Switched Keys

Wednesday was our first day of VITA locally. Taxpayers came in at a steady, but not frantic, pace. The slightly earlier opening of the program will help smooth out the demand for the first three weeks. As always there were a few new or unusual issues. These issues are what trip up new preparers so I'm sharing them with others here. This is also a good way to make a "note to self" for future reference. The accumulation of these special issues is what develops expertise in tax preparation.

Married Filing Separately

One of the issues that came up twice during the first evening of tax prep had to do with married filing separately. It appears to be common for paid preparers to prepare such returns as if the taxpayer were single, or taking the separate income of the taxpayer when filing. With Texas as a community property state, spouses filing separately must include half of each partner's income when filing.

Besides, it will almost always be more beneficial filing joint anyway. Even if living separately, partners could make an agreement to split the refund. If certain conditions are met separate taxpayers may be able to file head of household, but only if there is a child involved. Just being separated does not allow you to file as single. I have not read or heard of IRS involvement in such cases but it is still not correct and taxpayers will be liable for any taxes, penalties, and interest.

Child's Income

The Affordable Care Act adds to the confusion on the issue of dependent's income. When a child has some of their own income some think that parents must include that in their income. Normally, that is not true. One example is when a parent receives social security payments for the child. Publication 17 talks about this scenario specifically. In those cases the child's social security is the child's, not the parents, even though the check may be addressed to the parent. If that is the only income of the child taxability is based on 50% of that amount and it's unlikely that he will need to file a return.

One exception to the rule of including a child's income is referred to as the Kiddie Tax. That comes into play when a child's unearned income exceeds a certain level. In those cases, the income might be taxable at the parent's rates. Alternately, the parents have the option of including that income on their own return.

The confusion that the ACA adds is that form 8962 asks for household income (MAGI) in calculating the Premium Tax Credit. The income of all dependents is included in this amount. That doesn't mean it is included on the 1040.

Amending ITIN Returns

The third issue discussed during the evening session related to taxpayers with an ITIN that received their social security card. When a taxpayer receives their SSN they can amend prior year returns to get credits (EITC) that they were previously disallowed due to the ITIN, if they otherwise qualify. However, taxpayers should also notify the IRS of their receiving a SSN, so that the IRS can merge the ITIN returns with their SSN. The sooner this is done the better.

The following is from http://www.irs.gov/Individuals/Additional-ITIN-Information

What do I do when I am assigned a social security number (SSN)?
Once you receive a SSN, you must use that number for tax purposes and discontinue using your ITIN.  It is improper to use both the ITIN and the SSN assigned to the same person to file tax returns.  It is your responsibility to notify the IRS so we can combine all of your tax records under one identification number.  If you do not notify the IRS when you are assigned a SSN, you may not receive credit for all wages paid and taxes withheld which could reduce the amount of any refund due.  You can visit a local IRS office or write a letter explaining that you have now been assigned a SSN and want your tax records combined.  Include your complete name, mailing address, and ITIN along with a copy of your social security card and a copy of the CP 565, Notice of ITIN Assignment, if available.  The IRS will void the ITIN and associate all prior tax information filed under the ITIN with the SSN.  Send your letter to: 

     Internal Revenue Service 
     Austin, TX 73301-0057

I've searched and could not find a specific IRS procedure for amending prior year returns for such individuals, but have read advice that says amended returns are filed by simply using the SSN (not the ITIN) of the taxpayer, and would include the ITIN information in the explanations for the 1040X. The notation might read "Amending return with SSN to claim EITC. Prior return used ITIN ###-##-####." If the ITIN and SSN records have been merged it will be even easier for them to reconcile. The important thing is to meet the deadline for amended returns.

I'm looking forward to tackling other issues this season, although there are many, such as IRAs and conversions, that I won't see much of while preparing taxes in the VITA. Still, this is a valuable experience and a useful service to the public, a service that could use more volunteer participation.