout the course of the year, based on the number of trains operated with a reduced crew. Then, after year-end, each employee who participated in the operation of a train with a reduced crew receives a pro rata share of the funds set aside by the employer.

Employers have attempted to classify these payments as other than compensation for services, and therefore as not subject to RRTA. Employers generally base their position on Revenue Ruling 58-301, 1958-1 C.B. 23, modified and superseded by, Rev. Rul. 2004-110, 2004-2 C.B. 960.

The service has taken the position that these payments represent compensation for services rendered, and are subject to RRTA.  The service position is based on Revenue Ruling 75-44, 1975-1 C.B. 15.  In Rev. Rul. 75-44, the Service expressly distinguished the unexplained holding in Rev. Rul. 58-301 by pointing out that lump sum payments "for the past performance of services reflected in the employment rights [an employee] was giving up" are wages, whereas the relinquishment of a purely contractual right is not "wages."  STA of Baltimore – ILA Container Royalty Fund v. United States, 621 F. Supp. 1567 (1985), aff’d, 804 F.2d 296 (4th Cir. 1986).  This case held that payments made by employers into a “royalty fund” that were subsequently shared by eligible employees were “wages” for FICA and FUTA purposes.

If these types of payments are found, it is suggested that a request for Technical Advice be submitted because of the fact intensive nature of this issue.  Revenue Ruling 75-44, is not sufficient to support this type of issue.

Productivity Fund Buyouts

Some employers, having negotiated a productivity fund system, have subsequently offered employees a lump sum payment in exchange for the employees’ giving up any rights to receive future payments from the productivity fund.  These plans generally call for a payment to be made to the employee at the time the employee accepts the buyout, with an additional payment to be made to the employee at the time the employee leaves the service of the employer.

As with the issue presented above, employers have attempted to classify these payments as other than compensation for services, and therefore as not subject to RRTA, basing their position on Revenue Ruling 58-301.

The Service relies on Rev. Rul. 75-44 and Rev. Rul. 2004-110 to support its position that these payments represent compensation for services rendered, and are subject to RRTA.

Employee Achievement Awards

Employers frequently institute programs to recognize and reward employees for safety, perfect attendance, and other similar types of achievement.  In at least a few cases, railroads have chosen to give the employees shares of stock as the reward under these programs.  A dispute has arisen concerning the taxability of the stock for RRTA purposes.  The railroads are taking the position that stock does not meet the definition of compensation. (Other railroads may be taking this same position with respect to other forms of remuneration such as “reward points”, "bonus points”, etc.)

The argument of the railroad employers can be summarized as follows:

Both the RRA and RRTA define compensation as ”money remuneration". "Money" is a well defined term referring to coin and paper currency, and stock does not meet this definition.

For FICA purpose, compensation is defined as all remuneration, including the cash value of remuneration paid in some medium other than cash.  Stock would meet this broader definition of compensation.

Over the years Congress has had many opportunities to conform the definition of compensation for RRTA and FICA purposes, and in fact has done so with respect to some aspects of the definition.  However, Congress has never chosen to remove the term “money" from either the RRTA or RRA definition.

Since Congress included “money" in the definition of compensation, it must have had a reason for doing so, and the RRB and/or IRS cannot ignore the use of the word when issuing regulations.

Therefore, payments made to employees in the form of shares of stock are excludable from compensation for RRTA and RRA purposes.

The IRS and RRB position, on the other hand, is as follows:

While there are historical differences between the FICA and RRTA statutes, there are also significant similarities.  Legislation enacted over the years has made the RRTA Tier I tax identical to the FICA tax as well as conforming the Tier I wage ceiling to the FICA wage ceiling.  See, e.g., T.D. 8582, 1995-1 C.B. 187.

Along with conforming the structure of the RRTA to parallel that of the FICA, the exclusions from the definition of compensation under RRTA, with few exceptions, mirror the exclusions from the definition of wages under FICA.  These exclusions from compensation include non-monetary benefits such as fringe benefits, meals and lodging excludable under section 119 of the Internal Revenue Code, and employer-paid life insurance premiums for group-term life Insurance under $50,000.

In amending RRTA, Congress often indicated the purpose was to provide conformity to FICA.  Congress has added references to FICA provisions in the RRTA definition of successor employer and the rules for non-qualified deferred compensation (323l(e)(2)(C) and 323l(e)(8), respectively).  In addition, Tier I benefits are designed to be equivalent to social security benefits, and are subject to federal income taxation in the same manner as social security benefits.

Although the two statutes are not completely identical, the language of the regulations for RRTA indicates that the term compensation has the same meaning as the term wages for FICA.

It should be noted that new regulations regarding the definition of compensation were issued in 1994, clarifying that compensation for RRTA and FICA purposes was essentially the same. See Treas. Reg. § 31.3231(e)-1(a).

If you encounter this issue contact the Ground Transportation Technical Advisor for current information on our position.

Housing Allowances

See Rev. Rul. 69-391; 1969-2 C.B. 191, concerning of the value of housing provided to railroad employees.

Meals, Travel, Lodging

See Rev. Rul. 75-279, 1975-2 C.B. 409. Generally, allowances for travel expenses are not wages subject to RRTA taxes if the employee is required to take a period for substantial rest away from home, or if the employee is away from home overnight while on service, and made a full accounting for the allowance.

Other allowances for shorter trips when the employee does not require substantial rest away from home or is not away from home overnight are includible in wages subject to RRTA taxes.

Segregation

Segregation is a concept used for the separation of employees subject to FICA taxes from those subject to RRTA taxes.  Although the concept of segregation at one time was not present in the IRC or Regulations, the Service had used the concept in publishing rulings.  In 1994, Treas. Reg. § 31.3231(a)-1 was amended, by adding paragraph (f).  This new paragraph incorporated the concept of segregation into the regulations.

The purpose of segregation is to obtain a fair and reasonable application of law, but it cannot be used in all cases.  For example, it cannot be used if the records are inadequate or if the railroad and non-railroad work is so commingled that it cannot be separately identified.

Segregation is permitted only if the employer in question is principally engaged in non-railroad activities.  "Principally engaged," for this purpose, is 50 percent or more.  This determination requires consideration of relative revenues, number of employees, payrolls, output, facilities in use, and the character of customers.  Sound judgment will dictate the test or combination of tests to use for your determination.  You may want to incorporate into your determination process consideration of relative net profits and the amount of control over such profits exercised by the parent railroad; also, you may take into consideration the demonstrated purpose for creation of the company and the principal occupation and interest of company executives.

Excluded Companies

Segregation cannot be used for express companies, sleeping car companies, or carrier railroads.  Segregation can be used when, for example, a company has two different businesses and there is a definite separation between them.

Principally Engaged in Railroad Activities

Since, as stated, segregation is not applicable to a company that is principally engaged in railroad activities, you will have to determine the status of a given company by some or all of the following comparisons.

  • Revenues
  • Number of employees
  • Payrolls
  • Output
  • Facilities in use
  • Character of customers

Because the objective is to cover under RRTA all employees that perform some railroad services, it is important that the tests clearly reflect the business activities of the company.  The best tests to accomplish this purpose must be selected on a case-by-case basis.

  • Illustration - In the case of an office building, test by output (relative occupancy) and character of tenants (relative number of RRTA and non-RRTA employers).  It is immaterial to the latter test that non-RRTA employers include those owned or controlled by RRTA employers.  The ultimate test is whether the building primarily serves RRTA employers and if so, it is not eligible for segregation.

Separate, Identifiable Enterprise

Segregation can be applied only to a separate identifiable enterprise. Therefore, when a company's records are commingled so that the enterprise cannot be separately identified, segregation cannot be applied.

In some cases, the records for railroad activities and for non-railroad activities must, in order to meet the test, be kept as if the company were operating two separate divisions.  In other cases, the records do not need to be as separate.  In determining the extent to which records need to be separately maintained, consider the extent, scope, and inter-relationship of the railroad and non-railroad operations.  The larger the size of the company and the territory covered, and the more the railroad and non-railroad operations are related, the more independent the records should be in order for the railroad operation to quality as a separate identifiable enterprise for purposes of segregation.

Court Cases

A number of court cases and revenue rulings have dealt with the issue of segregation.  See in general, the discussion that follows concerning related corporations.
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Employer Issues

Common Paymaster

The common paymaster rules apply when the total wages of an employee of two or more related RRTA employers are paid by one of the RRTA employers.  The common paymaster is treated as the sole employer for purposes of the RRTA taxes and the annual wages base.

The common paymaster rule, however, does not apply if the employers are not related, or if the employers are not all RRTA employers.  Thus, an RRTA employer cannot be a common paymaster for FICA purposes and a FICA employer cannot be a common paymaster for RRTA purposes.

Successor Employers

The RRTA adopts the successor provisions found under FICA at IRC § 3121(a)(1), allowing an employer that acquires and continues a business of another employer to include wages paid by the prior employer for purposes of determining the annual wage base limitation.  However, the RRTA requires that the terms "employer", "service" and "compensation" be given their meaning under RRTA.  As a result, successor employer issues involving FICA and RRTA employers cannot be commingled.
 
Related Corporations:

“Employer” is defined by IRC § 3231(a) for RRTA purposes as a company under some kind of control by a railroad that provides a railroad-related service that is not a trucking service, casual service, or the casual operation of equipment or facilities.  This definition has generated a long line of court cases dealing with the issue of whether or not a related company should be considered a railroad employer.  The courts have generally held that if an entity’s operations are related both “functionally” and “economically” to a carrier under common control with the entity, the entity is an “employer” within the meaning of the RRTA.

Some of the related corporation issues that have been considered by the courts are presented below.

Car Repair Shops

Car repair shops – Despatch Shops, Inc. v. Railroad Retirement Board, 153
F.2d 644 (D.C. Cir. 1946) regarding RUIA and Despatch Shops, Inc. v. Railroad Retirement Board, 154 F.2d 417 (2d Cir. 1946) regarding RRA.  The taxpayer argued that it should not be treated as a railroad employer because it was a separately incorporated manufacturing company distinct from its parent, a railroad, and because it was doing heavy repairs and manufacturing similar to that done by other, similar non-railroad companies.  The court rejected this argument, stating:

“If Despatch, in this situation, is not an 'employer' under the Act it can be readily seen that the railroads would be free to take from under the Act virtually all of their workers whose employment is in the ‘supporting’ activities, through the simple expedient of setting up wholly owned corporate affiliates to perform these services.  It is conceivable that everything from maintenance-of-way through engineering or bookkeeping might be done by so called 'independent' corporations.”

Warehousing and Warehouse Companies

Warehousing and warehouse companies - Railroad Retirement Board v. Duquesne Warehouse Co., 326 U.S. 446(1946).

Construction Companies

Construction companies - Southern Development Company v Railroad Retirement Board, 243 F.2d 351 (8th Cir. 1957).

Real Estate Companies

Real estate companies - Standard Office Building Corp. v. United States, 819 F.2d 1371 (7th Cir. 1987).  In this case, the position of the Service was that employees of Standard, owner and operator of an office building, were RRTA employees because the company was controlled by a railroad and the building was more than half occupied by offices of the railroad.

Although the position of the Service was sustained by the district court, that court was reversed by the appellate court on the basis that the taxpayer was not covered by RRTA because it was incorporated prior to the passage in 1937 of the RRTA, and because its employees would have secured a pension windfall if covered under RRTA. The portion of the building occupied by the railroad did not exceed 57 percent during the period in question.

By contrast, in the Southern Development case, cited earlier, Southern was controlled by a railroad and owned an office building, 64 percent of which was occupied by offices of the railroad.  The railroad paid 73 percent of the total rents of the building equal to 39 percent of Southern's total income.  Although Southern owned other properties all of its employees were engaged in the operation of the office building.  Based on these facts, Southern was held to be an RRTA employer. The rationale of Southern was adopted in Rev. Rul. 74-121, l974-l C.B. 300.

These contrasting decisions highlight the fact that it cannot be assumed that any subsidiary corporation performing a railroad related function will be held to be an RRTA employer, even though it appears to meet the two tests of IRC § 3231(a). The result will depend on how the subsidiary unit fits into the general scheme of corporate operations.  If its service is truly significant to transportation, a good case can be made and, if not, all attempts to classify it as an RRTA employer may be fruitless.

Data Processing Companies

Issues involving these companies do not markedly differ from the preceding ones, particularly if the data processing company is controlled by a railroad and appears to have little reason for coming into existence other than to take a group of employees out of RRTA and make them subject to the lesser FICA taxes.

However, assume for discussion that a subsidiary of a railroad conglomerate provides data processing services to the railroad while also providing such services to banks, mutual funds, and other non-railroad clients.  In addition, another subsidiary is formed to provide computer programmers and software to the first subsidiary to the extent of 3O percent of its services, with the balance being provided to non-railroad clients.

Taxability of the subsidiaries for RRTA purposes is not dependent on the percentage of service as much as it is dependent on the degree to which the services are integrated into the normal functions of the railroad.

It can be argued that computer programming and design of software is as essential to railroad operations as is the leasing of office space or the furnishing of accounting services.  It would follow then that employees of the subsidiaries who render such services are subject to RRTA taxes.  However, it does not necessarily follow that the companies are RRTA employers with respect to all of their operations or all of their employees.

Examination Techniques, Related Corporations

Most issues concerning a parent and subsidiary relationship can be developed in a similar fashion. The guidelines presented below present a suggested method that can be modified, as appropriate, to fit the circumstances of your specific case. Also remember that while a subsidiary of a railroad employer may also be a railroad employer, the parent of a railroad employer is not a railroad employer under Union Pacific Corporation v. United States, 26 Cl. Ct. 739 (1992), aff'd, 5 F.3d 523 (Fed. Cir. 1993).

Subsidiary Records

Review the subsidiary's corporate minute book and stock record book to ascertain:

  • The date of incorporation
  • The stated corporate purpose
  • The exact location of the subsidiary
  • The stock authorized and issued, including a complete stock history from inception to the present

Parent Records

Analyze the following schedules on Form R-1, Annual Report to the Surface Transportation Board, of the parent corporation:

  • Schedule A, Identity of Respondent with Affiliated Companies
  • Schedule 310, Investments in Affiliated Companies
  • Schedule 310A, Investments in Common Stock of Affiliated Companies
  • Schedules 352A to 352B, Road and Equipment Property (These schedules can help in reconciling and locating property used by the entity under examination)
  • Schedule 410, Railway Operating Expenses (Look for expenses paid to a subsidiary that is supposedly not an RRTA company)
  • Schedule 512, Transactions Between Respondent and Companies or Persons Affiliated with Respondent for Services Received or Provided

Review the corporate minute book for:

  • Advances from the parent to the affiliate (Note date, amount, terms and purpose)
  • Financial forecasts for the affiliate, including monthly, quarterly, semiannual, annual, and other long-range forecasts
  • Budgets, proposed and actual, prepared by or for the company

Contractual Relationship

Determine the contractual relationship between the parent and subsidiary by examining all intercorporate contracts.  Pay particular attention to those for services to be rendered by the parent company.  Compare the contracts with similar contracts between non-affiliated companies and ascertain:

  • Whether transactions were at arms length
  • The amount of income derived by the subsidiary from the parent as compared with income from other sources
  • Contractual amounts expended by the parent to its affiliate, compared with similar amounts expended to non-affiliated companies
  • Whether persons presently under contract with the affiliate were formerly employed by the parent

General Inquiries

Make the following general inquiries:

  • Were private letter rulings obtained with reference to the issue? (If so, obtain copies and determine whether or not the facts as presented were complete and accurate in their presentation of the situation in question.)
  • Was the entity in question ever subject to RRTA taxes? (If so, determine why and when it was removed from coverage.)
  • Were letter opinions obtained from the Railroad Retirement Board? (If so, obtain copies and determine whether or not the facts as presented were complete and accurate in their presentation of the situation in question.)

Note: Letter opinions on coverage were issued by the RRB’s General Counsel prior to 1992.  After 1991, the RRB’s Board Members made such coverage rulings referred to as Board Determinations on coverage.

  • Obtain a copy of the Employer Status Listing published by the RRB, and, if necessary, secure more specific information from the Board via the Ground Transportation Technical Advisor
  • Refer to Moody's Transportation manuals for other useful information
  • Compute the operating ratio of the company in question for several years, if possible, and make further studies if the ratio exceeds 100 for a sustained period

Other Considerations

Analyze any statistical, financial, profitability, and feasibility studies made by or on behalf of the parent company.  Such studies would generally provide a basis for important decisions that may affect the subsidiary in question.

Review the Authority for Expenditures (AFE's) or at least the AFE logbook for acquisitions that affect the subsidiary in question and, if found, determine if they were subsequently charged back to the parent.

Review correspondence and filed records if the company maintains an index or log of such documentation.

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7. Report Writing

General

Report writing for RRTA purposes is similar to report writing for any other type of employment tax examination.  However, certain forms must be modified  for differences between RRTA and FICA rates and tax categories.

Form 4665, Form 4666, Form 886A, Form 2504, Form 2297, Form 3363

The forms listed above are used in a similar fashion for an RRTA report as in any other type of employment tax report.  In an unagreed case the report should include a complete narrative write up of facts, law, and argument.  Refer to general employment tax report writing instructions when completing these forms.

Form 4668

Form 4668 must be modified to account for Tier I and Tier II taxes.

Care should be taken to ensure that the appropriate wage base and tax rate amounts are used when completing this form.

Form 4667

Since railroad employers are not subject to FUTA, Form 4667 is not used. However, if workers were treated by the employer as being subject to FUTA and those workers are being converted to railroad employees, the examiner should prepare a report reflecting the over assessment of FUTA.  The examiner should include a recommendation to transfer the FUTA to any RUIA liability. See IRM 4.23.8.6.2.

Conversion Case

If an employer treated certain workers as employees subject to FICA, and it is determined that the workers should correctly be treated as employees subject to RRTA, or vice versa, it may be necessary to prepare two reports: one to process the deficiency, and one to process the over assessment.

Refer in general to IRM 4.23.8.6.2 for special rules concerning this type of case.

Prior to making a conversion, consideration must be given to the statutory period of limitations. Some employers may already have filed 941 returns as well as CT-1 returns. Do not undertake a conversion issue unless the statute on the return for which additional tax is due has been protected.

Where the conversion case involves a delinquent return, follow the usual substitute for return/delinquent return procedures.

In an agreed conversion case, where wages are converted from FICA to RRTA, only the net additional tax due will be assessed.

If the conversion is unagreed, the taxpayer should be advised to file a claim under IRC § 3503 for the FICA.  The examiner will propose the assessment of the full amount of the RRTA taxes, and the claim will not be acted upon until the final resolution of the unagreed case.

IRC § 3509

The provisions of IRC § 3509 do not apply to RRTA taxes.
 
Computation of Tax

Tier I
Tier I tax is the equivalent of FICA and Medicare, and is computed in the same manner, using the same annual wage base and tax rates.  It is assessed equally on the employer and employee.

Tier II
Tier II tax uses a separate annual wage base and tax rate from those applicable for Tier I.  In addition, the tax is not assessed equally on the employer and employee. Instead, the employer pays a significantly greater share of this tax.

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8. Other Considerations

Statutory Period of Limitations

Form CT-1 is an annual return, due by the last day of the second month following the end of the calendar year (i.e., February 28th) see Treas. Reg.   § 31.6071(a)-1(b). The normal statutory period of limitations expires three years after the due date, or the date filed, whichever is later.

The presumptive filing date pertaining to Form 941, found at IRC § 6501(b)(2), DOES NOT apply to Form CT-1.

Various courts have considered the question of whether or not the filing of Form 941 starts the running of the statute of limitations with respect to Form CT-1. Although the IRS has been sustained in some courts in its position that the filing of a Form 941 does not start the running of the statutory period of limitations with respect to the CT-1 at least one court has ruled otherwise. The court found that the Form 941 provided sufficient information for the IRS to assess the RRTA taxes, and, therefore, the three year statute for the Form CT-1 had started with the filing of the Form 941. As a result, aggressive action should be taken to protect the statutory period of limitations in all situations.

Form SS-1O
The statutory period of limitations for RRTA purposes is extended using Form SS-10.

Form SS-10 must be modified in order to extend the statutory period of limitations with regard to RURT taxes.  Line 1(a), which is normally used to extend the statutory period of limitations with respect to FUTA taxes, will not be effective for extending the statute with respect to RURT taxes.  Since FUTA taxes do not normally apply to a railroad employer, Line (1)(a) on Form SS-l0 should be changed to state: "The Railroad Unemployment Repayment Tax for Calendar years".

Questions or concerns with regard to extending the RURT statute should be discussed with the Ground Transportation Technical Advisor.  The Ground Transportation Technical Advisor can assist in obtaining advice from Counsel.

Penalties, Interest Free Adjustments, Abatements

Penalties, the provisions for interest free adjustments, and abatements apply to RRTA cases in the same manner as in any other type of employment tax examination.
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Page Last Reviewed or Updated: 24-Jan-2014

The 1040 Ez 2010

1040 ez 2010 3. 1040 ez 2010   Lifetime Learning Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. 1040 ez 2010 They are the American opportunity credit and the lifetime learning credit. 1040 ez 2010 This chapter discusses the lifetime learning credit. 1040 ez 2010 The American opportunity credit is discussed in chapter 2, The American Opportunity Credit . 1040 ez 2010 This chapter explains: Who can claim the lifetime learning credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. 1040 ez 2010 What is the tax benefit of the lifetime learning credit. 1040 ez 2010   For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. 1040 ez 2010 There is no limit on the number of years the lifetime learning credit can be claimed for each student. 1040 ez 2010   A tax credit reduces the amount of income tax you may have to pay. 1040 ez 2010 Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. 1040 ez 2010 The lifetime learning credit is a nonrefundable credit. 1040 ez 2010 This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. 1040 ez 2010   Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax. 1040 ez 2010 Can you claim more than one education credit this year. 1040 ez 2010   For each student, you can elect for any year only one of the credits. 1040 ez 2010 For example, if you elect to take the lifetime learning credit for a child on your 2013 tax return, you cannot, for that same child, also claim the American opportunity credit for 2013. 1040 ez 2010   If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. 1040 ez 2010   If you pay qualified education expenses for more than one student in the same year, you can choose to take certain credits on a per-student, per-year basis. 1040 ez 2010 This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. 1040 ez 2010 Differences between the American opportunity and lifetime learning credits. 1040 ez 2010   There are several differences between these two credits. 1040 ez 2010 For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope Scholarship Credit was claimed counts toward the 4 years. 1040 ez 2010 However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. 1040 ez 2010 The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. 1040 ez 2010 Overview of the lifetime learning credit. 1040 ez 2010   See Table 3-1, Overview of the Lifetime Learning Credit for the basics of the lifetime learning credit. 1040 ez 2010 The details are discussed in this chapter. 1040 ez 2010 Can You Claim the Credit The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return. 1040 ez 2010 Who Can Claim the Credit Generally, you can claim the lifetime learning credit if all three of the following requirements are met. 1040 ez 2010 You pay qualified education expenses of higher education. 1040 ez 2010 You pay the education expenses for an eligible student. 1040 ez 2010 The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. 1040 ez 2010 Table 3-1. 1040 ez 2010 Overview of the Lifetime Learning Credit Maximum credit Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $127,000 if married filling jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available for an unlimited number of years Type of program required Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Available for one or more courses Felony drug conviction Felony drug convictions do not make the student ineligible Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Note. 1040 ez 2010 Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. 1040 ez 2010 “Qualified education expenses” are defined later under Qualified Education Expenses . 1040 ez 2010 “Eligible students” are defined later under Who Is an Eligible Student . 1040 ez 2010 A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . 1040 ez 2010 You may find Figure 3-1, Can You Claim the Lifetime Learning Credit for 2013 , later, helpful in determining if you can claim a lifetime learning credit on your tax return. 1040 ez 2010 Who Cannot Claim the Credit You cannot claim the lifetime learning credit for 2013 if any of the following apply. 1040 ez 2010 Your filing status is married filing separately. 1040 ez 2010 You are listed as a dependent on another person's tax return (such as your parents'). 1040 ez 2010 See Who Can Claim a Dependent's Expenses , later. 1040 ez 2010 Your modified adjusted gross income (MAGI) is $63,000 or more ($127,000 or more in the case of a joint return). 1040 ez 2010 MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . 1040 ez 2010 You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. 1040 ez 2010 More information on nonresident aliens can be found in Publication 519. 1040 ez 2010 You claim the American Opportunity Credit (see chapter 2) or a Tuition and Fees Deduction (see chapter 6) for the same student in 2013. 1040 ez 2010 What Expenses Qualify The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. 1040 ez 2010 Generally, the credit is allowed for qualified education expenses paid in 2013 for an academic period beginning in 2013 or in the first 3 months of 2014. 1040 ez 2010 For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 credit. 1040 ez 2010 Academic period. 1040 ez 2010   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. 1040 ez 2010 In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. 1040 ez 2010 Paid with borrowed funds. 1040 ez 2010   You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. 1040 ez 2010 You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. 1040 ez 2010 Treat loan disbursements sent directly to the educational institution as paid on the date the institution credits the student's account. 1040 ez 2010 Student withdraws from class(es). 1040 ez 2010   You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws. 1040 ez 2010 Qualified Education Expenses For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. 1040 ez 2010 The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills. 1040 ez 2010 Eligible educational institution. 1040 ez 2010   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 1040 ez 2010 S. 1040 ez 2010 Department of Education. 1040 ez 2010 It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 1040 ez 2010 The educational institution should be able to tell you if it is an eligible educational institution. 1040 ez 2010   Certain educational institutions located outside the United States also participate in the U. 1040 ez 2010 S. 1040 ez 2010 Department of Education's Federal Student Aid (FSA) programs. 1040 ez 2010 Related expenses. 1040 ez 2010   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance. 1040 ez 2010 Prepaid expenses. 1040 ez 2010   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. 1040 ez 2010 See Academic period , earlier. 1040 ez 2010 For example, you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). 1040 ez 2010 You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). 1040 ez 2010 In the following examples, assume that each student is an eligible student at an eligible educational institution. 1040 ez 2010 Example 1. 1040 ez 2010   Jackson is a sophomore in University V's degree program in dentistry. 1040 ez 2010 This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. 1040 ez 2010 Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense. 1040 ez 2010 Example 2. 1040 ez 2010   Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. 1040 ez 2010 The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. 1040 ez 2010 Charles bought his books from a friend, so what he paid for them is not a qualified education expense. 1040 ez 2010 Donna bought hers at College W's bookstore. 1040 ez 2010 Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution. 1040 ez 2010 Example 3. 1040 ez 2010   When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. 1040 ez 2010 This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and student government. 1040 ez 2010 No portion of the fee covers personal expenses. 1040 ez 2010 Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. 1040 ez 2010 Therefore, it is a qualified expense. 1040 ez 2010 No Double Benefit Allowed You cannot do any of the following: Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses. 1040 ez 2010 Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student. 1040 ez 2010 Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses. 1040 ez 2010 Claim a lifetime learning credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). 1040 ez 2010 See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. 1040 ez 2010 Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. 1040 ez 2010 See Adjustments to Qualified Education Expenses, next. 1040 ez 2010 This image is too large to be displayed in the current screen. 1040 ez 2010 Please click the link to view the image. 1040 ez 2010 Figure 3-1 Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. 1040 ez 2010 The result is the amount of adjusted qualified education expenses for each student. 1040 ez 2010 Tax-free educational assistance. 1040 ez 2010   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. 1040 ez 2010 See Academic period , earlier. 1040 ez 2010   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. 1040 ez 2010 This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). 1040 ez 2010   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed , later. 1040 ez 2010 If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed , later. 1040 ez 2010   Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 1040 ez 2010 Generally, any scholarship or fellowship is treated as tax free. 1040 ez 2010 However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. 1040 ez 2010 The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. 1040 ez 2010 The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. 1040 ez 2010 You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. 1040 ez 2010 For examples, see Coordination with Pell grants and other scholarships, later. 1040 ez 2010 Refunds. 1040 ez 2010   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. 1040 ez 2010 Some tax-free educational assistance received after 2013 may be treated as a refund. 1040 ez 2010 See Tax-free educational assistance , earlier. 1040 ez 2010 Refunds received in 2013. 1040 ez 2010   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. 1040 ez 2010 Refunds received after 2013 but before your income tax return is filed. 1040 ez 2010   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. 1040 ez 2010 Refunds received after 2013 and after your income tax return is filed. 1040 ez 2010   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. 1040 ez 2010 See Credit recapture, next. 1040 ez 2010 Credit recapture. 1040 ez 2010    If any tax-free educational assistance for the qualified education expenses paid in 2013 or any refund of your qualified education expenses paid in 2013 is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. 1040 ez 2010 You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. 1040 ez 2010 You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). 1040 ez 2010 Include that amount as an additional tax for the year the refund or tax-free assistance was received. 1040 ez 2010 Example. 1040 ez 2010   You pay $9,300 in tuition and fees in December 2013, and your child began college in January 2014. 1040 ez 2010 You filed your 2013 tax return on February 14, 2014, and claimed a lifetime learning credit of $1,860. 1040 ez 2010 You claimed no other tax credits. 1040 ez 2010 After you filed your return, your child withdrew from two courses and you received a refund of $2,900. 1040 ez 2010 You must refigure your 2013 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. 1040 ez 2010 The refigured credit is $1,280 and your tax liability increased by $580. 1040 ez 2010 See instructions for your 2014 income tax return to determine where to include this tax. 1040 ez 2010 If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. 1040 ez 2010 Amounts that do not reduce qualified education expenses. 1040 ez 2010   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. 1040 ez 2010   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. 1040 ez 2010 The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. 1040 ez 2010 The use of the money is not restricted. 1040 ez 2010 For examples, see Adjustments to Qualified Education Expenses in chapter 2, American Opportunity Credit. 1040 ez 2010 Coordination with Pell grants and other scholarships. 1040 ez 2010   In some cases, you may be able to reduce your tax liability by including scholarships in income. 1040 ez 2010 If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. 1040 ez 2010 The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. 1040 ez 2010 Example 1—No scholarship. 1040 ez 2010 Judy Green, who is unmarried, is taking courses at a public community college to be recertified to teach in public schools. 1040 ez 2010 Her AGI and her MAGI, for purposes of the credit, are $27,000. 1040 ez 2010 Judy takes the standard deduction of $5,950 and personal exemption of $3,800, reducing her AGI to taxable income of $17,250 and her tax before credits is $2,156. 1040 ez 2010 She claims no credits other than the lifetime learning credit. 1040 ez 2010 In July 2013 she paid $700 for the summer 2013 semester; in August 2013 she paid $1,900 for the fall 2013 semester; and in December 2013 she paid another $1,900 for the spring semester beginning in January 2014. 1040 ez 2010 Judy and the college meet all requirements for the lifetime learning tax credit. 1040 ez 2010 She can use all of the $4,500 tuition she paid in 2013 when figuring her 2013 lifetime learning credit. 1040 ez 2010 She claims a $900 lifetime learning credit and her tax after credits is $1,256. 1040 ez 2010 Example 2—Scholarship excluded from income. 1040 ez 2010 The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. 1040 ez 2010 Under the terms of her scholarship, it may be used to pay any educational expenses, including room and board. 1040 ez 2010 If Judy excludes the scholarship from income, she will be deemed (for purposes of computing her education credit) as having used the scholarship to pay for tuition, required fees, and course materials. 1040 ez 2010 Only $3,000 of the $4,500 tuition she paid in 2013 could be used when figuring her 2013 lifetime learning credit. 1040 ez 2010 Her lifetime learning credit would be reduced to $600 and her tax after credits would be $1,556. 1040 ez 2010 Example 3—Scholarship included in income. 1040 ez 2010 The facts are the same as in Example 2—Scholarship excluded from income. 1040 ez 2010 If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have used the entire scholarship to pay for room and board. 1040 ez 2010 Judy's AGI will increase to $28,500, her taxable income would be $18,750, and her tax before credits would be $2,381. 1040 ez 2010 She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. 1040 ez 2010 Judy could claim a $900 lifetime learning credit and her tax after credits would be $1,481. 1040 ez 2010 Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. 1040 ez 2010 This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. 1040 ez 2010 Sports, games, hobbies, and noncredit courses. 1040 ez 2010   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. 1040 ez 2010 However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. 1040 ez 2010 Comprehensive or bundled fees. 1040 ez 2010   Some eligible educational institutions combine all of their fees for an academic period into one amount. 1040 ez 2010 If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. 1040 ez 2010 The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T. 1040 ez 2010 See Figuring the Credit , later, for more information about Form 1098-T. 1040 ez 2010 Who Is an Eligible Student For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier). 1040 ez 2010 Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim a lifetime learning credit for your dependent's expenses for that year. 1040 ez 2010 For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. 1040 ez 2010 You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. 1040 ez 2010 IF you. 1040 ez 2010 . 1040 ez 2010 . 1040 ez 2010 THEN only. 1040 ez 2010 . 1040 ez 2010 . 1040 ez 2010 claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. 1040 ez 2010 The dependent cannot claim the credit. 1040 ez 2010 do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the lifetime learning credit. 1040 ez 2010 You cannot claim the credit based on this dependent's expenses. 1040 ez 2010 Expenses paid by dependent. 1040 ez 2010   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. 1040 ez 2010 Include these expenses when figuring the amount of your lifetime learning credit. 1040 ez 2010    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. 1040 ez 2010 Expenses paid by you. 1040 ez 2010   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the lifetime learning credit. 1040 ez 2010 If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit. 1040 ez 2010 Expenses paid by others. 1040 ez 2010   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. 1040 ez 2010 In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. 1040 ez 2010 If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. 1040 ez 2010 Example. 1040 ez 2010 In 2013, Ms. 1040 ez 2010 Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. 1040 ez 2010 For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. 1040 ez 2010 Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim a lifetime learning credit. 1040 ez 2010 If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim a lifetime learning credit. 1040 ez 2010 If anyone else claims an exemption for Todd, Todd cannot claim a lifetime learning credit. 1040 ez 2010 Tuition reduction. 1040 ez 2010   When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. 1040 ez 2010 If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. 1040 ez 2010 For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. 1040 ez 2010 Figuring the Credit The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. 1040 ez 2010 The maximum amount of lifetime learning credit you can claim for 2013 is $2,000 (20% × $10,000). 1040 ez 2010 However, that amount may be reduced based on your MAGI. 1040 ez 2010 See Effect of the Amount of Your Income on the Amount of Your Credit , later. 1040 ez 2010 Example. 1040 ez 2010 Bruce and Toni Harper are married and file a joint tax return. 1040 ez 2010 For 2013, their MAGI is $75,000. 1040 ez 2010 Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. 1040 ez 2010 She already has a bachelor's degree in history and wants to become a nurse. 1040 ez 2010 In August 2013, Toni paid $5,000 of qualified education expenses for her fall 2013 semester. 1040 ez 2010 Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2013 joint tax return. 1040 ez 2010 Form 1098-T. 1040 ez 2010   To help you figure your lifetime learning credit, the student should receive Form 1098-T. 1040 ez 2010 Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. 1040 ez 2010 An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. 1040 ez 2010 However, the amounts in boxes 1 and 2 of Form 1098-T might be different from what you paid. 1040 ez 2010 When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. 1040 ez 2010   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. 1040 ez 2010    The eligible educational institution may ask for a completed Form W-9S, or similar statement to obtain the student's name, address, and taxpayer identification number. 1040 ez 2010 Effect of the Amount of Your Income on the Amount of Your Credit The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $53,000 and $63,000 ($107,000 and $127,000 if you file a joint return). 1040 ez 2010 You cannot claim a lifetime learning credit if your MAGI is $63,000 or more ($127,000 or more if you file a joint return). 1040 ez 2010 Modified adjusted gross income (MAGI). 1040 ez 2010   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. 1040 ez 2010 MAGI when using Form 1040A. 1040 ez 2010   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. 1040 ez 2010 MAGI when using Form 1040. 1040 ez 2010   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. 1040 ez 2010 You can use Worksheet 3-1 to figure your MAGI. 1040 ez 2010 Worksheet 3-1. 1040 ez 2010 MAGI for the Lifetime Learning Credit 1. 1040 ez 2010 Enter your adjusted gross income  (Form 1040, line 38)   1. 1040 ez 2010   2. 1040 ez 2010 Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. 1040 ez 2010       3. 1040 ez 2010 Enter your foreign housing deduction (Form 2555, line 50)   3. 1040 ez 2010       4. 1040 ez 2010 Enter the amount of income from Puerto Rico you are excluding   4. 1040 ez 2010       5. 1040 ez 2010 Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. 1040 ez 2010       6. 1040 ez 2010 Add the amounts on lines 2, 3, 4, and 5   6. 1040 ez 2010   7. 1040 ez 2010 Add the amounts on lines 1 and 6. 1040 ez 2010  This is your modified adjusted  gross income. 1040 ez 2010 Enter this amount  on Form 8863, line 14   7. 1040 ez 2010   Phaseout. 1040 ez 2010   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 10-18 of Form 8863. 1040 ez 2010 The same method is shown in the following example. 1040 ez 2010 Example. 1040 ez 2010 You are filing a joint return with a MAGI of $112,000. 1040 ez 2010 In 2013, you paid $6,600 of qualified education expenses. 1040 ez 2010 You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). 1040 ez 2010 The result is a $1,320 (20% x $6,600) tentative credit. 1040 ez 2010 Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. 1040 ez 2010 The numerator of the fraction is $127,000 (the upper limit for those filing a joint return) minus your MAGI. 1040 ez 2010 The denominator is $20,000, the range of incomes for the phaseout ($107,000 to $127,000). 1040 ez 2010 The result is the amount of your phased out (reduced) lifetime learning credit ($990). 1040 ez 2010   $1,320 × $127,000 − $112,000  $20,000 = $990   Claiming the Credit You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. 1040 ez 2010 Enter the credit on Form 1040, line 49, or Form 1040A, line 31. 1040 ez 2010 Note. 1040 ez 2010 In Appendix A, Illustrated Example of Education Credits at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. 1040 ez 2010 Prev  Up  Next   Home   More Online Publications