Tax Forms Guide · (for preparing 2006 Form 1040 tax returns and tax planning for 2007 and beyond)...

by HowardSoft®®®®

Tax Preparer®®®®

Tax Forms Guide2007 Edition

(for preparing 2006 Form 1040 tax returnsand tax planning for 2007 and beyond)

For a friendlier environment, HowardSoft manuals are printed on recycled paper. We areproud to be among the first in the industry, several years ago, to take this importantstep to help conserve our forests, and encourage you do the same wherever you can.

This guide and the associated software are based on information compiled and inter-preted by the staff of HowardSoft in late 2006 and January 2007, including the latestinformation from the IRS, but their complete accuracy cannot be guaranteed. NeitherHowardSoft nor Dr. J. E. Howard assumes any responsibility for any consequentialdamages resulting from their use. All customers are bound by the Customer Agree-ments that are printed on the next page and the separate Disk Packet.

This guide and the associated software are copyrighted by HowardSoft and all rightsare reserved. This document may not, in whole or in part, be copied, photocopied, re-produced, translated, or reduced to any electronic medium or machine-readable formwithout prior written consent from Dr. J. E. Howard, President of HowardSoft.

Copyright 2007 by HowardSoftP. O. Box 8432, La Jolla, CA 92038

(HowardSoft® and Tax Preparer® are registered trademarks of HowardSoft.)

Customer Agreements

CAREFULLY READ THE FOLLOWING TERMS AND CONDITIONS BEFOREOPENING THE DISK PACKET. OPENING THE DISK PACKET INDICATESYOUR ACCEPTANCE OF THESE TERMS AND CONDITIONS. IF YOU DO NOTAGREE WITH THEM, YOU SHOULD PROMPTLY RETURN THE ENTIREPACKAGE WITH THE DISK PACKET UNOPENED, AND YOUR MONEY WILLBE REFUNDED. HowardSoft provides this program and licenses its use in theUnited States and Puerto Rico. You assume responsibility for the selection ofthe program to achieve your intended results, and for the installation, use,and results obtained from the program.

License. You may1. use the program on any machine that you personally own and use, and2. copy the program into any machine-readable or printed form for backup

support of your use of the program on the machine.YOU MAY NOT USE, COPY, MODIFY, SUBLICENSE OR OTHERWISETRANSFER THE PROGRAM OR ANY COPY, MODIFICATION OR MERGEDPORTION, IN WHOLE OR IN PART, EXCEPT AS EXPRESSLY PROVIDED FORIN THIS LICENSE. IF YOU TRANSFER POSSESSION OF ANY COPY,MODIFICATION OR MERGED PORTION OF THE PROGRAM TO ANOTHERPARTY, YOUR LICENSE IS AUTOMATICALLY TERMINATED AND ANYATTEMPTED SUBLICENSE, ASSIGNMENT OR OTHER TRANSFER IS NULLAND VOID.

Term. The license is effective until terminated. You may terminate it at anytime by destroying the program, together with all copies, modifications andmerged portions in any form. It will also terminate upon conditions set forthelsewhere in this Agreement or if you fail to comply with any term or condi-tion of this Agreement. You agree upon such termination to destroy the pro-gram together with all copies, modifications and merged portions in any form.

Limited Warranty. This program is intended only as a computational aid andnot a professional advisor. HowardSoft does not represent itself as a tax, in-vestment, or legal advisor and is not responsible for decisions made on thebasis of data produced by the program. THE PROGRAM IS PROVIDED "ASIS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED,INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OFMERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THEENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE PROGRAMIS WITH YOU. SHOULD THE PROGRAM PROVE DEFECTIVE, YOU (AND NOTHOWARDSOFT NOR ITS REPRESENTATIVE) ASSUME THE ENTIRE COST OFALL NECESSARY SERVICING, REPAIR OR CORRECTION. SOME STATES DONOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVEEXCLUSION MAY NOT APPLY TO YOU. THIS WARRANTY GIVES YOUSPECIFIC LEGAL RIGHTS AND YOU MAY ALSO HAVE OTHER RIGHTSWHICH VARY FROM STATE TO STATE. HowardSoft does not warrant thatthe functions contained in the program will meet your requirements nor thatthe operation of the program will be uninterrupted or error free. However,HowardSoft does warrant the diskette on which the program is furnished to

HowardSoft

be free from defects in materials and workmanship under normal use for a pe-riod of ninety (90) days from the date of delivery to you as evidenced by acopy of your receipt.

Limitations of Remedies. HowardSoft's entire liability and your exclusiveremedy shall be:

1. the replacement of any diskette not meeting HowardSoft's warrantydescribed above and which is returned to HowardSoft with a copy ofyour payment receipt, or

2. if HowardSoft is unable to deliver a replacement diskette which is freeof defects in material or workmanship, you may terminate this Agree-ment by returning the program and your money will be refunded.

IN NO EVENT WILL HOWARDSOFT BE LIABLE TO YOU FOR ANY DAMAGES,INCLUDING ANY LOST PROFITS, LOST SAVINGS, OR OTHER INCIDENTALOR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OR INABILITYTO USE SUCH PROGRAM EVEN IF HOWARDSOFT HAS BEEN ADVISED OFTHE POSSIBILITY OF SUCH DAMAGES, OR FOR ANY CLAIM BY ANYOTHER PARTY. SOME STATES DO NOT ALLOW THE LIMITATION OREXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIALDAMAGES, SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLYTO YOU.

General. The Agreement will be governed by the laws of the State of Califor-nia. Should you have any questions concerning this Agreement, you may con-tact HowardSoft in writing at P. O. Box 8432, La Jolla, California 92038.YOU ACKNOWLEDGE THAT YOU HAVE READ THIS AGREEMENT,UNDERSTAND IT AND AGREE TO BE BOUND BY ITS TERMS ANDCONDITIONS. YOU FURTHER AGREE THAT IT IS THE COMPLETE ANDEXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US WHICHSUPERSEDES ANY PROPOSAL OR PRIOR AGREEMENT, ORAL OR WRITTEN,AND ANY OTHER COMMUNICATIONS BETWEEN US RELATING TO THESUBJECT MATTER OF THIS AGREEMENT.

* Included only in Premium Level software.

Contents-1

Table of Contents

HINT: For a clickable on-screen version of this table of contents, viewBookmarks. To search, press ctrl-F and enter the phrase you want tofind, then press ctrl-G to find other occurences.

IntroductionTax Forms Guide vs. User's GuideTax Forms Guide vs. User's GuideTax Forms Guide vs. User's GuideTax Forms Guide vs. User's Guide ........................................................................................................................................................................................ intro-intro-intro-intro-1111Paperwork Reduction Act NoticePaperwork Reduction Act NoticePaperwork Reduction Act NoticePaperwork Reduction Act Notice .................................................................................................................................................................................................... intro-intro-intro-intro-2222

Chapter 1Highlights of Changes

OverviewOverviewOverviewOverview ............................................................................................................................................................................................................................................................................................................................................................................................ 1-1-1-1-1111Form by Form ChangesForm by Form ChangesForm by Form ChangesForm by Form Changes ................................................................................................................................................................................................................................................................................ 1-1-1-1-14141414Printouts and Form 1040 Tab SettingsPrintouts and Form 1040 Tab SettingsPrintouts and Form 1040 Tab SettingsPrintouts and Form 1040 Tab Settings.................................................................................................................................................................................... 1-1-1-1-20202020Recommended IRS PublicationsRecommended IRS PublicationsRecommended IRS PublicationsRecommended IRS Publications .................................................................................................................................................................................................................... 1-1-1-1-23232323

Chapter 2Form by Form Details

How to Use This ChapterHow to Use This ChapterHow to Use This ChapterHow to Use This Chapter ................................................................................................................................................................................................................................................................................ 2-2-2-2-1111Where to Report Income and DeductionsWhere to Report Income and DeductionsWhere to Report Income and DeductionsWhere to Report Income and Deductions.................................................................................................................................................................... 2-2-2-2-3333Control FormControl FormControl FormControl Form ................................................................................................................................................................................................................................................................................................................................................................ 2-2-2-2-6666Form 1040 / Main FormForm 1040 / Main FormForm 1040 / Main FormForm 1040 / Main Form........................................................................................................................................................................................................................................................................................ 2-2-2-2-16161616Schedule A / Itemized DeductionsSchedule A / Itemized DeductionsSchedule A / Itemized DeductionsSchedule A / Itemized Deductions............................................................................................................................................................................................................ 2-2-2-2-82828282Schedule B / Interest and Dividend IncomeSchedule B / Interest and Dividend IncomeSchedule B / Interest and Dividend IncomeSchedule B / Interest and Dividend Income .................................................................................................................................... 2-2-2-2-101101101101Schedule C & C-EZ / Profit or Loss from BusinessSchedule C & C-EZ / Profit or Loss from BusinessSchedule C & C-EZ / Profit or Loss from BusinessSchedule C & C-EZ / Profit or Loss from Business............................................................................................ 2-2-2-2-111111111111Schedule D / Capital Gains and LossesSchedule D / Capital Gains and LossesSchedule D / Capital Gains and LossesSchedule D / Capital Gains and Losses ............................................................................................................................................................ 2-2-2-2-123123123123Schedule E / Supplemental Income and LossSchedule E / Supplemental Income and LossSchedule E / Supplemental Income and LossSchedule E / Supplemental Income and Loss .................................................................................................................... 2-2-2-2-144144144144Schedule EIC / Earned Income CreditSchedule EIC / Earned Income CreditSchedule EIC / Earned Income CreditSchedule EIC / Earned Income Credit ........................................................................................................................................................................ 2-2-2-2-166166166166Schedule F / Profit or Loss from FarmingSchedule F / Profit or Loss from FarmingSchedule F / Profit or Loss from FarmingSchedule F / Profit or Loss from Farming .................................................................................................................................................... 2-2-2-2-171171171171Schedule H / Household Employment TaxesSchedule H / Household Employment TaxesSchedule H / Household Employment TaxesSchedule H / Household Employment Taxes ............................................................................................................................ 2-2-2-2-181181181181Schedule J / Income Averaging for Farmers & FishermenSchedule J / Income Averaging for Farmers & FishermenSchedule J / Income Averaging for Farmers & FishermenSchedule J / Income Averaging for Farmers & Fishermen........................................ 2-2-2-2-187187187187Schedule R / Credit for the Elderly or DisabledSchedule R / Credit for the Elderly or DisabledSchedule R / Credit for the Elderly or DisabledSchedule R / Credit for the Elderly or Disabled ............................................................................................................ 2-2-2-2-195195195195Schedule SE / Self-Employment TaxSchedule SE / Self-Employment TaxSchedule SE / Self-Employment TaxSchedule SE / Self-Employment Tax .................................................................................................................................................................................... 2-2-2-2-198198198198Form 1116 / Foreign Tax CreditForm 1116 / Foreign Tax CreditForm 1116 / Foreign Tax CreditForm 1116 / Foreign Tax Credit ........................................................................................................................................................................................................................ 2-2-2-2-203203203203*Form 1310 / Refund Due a Deceased Taxpayer*Form 1310 / Refund Due a Deceased Taxpayer*Form 1310 / Refund Due a Deceased Taxpayer*Form 1310 / Refund Due a Deceased Taxpayer.................................................................................................... 2-2-2-2-220220220220Form 2106 & 2106-EZ / Employee Business ExpensesForm 2106 & 2106-EZ / Employee Business ExpensesForm 2106 & 2106-EZ / Employee Business ExpensesForm 2106 & 2106-EZ / Employee Business Expenses .................................................................... 2-2-2-2-221221221221


Contents-2

*Form 2120 / Multiple Support Declaration*Form 2120 / Multiple Support Declaration*Form 2120 / Multiple Support Declaration*Form 2120 / Multiple Support Declaration ........................................................................................................................................ 2-2-2-2-236236236236Form 2210 & 2210-F / Underpayment of Estimated TaxForm 2210 & 2210-F / Underpayment of Estimated TaxForm 2210 & 2210-F / Underpayment of Estimated TaxForm 2210 & 2210-F / Underpayment of Estimated Tax ............................................................ 2-2-2-2-237237237237*Form 2350 / Application for Extension of Time to File U.S. Income*Form 2350 / Application for Extension of Time to File U.S. Income*Form 2350 / Application for Extension of Time to File U.S. Income*Form 2350 / Application for Extension of Time to File U.S. Income

Tax ReturnTax ReturnTax ReturnTax Return............................................................................................................................................................................................................................................................................................................................................ 2-2-2-2-251251251251Form 2441 / Child and Dependent Care ExpensesForm 2441 / Child and Dependent Care ExpensesForm 2441 / Child and Dependent Care ExpensesForm 2441 / Child and Dependent Care Expenses........................................................................................ 2-2-2-2-252252252252*Form 2555 & 2555-EZ / Foreign Earned Income*Form 2555 & 2555-EZ / Foreign Earned Income*Form 2555 & 2555-EZ / Foreign Earned Income*Form 2555 & 2555-EZ / Foreign Earned Income .................................................................................................... 2-2-2-2-265265265265*Form 2848 / Power of Attorney and Declaration of Representative*Form 2848 / Power of Attorney and Declaration of Representative*Form 2848 / Power of Attorney and Declaration of Representative*Form 2848 / Power of Attorney and Declaration of Representative 2-2-2-2-265265265265Form 3468 / Investment CreditForm 3468 / Investment CreditForm 3468 / Investment CreditForm 3468 / Investment Credit ................................................................................................................................................................................................................................ 2-2-2-2-266266266266Form 3800 / General Business CreditForm 3800 / General Business CreditForm 3800 / General Business CreditForm 3800 / General Business Credit ................................................................................................................................................................................ 2-2-2-2-271271271271Form 3903 / Moving ExpensesForm 3903 / Moving ExpensesForm 3903 / Moving ExpensesForm 3903 / Moving Expenses ................................................................................................................................................................................................................................ 2-2-2-2-276276276276*Form 4136 / Credit for Federal Tax Paid on Fuels*Form 4136 / Credit for Federal Tax Paid on Fuels*Form 4136 / Credit for Federal Tax Paid on Fuels*Form 4136 / Credit for Federal Tax Paid on Fuels........................................................................................ 2-2-2-2-279279279279*Form 4137 / Social Security and Medicare Tax on Unreported Tip*Form 4137 / Social Security and Medicare Tax on Unreported Tip*Form 4137 / Social Security and Medicare Tax on Unreported Tip*Form 4137 / Social Security and Medicare Tax on Unreported Tip

IncomeIncomeIncomeIncome .................................................................................................................................................................................................................................................................................................................................................................... 2-2-2-2-279279279279*Form 4255 / Recapture of Investment Credit*Form 4255 / Recapture of Investment Credit*Form 4255 / Recapture of Investment Credit*Form 4255 / Recapture of Investment Credit ........................................................................................................................ 2-2-2-2-279279279279Form 4562 / Depreciation and AmortizationForm 4562 / Depreciation and AmortizationForm 4562 / Depreciation and AmortizationForm 4562 / Depreciation and Amortization .................................................................................................................................... 2-2-2-2-280280280280Form 4684 / Casualties and TheftsForm 4684 / Casualties and TheftsForm 4684 / Casualties and TheftsForm 4684 / Casualties and Thefts.................................................................................................................................................................................................... 2-2-2-2-315315315315Form 4797 / Sales of Business PropertyForm 4797 / Sales of Business PropertyForm 4797 / Sales of Business PropertyForm 4797 / Sales of Business Property ................................................................................................................................................................ 2-2-2-2-325325325325Form 4835 / Farm Rental Income and ExpensesForm 4835 / Farm Rental Income and ExpensesForm 4835 / Farm Rental Income and ExpensesForm 4835 / Farm Rental Income and Expenses........................................................................................................ 2-2-2-2-348348348348Form 4868 / Automatic Extension of Time to FileForm 4868 / Automatic Extension of Time to FileForm 4868 / Automatic Extension of Time to FileForm 4868 / Automatic Extension of Time to File........................................................................................................ 2-2-2-2-352352352352Form 4952 / Investment Interest Expense DeductionForm 4952 / Investment Interest Expense DeductionForm 4952 / Investment Interest Expense DeductionForm 4952 / Investment Interest Expense Deduction ............................................................................ 2-2-2-2-355355355355*Form 4970 / Tax on Accumulation Distribution of Trusts*Form 4970 / Tax on Accumulation Distribution of Trusts*Form 4970 / Tax on Accumulation Distribution of Trusts*Form 4970 / Tax on Accumulation Distribution of Trusts ............................................ 2-2-2-2-361361361361*Form 4972 / Tax on Lump-Sum Distributions*Form 4972 / Tax on Lump-Sum Distributions*Form 4972 / Tax on Lump-Sum Distributions*Form 4972 / Tax on Lump-Sum Distributions ........................................................................................................................ 2-2-2-2-361361361361Form 5329 / Additional Tax on Qualified Plans (IRAs, etc.)Form 5329 / Additional Tax on Qualified Plans (IRAs, etc.)Form 5329 / Additional Tax on Qualified Plans (IRAs, etc.)Form 5329 / Additional Tax on Qualified Plans (IRAs, etc.).................................... 2-2-2-2-362362362362Form 5695 / Residential Energy CreditsForm 5695 / Residential Energy CreditsForm 5695 / Residential Energy CreditsForm 5695 / Residential Energy Credits ................................................................................................................................................................ 2-2-2-2-377377377377*Form 5884 / Work Opportunity Credit*Form 5884 / Work Opportunity Credit*Form 5884 / Work Opportunity Credit*Form 5884 / Work Opportunity Credit ........................................................................................................................................................................ 2-2-2-2-383383383383*Form 6198 / At-Risk Limitations*Form 6198 / At-Risk Limitations*Form 6198 / At-Risk Limitations*Form 6198 / At-Risk Limitations ................................................................................................................................................................................................................ 2-2-2-2-383383383383Form 6251 / Alternative Minimum TaxForm 6251 / Alternative Minimum TaxForm 6251 / Alternative Minimum TaxForm 6251 / Alternative Minimum Tax ............................................................................................................................................................................ 2-2-2-2-384384384384Form 6252 / Installment Sale IncomeForm 6252 / Installment Sale IncomeForm 6252 / Installment Sale IncomeForm 6252 / Installment Sale Income ................................................................................................................................................................................ 2-2-2-2-392392392392*Form 6478 / Credit for Alcohol Used as Fuel*Form 6478 / Credit for Alcohol Used as Fuel*Form 6478 / Credit for Alcohol Used as Fuel*Form 6478 / Credit for Alcohol Used as Fuel ........................................................................................................................ 2-2-2-2-400400400400*Form 6765 / Credit for Increasing Research*Form 6765 / Credit for Increasing Research*Form 6765 / Credit for Increasing Research*Form 6765 / Credit for Increasing Research............................................................................................................................ 2-2-2-2-400400400400*Form 6781 / Gains and Losses from Section 1256 Contracts and*Form 6781 / Gains and Losses from Section 1256 Contracts and*Form 6781 / Gains and Losses from Section 1256 Contracts and*Form 6781 / Gains and Losses from Section 1256 Contracts and

StraddlesStraddlesStraddlesStraddles .................................................................................................................................................................................................................................................................................................................................................... 2-2-2-2-400400400400*Form 8271 / Investor Reporting of Tax Shelter Registration Number*Form 8271 / Investor Reporting of Tax Shelter Registration Number*Form 8271 / Investor Reporting of Tax Shelter Registration Number*Form 8271 / Investor Reporting of Tax Shelter Registration Number

........................................................................................................................................................................................................................................................................................................................................................................................................................ 2-2-2-2-400400400400Form 8283 / Noncash Charitable ContributionsForm 8283 / Noncash Charitable ContributionsForm 8283 / Noncash Charitable ContributionsForm 8283 / Noncash Charitable Contributions ............................................................................................................ 2-2-2-2-401401401401*Form 8332 / Release of Claim to Exemption for Child of Divorced*Form 8332 / Release of Claim to Exemption for Child of Divorced*Form 8332 / Release of Claim to Exemption for Child of Divorced*Form 8332 / Release of Claim to Exemption for Child of Divorced

or Separated Parentsor Separated Parentsor Separated Parentsor Separated Parents ................................................................................................................................................................................................................................................................ 2-2-2-2-402402402402*Form 8379 / Injured Spouse Claim and Allocation*Form 8379 / Injured Spouse Claim and Allocation*Form 8379 / Injured Spouse Claim and Allocation*Form 8379 / Injured Spouse Claim and Allocation.................................................................................... 2-2-2-2-402402402402*Form 8396 / Mortgage Interest Credit*Form 8396 / Mortgage Interest Credit*Form 8396 / Mortgage Interest Credit*Form 8396 / Mortgage Interest Credit........................................................................................................................................................................ 2-2-2-2-402402402402Form 8582 / Passive Activity Loss LimitationsForm 8582 / Passive Activity Loss LimitationsForm 8582 / Passive Activity Loss LimitationsForm 8582 / Passive Activity Loss Limitations ............................................................................................................................ 2-2-2-2-403403403403


Contents-3

*Form 8586 / Low-Income Housing Credit*Form 8586 / Low-Income Housing Credit*Form 8586 / Low-Income Housing Credit*Form 8586 / Low-Income Housing Credit ................................................................................................................................................ 2-2-2-2-412412412412*Form 8594 / *Form 8594 / *Form 8594 / *Form 8594 / Asset Acquisition Statement Under Section 1060Asset Acquisition Statement Under Section 1060Asset Acquisition Statement Under Section 1060Asset Acquisition Statement Under Section 1060 ............ 2-2-2-2-412412412412Form 8606 / Nondeductible IRAsForm 8606 / Nondeductible IRAsForm 8606 / Nondeductible IRAsForm 8606 / Nondeductible IRAs ................................................................................................................................................................................................................ 2-2-2-2-413413413413*Form 8611 / Recapture of Low-Income Housing Credit*Form 8611 / Recapture of Low-Income Housing Credit*Form 8611 / Recapture of Low-Income Housing Credit*Form 8611 / Recapture of Low-Income Housing Credit.................................................... 2-2-2-2-427427427427Form 8615 / Tax for Children Under Age 18Form 8615 / Tax for Children Under Age 18Form 8615 / Tax for Children Under Age 18Form 8615 / Tax for Children Under Age 18........................................................................................................................................ 2-2-2-2-428428428428*Form 8801 / Credit for Prior Year Minimum Tax*Form 8801 / Credit for Prior Year Minimum Tax*Form 8801 / Credit for Prior Year Minimum Tax*Form 8801 / Credit for Prior Year Minimum Tax.................................................................................................... 2-2-2-2-435435435435Form 8812 / Additional Child Tax CreditForm 8812 / Additional Child Tax CreditForm 8812 / Additional Child Tax CreditForm 8812 / Additional Child Tax Credit ............................................................................................................................................................ 2-2-2-2-436436436436Form 8814 / Election to Report Child's Interest and DividendsForm 8814 / Election to Report Child's Interest and DividendsForm 8814 / Election to Report Child's Interest and DividendsForm 8814 / Election to Report Child's Interest and Dividends ............................................ 2-2-2-2-438438438438*Form 8815 / Exclusion of Interest from Series EE and I U.S. Savings*Form 8815 / Exclusion of Interest from Series EE and I U.S. Savings*Form 8815 / Exclusion of Interest from Series EE and I U.S. Savings*Form 8815 / Exclusion of Interest from Series EE and I U.S. Savings

Bonds Issued After 1989Bonds Issued After 1989Bonds Issued After 1989Bonds Issued After 1989 ................................................................................................................................................................................................................................................ 2-2-2-2-443443443443*Form 8822 / Change of Address*Form 8822 / Change of Address*Form 8822 / Change of Address*Form 8822 / Change of Address ............................................................................................................................................................................................................ 2-2-2-2-443443443443*Form 8824 / Like-Kind Exchanges*Form 8824 / Like-Kind Exchanges*Form 8824 / Like-Kind Exchanges*Form 8824 / Like-Kind Exchanges ................................................................................................................................................................................................ 2-2-2-2-443443443443*Form 8828 / Recapture of Federal Mortgage Subsidy*Form 8828 / Recapture of Federal Mortgage Subsidy*Form 8828 / Recapture of Federal Mortgage Subsidy*Form 8828 / Recapture of Federal Mortgage Subsidy ........................................................ 2-2-2-2-444444444444Form 8829 / Business Use of Your HomeForm 8829 / Business Use of Your HomeForm 8829 / Business Use of Your HomeForm 8829 / Business Use of Your Home............................................................................................................................................................ 2-2-2-2-445445445445*Form 8834 / Qualified Electric Vehicle Credit*Form 8834 / Qualified Electric Vehicle Credit*Form 8834 / Qualified Electric Vehicle Credit*Form 8834 / Qualified Electric Vehicle Credit.................................................................................................................... 2-2-2-2-451451451451*Form 8839 / Qualified Adoption Expenses*Form 8839 / Qualified Adoption Expenses*Form 8839 / Qualified Adoption Expenses*Form 8839 / Qualified Adoption Expenses ........................................................................................................................................ 2-2-2-2-451451451451*Form 8846 / Credit for Employer Social Security and Medicare*Form 8846 / Credit for Employer Social Security and Medicare*Form 8846 / Credit for Employer Social Security and Medicare*Form 8846 / Credit for Employer Social Security and Medicare

Taxes Paid on Certain Employee TipsTaxes Paid on Certain Employee TipsTaxes Paid on Certain Employee TipsTaxes Paid on Certain Employee Tips.................................................................................................................................................... 2-2-2-2-451451451451*Form 8853 / Archer MSAs and Long-Term Care Insurance*Form 8853 / Archer MSAs and Long-Term Care Insurance*Form 8853 / Archer MSAs and Long-Term Care Insurance*Form 8853 / Archer MSAs and Long-Term Care Insurance

ContractsContractsContractsContracts.................................................................................................................................................................................................................................................................................................................................................... 2-2-2-2-451451451451*Form 8859 / District of Columbia First-Time Homebuyer Credit*Form 8859 / District of Columbia First-Time Homebuyer Credit*Form 8859 / District of Columbia First-Time Homebuyer Credit*Form 8859 / District of Columbia First-Time Homebuyer Credit........ 2-2-2-2-452452452452*Form 8861 / Welfare-to-Work Credit*Form 8861 / Welfare-to-Work Credit*Form 8861 / Welfare-to-Work Credit*Form 8861 / Welfare-to-Work Credit ................................................................................................................................................................................ 2-2-2-2-452452452452*Form 8862 / Information to Claim Earned Income Credit After*Form 8862 / Information to Claim Earned Income Credit After*Form 8862 / Information to Claim Earned Income Credit After*Form 8862 / Information to Claim Earned Income Credit After

DisallowanceDisallowanceDisallowanceDisallowance ........................................................................................................................................................................................................................................................................................................................ 2-2-2-2-452452452452Form 8863 / Education CreditsForm 8863 / Education CreditsForm 8863 / Education CreditsForm 8863 / Education Credits ............................................................................................................................................................................................................................ 2-2-2-2-453453453453Form 8880 / Qualified Retirement Savings Contributions CreditForm 8880 / Qualified Retirement Savings Contributions CreditForm 8880 / Qualified Retirement Savings Contributions CreditForm 8880 / Qualified Retirement Savings Contributions Credit2-2-2-2-455455455455*Form 8885 / Health Coverage Tax Credit*Form 8885 / Health Coverage Tax Credit*Form 8885 / Health Coverage Tax Credit*Form 8885 / Health Coverage Tax Credit................................................................................................................................................ 2-2-2-2-457457457457*Form 8889 / Health Savings Accounts (HSAs)*Form 8889 / Health Savings Accounts (HSAs)*Form 8889 / Health Savings Accounts (HSAs)*Form 8889 / Health Savings Accounts (HSAs) ................................................................................................................ 2-2-2-2-457457457457Form 8901 / Information on Qualifying Children Who Are NotForm 8901 / Information on Qualifying Children Who Are NotForm 8901 / Information on Qualifying Children Who Are NotForm 8901 / Information on Qualifying Children Who Are Not

DependentsDependentsDependentsDependents.................................................................................................................................................................................................................................................................................................................................... 2-2-2-2-458458458458Form 8914 / Exemption Amount for Taxpayers Housing IndividualsForm 8914 / Exemption Amount for Taxpayers Housing IndividualsForm 8914 / Exemption Amount for Taxpayers Housing IndividualsForm 8914 / Exemption Amount for Taxpayers Housing Individuals

Displaced by Hurricane KatrinaDisplaced by Hurricane KatrinaDisplaced by Hurricane KatrinaDisplaced by Hurricane Katrina............................................................................................................................................................................................ 2-2-2-2-459459459459Schedule D Tax WorksheetSchedule D Tax WorksheetSchedule D Tax WorksheetSchedule D Tax Worksheet ................................................................................................................................................................................................................................................ 2-2-2-2-461461461461Form 1040-ES / Estimated Tax for IndividualsForm 1040-ES / Estimated Tax for IndividualsForm 1040-ES / Estimated Tax for IndividualsForm 1040-ES / Estimated Tax for Individuals ........................................................................................................................ 2-2-2-2-462462462462Form 1040X / Amended Income Tax ReturnForm 1040X / Amended Income Tax ReturnForm 1040X / Amended Income Tax ReturnForm 1040X / Amended Income Tax Return .................................................................................................................................... 2-2-2-2-464464464464Form 8453 / U.S. Individual Electronic FilingForm 8453 / U.S. Individual Electronic FilingForm 8453 / U.S. Individual Electronic FilingForm 8453 / U.S. Individual Electronic Filing ................................................................................................................................ 2-2-2-2-466466466466RAL or QIK Bank ApplicationRAL or QIK Bank ApplicationRAL or QIK Bank ApplicationRAL or QIK Bank Application .................................................................................................................................................................................................................................... 2-2-2-2-479479479479


Contents-4

Chapter 3Laser and Windows Graphic Printing

What Is RequiredWhat Is RequiredWhat Is RequiredWhat Is Required .................................................................................................................................................................................................................................................................................................................................... 3-3-3-3-1111How to InstallHow to InstallHow to InstallHow to Install ................................................................................................................................................................................................................................................................................................................................................................ 3-3-3-3-3333Operating HintsOperating HintsOperating HintsOperating Hints................................................................................................................................................................................................................................................................................................................................................ 3-3-3-3-5555If You Have TroubleIf You Have TroubleIf You Have TroubleIf You Have Trouble .................................................................................................................................................................................................................................................................................................................... 3-3-3-3-8888

Chapter 4Electronic Filing (e-file)

The BasicsThe BasicsThe BasicsThe Basics.................................................................................................................................................................................................................................................................................................................................................................................... 4-4-4-4-1111How to InstallHow to InstallHow to InstallHow to Install ................................................................................................................................................................................................................................................................................................................................................................ 4-4-4-4-2222Operating HintsOperating HintsOperating HintsOperating Hints................................................................................................................................................................................................................................................................................................................................................ 4-4-4-4-4444If You Have TroubleIf You Have TroubleIf You Have TroubleIf You Have Trouble .................................................................................................................................................................................................................................................................................................................... 4-4-4-4-7777

List of FiguresFigure 1-1. Tabs for ALL HowardSoft forms: Facsimile, Laser-Figure 1-1. Tabs for ALL HowardSoft forms: Facsimile, Laser-Figure 1-1. Tabs for ALL HowardSoft forms: Facsimile, Laser-Figure 1-1. Tabs for ALL HowardSoft forms: Facsimile, Laser-

graphic, and Windows-graphic Form 1040graphic, and Windows-graphic Form 1040graphic, and Windows-graphic Form 1040graphic, and Windows-graphic Form 1040 ........................................................................................................................................ 21212121Figure 1-2. Tabs for IRS-printed Form 1040 ONLYFigure 1-2. Tabs for IRS-printed Form 1040 ONLYFigure 1-2. Tabs for IRS-printed Form 1040 ONLYFigure 1-2. Tabs for IRS-printed Form 1040 ONLY ................................................................................................................ 22222222Figure 1-3. Tabs for IRS-printed Form 1040 AlternateFigure 1-3. Tabs for IRS-printed Form 1040 AlternateFigure 1-3. Tabs for IRS-printed Form 1040 AlternateFigure 1-3. Tabs for IRS-printed Form 1040 Alternate ........................................................................................ 22222222Figure 2-1. Optional Text for LettersFigure 2-1. Optional Text for LettersFigure 2-1. Optional Text for LettersFigure 2-1. Optional Text for Letters ........................................................................................................................................................................................................ 14141414Figure 2-2. Dependents' WorksheetFigure 2-2. Dependents' WorksheetFigure 2-2. Dependents' WorksheetFigure 2-2. Dependents' Worksheet ................................................................................................................................................................................................................ 24242424Figure 2-3a. W-2 Worksheet, Screen 1Figure 2-3a. W-2 Worksheet, Screen 1Figure 2-3a. W-2 Worksheet, Screen 1Figure 2-3a. W-2 Worksheet, Screen 1 ........................................................................................................................................................................................ 30303030Figure 2-3b. W-2 Worksheet, Screen 2Figure 2-3b. W-2 Worksheet, Screen 2Figure 2-3b. W-2 Worksheet, Screen 2Figure 2-3b. W-2 Worksheet, Screen 2 ........................................................................................................................................................................................ 31313131Figure 2-3c. W-2 Worksheet, Screen 3Figure 2-3c. W-2 Worksheet, Screen 3Figure 2-3c. W-2 Worksheet, Screen 3Figure 2-3c. W-2 Worksheet, Screen 3 ........................................................................................................................................................................................ 33333333Figure 2-3d. W-2 Worksheet, Screen 4Figure 2-3d. W-2 Worksheet, Screen 4Figure 2-3d. W-2 Worksheet, Screen 4Figure 2-3d. W-2 Worksheet, Screen 4 ........................................................................................................................................................................................ 34343434Figure 2-3e. W-2 Worksheet, Screen 5Figure 2-3e. W-2 Worksheet, Screen 5Figure 2-3e. W-2 Worksheet, Screen 5Figure 2-3e. W-2 Worksheet, Screen 5 ........................................................................................................................................................................................ 36363636Figure 2-4a. 1099-R Worksheet, Screen 1Figure 2-4a. 1099-R Worksheet, Screen 1Figure 2-4a. 1099-R Worksheet, Screen 1Figure 2-4a. 1099-R Worksheet, Screen 1 ........................................................................................................................................................................ 41414141Figure 2-4b. 1099-R Worksheet, Screen 2Figure 2-4b. 1099-R Worksheet, Screen 2Figure 2-4b. 1099-R Worksheet, Screen 2Figure 2-4b. 1099-R Worksheet, Screen 2 ........................................................................................................................................................................ 43434343Figure 2-4c. 1099-R Worksheet, Screen 3Figure 2-4c. 1099-R Worksheet, Screen 3Figure 2-4c. 1099-R Worksheet, Screen 3Figure 2-4c. 1099-R Worksheet, Screen 3........................................................................................................................................................................ 46464646Figure 2-5a. W-2G Worksheet, Screen 1Figure 2-5a. W-2G Worksheet, Screen 1Figure 2-5a. W-2G Worksheet, Screen 1Figure 2-5a. W-2G Worksheet, Screen 1 ................................................................................................................................................................................ 51515151Figure 2-5b. W-2G Worksheet, Screen 2Figure 2-5b. W-2G Worksheet, Screen 2Figure 2-5b. W-2G Worksheet, Screen 2Figure 2-5b. W-2G Worksheet, Screen 2 ................................................................................................................................................................................ 52525252Figure 2-6. Sales Tax WorksheetFigure 2-6. Sales Tax WorksheetFigure 2-6. Sales Tax WorksheetFigure 2-6. Sales Tax Worksheet ............................................................................................................................................................................................................................ 89898989Figure 2-7. Mortgage Interest WorksheetFigure 2-7. Mortgage Interest WorksheetFigure 2-7. Mortgage Interest WorksheetFigure 2-7. Mortgage Interest Worksheet .................................................................................................................................................................... 94949494Figure 2-8. Seller-Financed WorksheetFigure 2-8. Seller-Financed WorksheetFigure 2-8. Seller-Financed WorksheetFigure 2-8. Seller-Financed Worksheet ............................................................................................................................................................................ 103103103103Figure 2-9. 1099-INT WorksheetFigure 2-9. 1099-INT WorksheetFigure 2-9. 1099-INT WorksheetFigure 2-9. 1099-INT Worksheet................................................................................................................................................................................................................................ 103103103103Figure 2-10. 1099-DIV WorksheetFigure 2-10. 1099-DIV WorksheetFigure 2-10. 1099-DIV WorksheetFigure 2-10. 1099-DIV Worksheet........................................................................................................................................................................................................................ 107107107107Figure 2-11a. Short-term Gain/Loss WorksheetFigure 2-11a. Short-term Gain/Loss WorksheetFigure 2-11a. Short-term Gain/Loss WorksheetFigure 2-11a. Short-term Gain/Loss Worksheet .................................................................................................................... 125125125125


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Figure 2-11b. Long-term Gain/Loss WorksheetFigure 2-11b. Long-term Gain/Loss WorksheetFigure 2-11b. Long-term Gain/Loss WorksheetFigure 2-11b. Long-term Gain/Loss Worksheet ........................................................................................................................ 126126126126Figure 2-12. Schedule K-1 Gain/Loss WorksheetFigure 2-12. Schedule K-1 Gain/Loss WorksheetFigure 2-12. Schedule K-1 Gain/Loss WorksheetFigure 2-12. Schedule K-1 Gain/Loss Worksheet ............................................................................................................ 130130130130Figure 2-13a. Rental/Royalty Worksheet, Screen 1Figure 2-13a. Rental/Royalty Worksheet, Screen 1Figure 2-13a. Rental/Royalty Worksheet, Screen 1Figure 2-13a. Rental/Royalty Worksheet, Screen 1................................................................................................ 147147147147Figure 2-13b. Rental/Royalty Worksheet, Screen 2Figure 2-13b. Rental/Royalty Worksheet, Screen 2Figure 2-13b. Rental/Royalty Worksheet, Screen 2Figure 2-13b. Rental/Royalty Worksheet, Screen 2................................................................................................ 149149149149Figure 2-14. Partnerships and S Corps WorksheetFigure 2-14. Partnerships and S Corps WorksheetFigure 2-14. Partnerships and S Corps WorksheetFigure 2-14. Partnerships and S Corps Worksheet ................................................................................................ 155155155155Figure 2-15. Estates and Trusts WorksheetFigure 2-15. Estates and Trusts WorksheetFigure 2-15. Estates and Trusts WorksheetFigure 2-15. Estates and Trusts Worksheet .................................................................................................................................................... 160160160160Figure 2-16. REMICs WorksheetFigure 2-16. REMICs WorksheetFigure 2-16. REMICs WorksheetFigure 2-16. REMICs Worksheet................................................................................................................................................................................................................................ 164164164164Figure 2-17. State Fund Contributions WorksheetFigure 2-17. State Fund Contributions WorksheetFigure 2-17. State Fund Contributions WorksheetFigure 2-17. State Fund Contributions Worksheet ........................................................................................................ 185185185185Figure 2-18a. Foreign Source Worksheet, Screen 1Figure 2-18a. Foreign Source Worksheet, Screen 1Figure 2-18a. Foreign Source Worksheet, Screen 1Figure 2-18a. Foreign Source Worksheet, Screen 1 ............................................................................................ 212212212212Figure 2-18b. Foreign Source Worksheet, Screen 2Figure 2-18b. Foreign Source Worksheet, Screen 2Figure 2-18b. Foreign Source Worksheet, Screen 2Figure 2-18b. Foreign Source Worksheet, Screen 2 ............................................................................................ 214214214214Figure 2-19a. Vehicle Expense Worksheet, Screen 1Figure 2-19a. Vehicle Expense Worksheet, Screen 1Figure 2-19a. Vehicle Expense Worksheet, Screen 1Figure 2-19a. Vehicle Expense Worksheet, Screen 1 .................................................................................... 229229229229Figure 2-19b. Vehicle Expense Worksheet, Screen 2Figure 2-19b. Vehicle Expense Worksheet, Screen 2Figure 2-19b. Vehicle Expense Worksheet, Screen 2Figure 2-19b. Vehicle Expense Worksheet, Screen 2 .................................................................................... 232232232232Figure 2-20. Care Provider WorksheetFigure 2-20. Care Provider WorksheetFigure 2-20. Care Provider WorksheetFigure 2-20. Care Provider Worksheet .................................................................................................................................................................................... 256256256256Figure 2-21. Qualifying Person WorksheetFigure 2-21. Qualifying Person WorksheetFigure 2-21. Qualifying Person WorksheetFigure 2-21. Qualifying Person Worksheet ........................................................................................................................................................ 259259259259Figure 2-22. Prior-Year Qualifying Person WorksheetFigure 2-22. Prior-Year Qualifying Person WorksheetFigure 2-22. Prior-Year Qualifying Person WorksheetFigure 2-22. Prior-Year Qualifying Person Worksheet................................................................................ 262262262262Figure 2-23. Section 179 WorksheetFigure 2-23. Section 179 WorksheetFigure 2-23. Section 179 WorksheetFigure 2-23. Section 179 Worksheet.................................................................................................................................................................................................... 285285285285Figure 2-24. MACRS/ACRS WorksheetFigure 2-24. MACRS/ACRS WorksheetFigure 2-24. MACRS/ACRS WorksheetFigure 2-24. MACRS/ACRS Worksheet ................................................................................................................................................................................ 296296296296Figure 2-25. Sec. 168(f)(1) WorksheetFigure 2-25. Sec. 168(f)(1) WorksheetFigure 2-25. Sec. 168(f)(1) WorksheetFigure 2-25. Sec. 168(f)(1) Worksheet ........................................................................................................................................................................................ 300300300300Figure 2-26. Depreciation WorksheetFigure 2-26. Depreciation WorksheetFigure 2-26. Depreciation WorksheetFigure 2-26. Depreciation Worksheet ........................................................................................................................................................................................ 302302302302Figure 2-27. Listed Property WorksheetFigure 2-27. Listed Property WorksheetFigure 2-27. Listed Property WorksheetFigure 2-27. Listed Property Worksheet ............................................................................................................................................................................ 307307307307Figure 2-28. Vehicle Info WorksheetFigure 2-28. Vehicle Info WorksheetFigure 2-28. Vehicle Info WorksheetFigure 2-28. Vehicle Info Worksheet .................................................................................................................................................................................................... 311311311311Figure 2-29. Amortization WorksheetFigure 2-29. Amortization WorksheetFigure 2-29. Amortization WorksheetFigure 2-29. Amortization Worksheet ........................................................................................................................................................................................ 313313313313Figure 2-30. Casualty and Theft WorksheetFigure 2-30. Casualty and Theft WorksheetFigure 2-30. Casualty and Theft WorksheetFigure 2-30. Casualty and Theft Worksheet.................................................................................................................................................... 317317317317Figure 2-31. Casualty or Theft SummaryFigure 2-31. Casualty or Theft SummaryFigure 2-31. Casualty or Theft SummaryFigure 2-31. Casualty or Theft Summary ................................................................................................................................................................ 323323323323Figure 2-32. Gain/Loss WorksheetFigure 2-32. Gain/Loss WorksheetFigure 2-32. Gain/Loss WorksheetFigure 2-32. Gain/Loss Worksheet ................................................................................................................................................................................................................ 331331331331Figure 2-33. Schedule K-1 Gain/Loss WorksheetFigure 2-33. Schedule K-1 Gain/Loss WorksheetFigure 2-33. Schedule K-1 Gain/Loss WorksheetFigure 2-33. Schedule K-1 Gain/Loss Worksheet ............................................................................................................ 333333333333Figure 2-34a. Gain/Recapture Worksheet, Screen 1Figure 2-34a. Gain/Recapture Worksheet, Screen 1Figure 2-34a. Gain/Recapture Worksheet, Screen 1Figure 2-34a. Gain/Recapture Worksheet, Screen 1 ........................................................................................ 341341341341Figure 2-34b. Gain/Recapture Worksheet, Screen 2Figure 2-34b. Gain/Recapture Worksheet, Screen 2Figure 2-34b. Gain/Recapture Worksheet, Screen 2Figure 2-34b. Gain/Recapture Worksheet, Screen 2 .................................................................................... 343343343343Figure 2-35. Passive Activity WorksheetFigure 2-35. Passive Activity WorksheetFigure 2-35. Passive Activity WorksheetFigure 2-35. Passive Activity Worksheet ........................................................................................................................................................................ 406406406406Figure 4-1. Printout Menu with Figure 4-1. Printout Menu with Figure 4-1. Printout Menu with Figure 4-1. Printout Menu with e-filee-filee-filee-file .................................................................................................................................................................................................................... 4444


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List of TablesTable 1-1. IRS Forms in Current 1040 EditionTable 1-1. IRS Forms in Current 1040 EditionTable 1-1. IRS Forms in Current 1040 EditionTable 1-1. IRS Forms in Current 1040 Edition .................................................................................................................................... 1-1-1-1-10101010Table 1-2. Supporting Data Entry Worksheets in Current 1040Table 1-2. Supporting Data Entry Worksheets in Current 1040Table 1-2. Supporting Data Entry Worksheets in Current 1040Table 1-2. Supporting Data Entry Worksheets in Current 1040

EditionEditionEditionEdition................................................................................................................................................................................................................................................................................................................................................................................ 1-1-1-1-12121212Table 1-3. IRS Worksheets Built into CalculationsTable 1-3. IRS Worksheets Built into CalculationsTable 1-3. IRS Worksheets Built into CalculationsTable 1-3. IRS Worksheets Built into Calculations .................................................................................................... 1-1-1-1-13131313Table 1-4. Standard Deduction SchedulesTable 1-4. Standard Deduction SchedulesTable 1-4. Standard Deduction SchedulesTable 1-4. Standard Deduction Schedules ................................................................................................................................................ 1-1-1-1-15151515Table 1-5. Thresholds for Phaseout of ExemptionsTable 1-5. Thresholds for Phaseout of ExemptionsTable 1-5. Thresholds for Phaseout of ExemptionsTable 1-5. Thresholds for Phaseout of Exemptions ............................................................................................ 1-1-1-1-15151515Table 1-6. Tax Rate SchedulesTable 1-6. Tax Rate SchedulesTable 1-6. Tax Rate SchedulesTable 1-6. Tax Rate Schedules................................................................................................................................................................................................................................ 1-1-1-1-16161616Table 1-7. Recommended IRS PublicationsTable 1-7. Recommended IRS PublicationsTable 1-7. Recommended IRS PublicationsTable 1-7. Recommended IRS Publications............................................................................................................................................ 1-1-1-1-25252525Table 2-1. Where to Report Income (by type of income)Table 2-1. Where to Report Income (by type of income)Table 2-1. Where to Report Income (by type of income)Table 2-1. Where to Report Income (by type of income) ................................................................ 2-2-2-2-3333Table 2-2. Where to Report Income (by IRS form received)Table 2-2. Where to Report Income (by IRS form received)Table 2-2. Where to Report Income (by IRS form received)Table 2-2. Where to Report Income (by IRS form received)............................................ 2-2-2-2-4444Table 2-3. Where to Report DeductionsTable 2-3. Where to Report DeductionsTable 2-3. Where to Report DeductionsTable 2-3. Where to Report Deductions ............................................................................................................................................................................ 2-2-2-2-5555Table 2-4. Abbreviations for Address EntryTable 2-4. Abbreviations for Address EntryTable 2-4. Abbreviations for Address EntryTable 2-4. Abbreviations for Address Entry ............................................................................................................................................ 2-2-2-2-20202020Table 2-5. Official State CodesTable 2-5. Official State CodesTable 2-5. Official State CodesTable 2-5. Official State Codes ............................................................................................................................................................................................................................ 2-2-2-2-20202020Table 2-6. Deductible Medical and Dental ExpensesTable 2-6. Deductible Medical and Dental ExpensesTable 2-6. Deductible Medical and Dental ExpensesTable 2-6. Deductible Medical and Dental Expenses............................................................................ 2-2-2-2-84848484Table 2-7. Deductible Interest ExpensesTable 2-7. Deductible Interest ExpensesTable 2-7. Deductible Interest ExpensesTable 2-7. Deductible Interest Expenses................................................................................................................................................................ 2-2-2-2-92929292Table 2-8. Deductible ContributionsTable 2-8. Deductible ContributionsTable 2-8. Deductible ContributionsTable 2-8. Deductible Contributions ............................................................................................................................................................................................ 2-2-2-2-96969696Table 2-9. Miscellaneous DeductionsTable 2-9. Miscellaneous DeductionsTable 2-9. Miscellaneous DeductionsTable 2-9. Miscellaneous Deductions............................................................................................................................................................................ 2-2-2-2-100100100100Table 2-10. Codes for Principal Agricultural ActivityTable 2-10. Codes for Principal Agricultural ActivityTable 2-10. Codes for Principal Agricultural ActivityTable 2-10. Codes for Principal Agricultural Activity ........................................................................ 2-2-2-2-172172172172Table 2-11. Limitations on CarsTable 2-11. Limitations on CarsTable 2-11. Limitations on CarsTable 2-11. Limitations on Cars.................................................................................................................................................................................................................... 2-2-2-2-235235235235Table 2-12. Straight-Line Recovery PeriodsTable 2-12. Straight-Line Recovery PeriodsTable 2-12. Straight-Line Recovery PeriodsTable 2-12. Straight-Line Recovery Periods .................................................................................................................................... 2-2-2-2-300300300300Table 2-13. Limitations on Passenger VehiclesTable 2-13. Limitations on Passenger VehiclesTable 2-13. Limitations on Passenger VehiclesTable 2-13. Limitations on Passenger Vehicles ............................................................................................................ 2-2-2-2-312312312312Table 2-14. Recovery Periods for Office in HomeTable 2-14. Recovery Periods for Office in HomeTable 2-14. Recovery Periods for Office in HomeTable 2-14. Recovery Periods for Office in Home.................................................................................................... 2-2-2-2-450450450450Table 2-15. Forms Allowed for Electronic FilingTable 2-15. Forms Allowed for Electronic FilingTable 2-15. Forms Allowed for Electronic FilingTable 2-15. Forms Allowed for Electronic Filing ........................................................................................................ 2-2-2-2-477477477477Table 2-16. Overflow supporting statements allowedTable 2-16. Overflow supporting statements allowedTable 2-16. Overflow supporting statements allowedTable 2-16. Overflow supporting statements allowed ................................................................ 2-2-2-2-478478478478Table 3-1. Laser Printer CompatibilityTable 3-1. Laser Printer CompatibilityTable 3-1. Laser Printer CompatibilityTable 3-1. Laser Printer Compatibility ........................................................................................................................................................................................ 3-3-3-3-2222

Introduction

Tax Forms Guide vs. User's GuidePaperwork Reduction Act Notice

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Introduction

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Tax Forms Guide vs. User's GuideTax Forms Guide for Timely Information. Because the tax forms and their in-structions are changed annually by the IRS, this Tax Forms Guide is revisedannually, based on the information we receive annually from the IRS:

Chapter 1. Highlights of Changes. A review of the important tax lawchanges for the year and how they affect the software.

Chapter 2. Form by Form Details. A detailed reference for every taxform in the software. This is the bulk of the guide, and containsdetails on nearly every line of each form and schedule that it covers.

Chapter 3. Laser and Windows Graphic Printing. Instructions for thegraphic printing of forms using our Standard Level or Premium Levelsoftware.

Chapter 4. Electronic Filing (e-file). Instructions for generating files forelectronic filing and submitting them for transmission to the IRSusing Standard Level or Premium Level versions of Tax Preparer.

When you get an update each year, you should leave the User's Guide in theHowardSoft binder, and

Replace the ENTIRE Tax Forms Guidewith this new version.

However, we strongly recommend that you also

SAVE the expired Tax Forms Guidesin a separate binder

for later help in producing records for an audit or preparing an amended re-turn. Two to three years worth of Tax Forms Guides will fit in eachHowardSoft binder, which you can purchase separately from us near ourcost.

User's Guide for Other Information. Unlike the tax forms, the structure andoperation of the software are stable, and change little from year to year. As aresult, the separate User's Guide is revised only as needed, and any changesinvolve very few pages of the guide. You will use this guide for years tocome for help with general operating procedures. First-time users can benefitfrom the tutorial on how to prepare and print a return. But the rest of theguide is an important reference for everyone. It includes keyboard charts,trouble-shooting hints, and complete details on translating prior-year returnsinto current-year returns, printing a return for filing, program setup, and cus-tom settings.

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Paperwork Reduction Act NoticeLegal requirement. The IRS requires that computer-generated forms containthe phrase "For Paperwork Reduction Act Notice, see instructions" and thatwe provide you with a copy of the notice. The following quote does not re-duce paper, but it does meet the IRS requirements:The Privacy Act of 1974 and Paperwork Reduction Act of 1980 say that when weask you for information, we must first tell you our legal right to ask for the infor-mation, why we are asking for it, and how it will be used. We must also tell youwhat could happen if we do not receive it, and whether your response is voluntary,required to obtain a benefit, or mandatory under the law.

This notice applies to all papers you file with us, including this tax return. It alsoapplies to any questions we need to ask you so we can complete, correct, or proc-ess your return; figure your tax; and collect tax, interest, or penalties.

Our legal right to ask for information is Internal Revenue Code 6001, 6011, and6012(a) and their regulations. They say that you must file a return or statementwith us for any tax you are liable for. Your response is mandatory under these sec-tions. Code section 6109 and its regulations say that you must show your socialsecurity number on what you file. This is so we know who you are, and can proc-ess your return and papers. You must fill in all parts of the tax form that apply toyou. But you do not have to check boxes for the Presidential Election CampaignFund.

You are not required to provide the information requested on a form that is subjectto the Paperwork Reduction Act unless the form displays a valid OMB controlnumber. Books or records relating to a form or its instructions must be retained aslong as their contents may become material in the administration of any InternalRevenue law. Generally, tax returns and return information are confidential, as re-quired by Code section 6103.

We ask for tax return information to carry out the tax laws of the United States.We need it to figure and collect the right amount of tax.

We may give the information to the Department of Justice and to other Federalagencies, as provided by law. We may also give it to states, the District of Colum-bia, and U. S. commonwealths or possessions to carry out their tax laws. And wemay give it to foreign governments because of tax treaties they have with theUnited States.

If you do not file a return, do not provide the information we ask for, or providefraudulent information, you may be charged penalties and be subject to criminalprosecution. We may also have to disallow the exemptions, exclusions, credits,deductions, or adjustments shown on the tax return. This could make the taxhigher or delay any refund. Interest may also be charged.

Please keep this notice with your records. It may help you if we ask you for otherinformation. If you have questions about the rules for filing and giving information,please call or visit any Internal Revenue Service office.

Chapter 1

Highlights of Changes

OverviewIRS Forms Built into Software

Printouts and Form 1040 Tab SettingsForm by Form Changes

Recommended IRS Publications


1-1

OverviewThree major tax bills enacted in 2006. Although they didn’t receive nearly thesame level of publicity as previous tax bills, three bills that affect Form 1040returns in a major way were passed in 2006. Furthermore, the last onecaught the IRS by surprise because it was enacted in mid-December, long af-ter the IRS had printed forms and instructions to send to taxpayers, and theIRS has been trying to recover ever since. After a quick review of these billsin this section, we’ll highlight form-by-form changes for the 2007 filing sea-son in the next section.

Tax Increase and Reconciliation Act of 2005:

A long time coming. The first major tax bill to pass in 2006 was actuallydrawn up in 2005. In fact, when passed it is still labeled 2005 for technical(budgetary) reasons. It was not signed into law until May 17, 2006 ... oncethe House and Senate finally reached a compromise. The most widely-publicized parts of the bill (extending favorable capital gains and depreciationrules) do not come into effect until 2008 and later. Nevertheless, there aremajor changes for tax year 2006 as well, including further AMT relief (thegood news) and a new tax hit for parents with children under age 18 butover age 13 (the bad news).

Both tax relief and tax increases. The Tax Increase Prevention and Recon-ciliation Act of 2005 includes $90 billion in tax breaks and $20 billion in taxincreases. It includes not only AMT relief for one more year and continuedbreaks for investors and small businesses years from now, but also an expan-sion of the “kiddie tax” to older children and a tightening of foreign earnedincome and housing exclusions. However, in spite of early publicity to thecontrary, it does not include extensions to 2006 of several popular breaks,including the research credit, work credits, higher education expense deduc-tion, state and local sales tax deduction, new markets credit, electric vehiclecredit, and several more. They were dropped in order to keep the net cost ofthe bill down to $70 billion and connected to the 2005 budget. (The expiredbreaks were finally reinstated, retroactively, in the last tax bill of 2006.)The good news...AMT steamroller paused. The biggest breaks for 2006 apply to the alterna-tive minimum tax (AMT), slowing down the expected large increase in num-ber of taxpayers hit by the AMT. These changes affect the 2006 Form6251.

• Personal credits to be applied against AMT for 2006. This benefit,extended to only 2004 and 2005 in the last broad-based tax bill (theWorking Families Tax relief Act of 2004), applies to such credits asthose for the elderly and disabled, adoption expenses, child tax, andhigher education. Without this tax break a large number of middleclass families would have found themselves hit by the AMT. (TheSenate amendment to extend this benefit to 2007 as well was re-jected.)

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• AMT exemptions increased. Originally scheduled to drop to pre-2004 levels, the special increases for 2004 and 2005 are extendedto 2006 and further increased. The new levels are $62,550 for mar-ried taxpayers (up from $58,000) and $42,500 for singles (up from$40,250). Without this bill the levels would have dropped to$45,000 and $33,750, respectively.

Liberalized depreciation/amortization for music. Clearly a special-interestprovision, the cost of acquiring or creating musical works can now be amor-tized over 5 years. The 10-year income forecast method is no longer required.This change affects your use of the 2006 Form 4562.

Future change in Roth IRAs impacts tax planning NOW. Starting tax year2010, you are no longer disallowed from converting a traditional IRA to aRoth IRA when your income (AGI) exceeds $100,000. Even though not ap-plicable until 2010 and considered a revenue-raiser by Congress, high-incometaxpayers can benefit from this change. Those who cannot make tax-freecontributions to their traditional IRAs because of their high income can makenondeductible contributions (up to the maximums) and then convert the tradi-tional IRAs to Roth IRAs in 2010. They’ll be taxed only on earnings on theaccount and can spread the taxable amount over 2 years. (With a Roth IRA,earnings are tax-free and withdrawals are never required.) This change affectsthe use of the 2006 Form 8606, where nondeductible contributions to tradi-tional IRAs must be reported.…and the badKiddie Tax hits more families. Until now, the tax code prevented you frombenefiting from putting assets in your child’s name only if the child was under14 years of age. But starting tax year 2006, the age is raised to 18. Parentswho had planned to sell a child’s portfolio when the child reaches age 14 willnow have to wait until age 18 to benefit from their child’s lower tax bracket.This change affects Forms 8615 and 8814 for 2006.

Foreign earned income and housing exclusions tightened. Taxpayers whoearn income abroad will be hit harder:

• Foreign earned income exclusion now indexed with inflation. Start-ing in 2006, the maximum exclusion is indexed with inflation fromthe 2005 figure of $80,000 to $82,400 for 2006. (Formerly, in-dexing was not scheduled to start until 2008.) This is the goodnews.

• Foreign housing allowance reduced. The base above which housingexpenses are deductible is now 16% of the maximum foreign earnedincome exclusion. The base for 2006 is $13,184, up from $12,447for 2006 before the law change. That’s not so bad, but there is anew cap on the maximum exclusion allowed … $11,536 for 2006(14% of the maximum foreign earned income exclusion). (Formerly,there was no cap on the housing expenses at all.)

• Tax increase on all other income. Income remaining after the foreignexclusions are taken will be taxed at higher tax rates. In figuring the


1-3

tax rates to apply, the income level before the exclusions will beused. Some taxpayers will be pushed from the 10% tax bracket intothe 28% tax bracket as a result of this change!

These changes affect Forms 2555 and 2555-EZ for 2006 and how tax iscomputed on Form 1040.

Stricter reporting requirements for tax-exempt bonds. Payers of interest ontax-exempt bonds must now report the payments to the IRS. Although thepayments are not taxable, this reporting should keep taxpayers honest in cal-culations that are adversely affected by nontaxable income, including manyprovisions that depend on a modified AGI.

Up-front payments for offers-in-compromise. After July 16, 2006, when ataxpayer proposes a lower tax to the IRS, the taxpayer will have to make aninitial payment at the time of the offer: 20% of a proposed lump-sum pay-ment or the first installment of a proposed installment schedule. (Formerlyonly a filing fee had to be paid.)Better news for the futureOther major changes do not apply until later years:

• For 2007, stricter rules for the domestic production activities deduc-tion. There is a cap on this deduction, new for 2005, amounting to50% of wages paid. Starting 2007, however, wages used in figuringthis cap must be related to domestic production income.

• Also for 2007, another benefit for musical works. Starting 2007, thegain on the sale or exchange of musical works is taxed at the lowcapital gains tax rates.

• For 2008 and 2009, further extension of the raised section 179 ceil-ing. The maximum sec. 179 expense that can be deducted remainsat $100,000 (adjusted for inflation) for another two years. (It wouldhave dropped to $25,000 in 2008 without this change.)

• For 2009 and 2010, further extension of low capital gains tax rates.The rates in effect for 2008 are extended to 2009 and 2010, in-cluding a 0% rate for low-income taxpayers and a 15% maximumrate overall.

• For 2010, conversion to Roth IRA at any income level. Starting 2010,the former restriction to taxpayers with AGI under $100,000 islifted. Anyone can convert a traditional IRA to a Roth IRA under thenew rules, and can spread any tax on the conversion over twoyears.

• For 2011, withholding from government payments required. Starting2011, government agencies must withhold 3% of all paymentsmade for services or property. (Interest, classified contracts, realproperty, and welfare-related payments are exempt.)

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Pension Protection Act of 2006:

Much more than pensions! The Pension Protection Act of 2006, the secondmajor tax bill of the year, was signed into law on August 17, 2006. The mainthrust of the bill is a massive reform of the rules for pensions, including in-creased funding requirements for defined benefit retirement plans to makethem safer. However, a number of unrelated tax provisions were tacked ontothe bill that affect tax returns for individuals.

Charity reforms. The new law tightens the substantiation rules for most giv-ing, but also adds new benefits:

• Tax-free distribution of IRA to charity. For tax years 2006 and2007, taxpayers of age 70½ or older are allowed to exclude fromtaxation up to $100,000 of IRA withdrawals made to a qualifiedcharity. (The withdrawal must be a direct distribution to the charity.)

• Favorable rules for contributions of food and books extended. The2005 Katrina tax bill included liberal rules for valuing contributedfood and books contributed to K-through-12 public schools, irrespec-tive of whether the donee was a victim of Katrina. Originally set toexpire at the end of 2005, the rules are now extended to the end of2007.

• Limit raised on contributed conservation capital gain property. Fortax years 2006 and 2007, you are allowed to contribute capital gainproperty valued up to 50% of your AGI, rather than the usual 30%,and allowed to carry over the excess up to 15 years, providing theproperty is restricted to qualified conservation use. (The limit is100% of AGI for farmers and ranchers who contribute property withthe restriction that it remain available for agriculture or livestockproduction.)

• Restrictions on contributed clothing and household goods. For con-tributions made after August 17, 2006, no deduction is allowed forclothing and household goods unless in good used condition. Excep-tions: (1) the IRS may disallow any item of minimal value, and (2)the taxpayer may deduct any single item valued at $500 or more ir-respective of condition provided a qualified appraisal is included withthe return.

• Records required for all monetary gifts. Starting tax year 2007, youmust have a bank record or a qualified eceipt from the donee in or-der to deduct any contributed cash, check, or other form of money.

Saver's credit made permanent. A tax credit of up to $1,000 is currentlyavailable to low-income taxpayers based on a sliding scale that phases out at$50,000 of AGI (through Form 8880). Originally set to expire at the end of2006, the credit is now permanent and the income limits will be indexed withinflation starting in 2007.

Direct deposit of refunds into IRAs. You are now allowed to direct that partor all of your tax refund be deposited in your IRA. While the law only requires


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the IRS to design any new form for tax year 2007 or later, the IRS has al-ready designed the form for use on your return for tax year 2006. Form 8888allows you to allocate your refund among three different accounts, which caninclude an IRA account. (If you want all of your refund deposited in your IRA,you can enter the information directly on Form 1040 instead, as you havedone in the past for savings or checking accounts.)

IRA limits set to sunset after 2010 made permanent. A number of benefitsthat were started in the massive 2001 tax reform and set to expire after2010 are now permanent, including:

• Increased IRA contributions. The IRA limit is currently $4,000 pertaxpayer and increases to $5,000 in 2008. The level will now stayat $5,000 after 2010.

• Additional allowed for age 50 and older. The IRA limit is currentlyincreased by $500 for taxpayers of age 50 or more, and increasedby $1,000 in 2007. The increase will now stay at $1,000 after2010.

• Other pension and IRA rules made permanent. All other provisionsof the Economic Growth and Tax Relief Reconciliation Act of 2001that relate to pensions and IRAs are also made permanent, includingincreased maximums for 401(k) contributions and liberal rolloverrules.

New withdrawal and rollover flexibilities introduced. Several special interestgroups benefit from the new pension law:

• No withdrawal penalty for police and firemen. After August 17,2006 there is no 10% penalty for an early withdrawal from govern-ment defined benefit plans to qualified public safety employees.

• No withdrawal penalty for reservists called to active duty. Retroac-tive to September 11, 2001, there is no 10% penalty for an earlywithdrawal from an IRA or other qualifying plan if the distribution ismade between the time of an order to active duty for at least 180days and the end of the active duty. Furthermore, the taxpayer canre-contribute any such withdrawn amount without limit. (This provi-sion expires December 31, 2007.)

• Rollover of qualified plan into Roth IRA allowed. Starting 2008, youcan make a direct rollover from a qualified plan into a Roth IRA ifAGI is less than $100,000, and without limit after 2009.

• Nonspousal beneficiaries allowed rollovers in own IRAs. Starting2007, you do not have to be a spouse to make a rollover of an in-herited pension or IRA into your own IRA.

• Uniform rules for hardship withdrawals from a 401(k). The IRS is in-structed to draw up new rules for nonspousal beneficiaries so thatthey are eligible for tax breaks similar to those already affordedspouses.

• No withdrawal penalty for employees of age 62 or more. Under thisprovision, older employees can take distributions from their pension

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without penalty even though they are still working (for plan yearsstarting in 2007 or later).

Tax Relief and Health Care Act of 2006:

More last-minute tax law changes. After several failed attempts throughoutthe year to pass a bill that extends popular credits and deductions to tax year2006, Congress finally succeeded with the Tax Relief and Health Care Act of2006 (signed into law on December 20, 2006). Unfortunately, it was too lateto be reflected in the final IRS releases of the most widely used forms, suchas Form 1040 and its schedules, so there is a great deal of confusion amongtaxpayers as the IRS provides supplemental instructions for some forms andmajor revisions for others.

But wait ... there's more! In typical fashion, Congress turned a simple bill intoan omnibus bill that satisfies many special interests by adding extensive newbenefits for the energy industry, health savings accounts, and even a numberof provisions unrelated to taxes, including whistleblower reforms and rules forsemi-generic wine names. We review here the most anticipated changes andtheir impact on forms and instructions, including the complex way the IRShas already defined for claiming deductions for educator expenses and higher-education tuition and fees. (The congressional delay caused problems notonly for the IRS but also for anyone whose actions are affected by the creditsand deductions they can expect to receive. Intelligent tax planning is nearlyimpossible when tax bills are passed long after their provisions are effective.)

Changes for tax year 2006. A number of popular credits and deductions ex-pired at the end of 2005, so the IRS spent the year revising forms and in-structions to reflect the law without those benefits. Now these benefits havebeen retroactively renewed as if they had never expired, but the IRS has al-ready released most of the related forms. We'll review below the new lawand what we expect the IRS to do about the changes.

• State and local sales tax deduction for itemizers. The option to de-duct state and local sales tax instead of state and local income taxhas been reinstated retroactively to 2006 and extended to the endof the 2007. The IRS removed the corresponding check boxes in itsfinal release of Schedule A, and line 5 of Schedule A now refers onlyto income taxes. Nevertheless, the IRS is not changing the form nowthat it has been printed and mailed to taxpayers. Instead, they arehandling the change through instructions in a new IRS Pub. 600,which was released on December 22, 2006 and updated with Excelattachments on December 23. This publication contains special in-structions for those who want to use line 5 for sales taxes, includingtables for each state for those who don't save receipts. If you wantto deduct sales taxes at line 5 instead of income taxes as the formreads, you must enter a code ST on the dotted line for line 5. (TaxPreparer, of course, does this for you automatically.)


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• Tuition and fees deduction. An above-the-line deduction of up to$4,000 of tuition and fees for higher education has been reinstatedretroactively to 2006 and extended to the end of the 2007 tax year.The IRS removed the special line for this deduction in its final releaseof Form 1040; line 34 is now used for jury duty payments instead.In bulletin IR-2006-195, the IRS now instructs you to use line 35 forthis deduction, even though the label for that line is Domestic pro-duction activities deduction, and enter a code T 'on the dotted lineto the left of that line entry' (even though there is no dotted line forline 35 of the IRS-printed Form 1040) if the line is used ONLY fortuition and fees, a code B if used for BOTH tuition and fees and do-mestic production activities, and attach a statement of the break-down if code B is used. (The IRS could have made it simple by in-structing you to claim the deduction as a write-in deduction at line36, like they already do for many other deductions, but they optedfor a much less intuitive way. Tax Preparer, of course, does this foryou automatically.)

• Educator expense deduction. An above-the-line deduction of up to$500 of elementary and secondary school teachers' out-of-pocketexpenses has been reinstated retroactively to 2006 and extended tothe end of the 2007 tax year. The IRS removed the special line forthis deduction in its final release of Form 1040; line 23 is now usedfor Archer MSAs instead. In bulletin IR-2006-195, the IRS now in-structs you to use line 23 for this deduction, even though the labelfor that line is Archer MSA deduction, and enter a code E on thedotted line to the left of that line entry if the line is used ONLY foreducator expenses, a code B if used for BOTH educator expensesand Archer MSA, and attach a statement of the breakdown if code Bis used. (The IRS could have made it simple by instructing you toclaim the deduction as a write-in deduction at line 36, like they al-ready do for many other deductions, but they opted for a much lessintuitive way. Tax Preparer, of course, does this for you automati-cally.)

• Research credit. The credit for increasing research has been not onlyreinstated retroactively to 2006 and extended to the end of the2007 tax year, but expanded for 2007 with better rates and a sim-pler alternative calculation. The changes in the credit percentagesand simplified methods do not take effect until 2007; neverthelessthe IRS changed the form for 2006 in order to allow its use by fiscalyear filers, including partnerships.

• Work opportunity and welfare-to-work credits. These two credits forhiring employees in targeted groups have been not only reinstatedretroactively to 2006 and extended to the end of the 2007 tax year,but integrated for 2007 into a single credit. (The credit is generally40 percent of up to $6,000 of first-year wages.) Even with the expi-ration of these credits at the end of 2005, the forms would still exist

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for 2006 because they apply to first-year wages (and second-yearwages in the case of welfare-to-work) of employees who startedwork before January 1, 2006. The IRS was therefore uncharacteris-tically clever in their design of the forms for 2006 (Forms 5884 and8861). The IRS forms merely state that they are for employees whobegan work for you before the applicable date in the instructions.The forms therefore did not have to be redesigned for 2006 to ac-commodate their renewal. By contrast, for tax year 2007 the twoforms will be combined into a single form and their calculations willbe simplified.

• Domestic production activities deduction. Puerto Rico now qualifiesas a qualifying location for domestic production in determining thisabove-the-line deduction. The addition of Puerto Rico applies to taxyears 2006 and 2007.

• Archer medical savings accounts. The ability to set up a newArcher Medical Savings Account (MSA) has been extended for twomore years, through 2007. The associated form (Form 8853) is notaffected because the form still has to be used by those who set upan Archer MSA before 2006.

• D. C. first-time homebuyer credit. This credit for new homeownersin the District of Columbia has been reinstated retroactively to 2006and extended through 2007. The associated form (Form 8859) waspreviously redesigned by the IRS to handle only carryovers from prioryears, so it had no section for credits stemming from home pur-chases in 2006. The form therefore had to be redesigned by the IRSagain before its final (late) release for 2006.

• D. C. enterprise zone benefits. Favorable treatment for activities inthe designated zone has been reinstated retroactively to 2006 andextended through 2007. Wage credits, sec. 179 expensing, andcapital gains rates are all affected.

Other changes. The bill also includes a number of extensions and modifica-tions to provisions that were not set to expire before 2007. Here are just afew of the changes that will only affect activities in later years.

• Bonus depreciation in the Gulf Opportunity Zone. The special 50%first-year allowance for new property in the GO Zone was set to ex-pire at the end of 2007. It is now extended through 2010.

• Combat pay election for the earned income credit. The option touse non-taxable combat pay in computing earned income for theearned income credit was set to expire at the end of 2006. It is nowextended to the end of 2007.

• Health savings accounts. A number of enhancements to healthsavings accounts (HSAs) were added, but most do not take effectuntil tax year 2007. They include a provision to roll over an IRA intoan HSA (only once in a lifetime) and the elimination of limits on de-ductible annual contributions.


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• Energy credits and deductions. A number of provisions of the 2005energy act (actually passed in 2006) were set to expire at the end of2007. Several of these have been extended through 2008, includingthe credit for manufacturers of energy-efficient homes, the dedutionfor energy-efficient commercial buildings, the residential solar andfuel cell credit, the renewable energy production credit, and much,much more.

• Capital gains treatment for musical works. In the tax bill enacted inMay, 2006, self-created musical works were added to the list of as-sets that qualify for favorable treatment as capital assets. However,this treatment was set to expire at the end of 2010. The new billmakes this treatment permanent.

Tax Preparer 2007:

What it all means for Tax Preparer. The new bills add a great deal of compli-cation to the tax laws and, because of their late passage, a great deal of con-fusion on the IRS forms that were not changed by the time most people re-ceived their 1040 packages for filing in 2007. In general, the IRS has optedfor more complex instructions rather than more complex forms to handlemost of the changes, relying on frequent references to IRS publications thatwere not released until long after the tax season started. Furthermore, manyof the changes are reflected only in later revisions to the forms and instruc-tions. Nevertheless, the changes are built into your Tax Preparer software soseamlessly that you’ll hardly notice the difference in the way you prepare re-turns. We’ll provide a form-by-form review of some of the more significantchanges for 2006 in the following pages.

Built-in forms, schedules, and worksheets. Our three levels of programs havedifferent forms built in. The Economy Level has all the same forms we havehad in the past. The Standard Level has those forms plus Form 8453 for e-file, because e-file is now built into the Standard Level. The Premium Levelhas double the forms of the Standard Level, adding a number of forms thathave been requested by customers over the years. The forms built into TaxPreparer 2007 for the Economy and Standard Levels are listed in Table 1-1,and data entry worksheets that support them are listed in Table 1-2. Themost prominent built-in worksheets for IRS calculations are listed in Table 1-3.

See Premium Level Supplement for information on additional forms. Formsthat are unique to the Premium Level are detailed in a separate Premium LevelSupplement, and not included here. You can download this supplement fromour restricted web site by clicking Check for Updates on your Tax PreparerControl Panel. It is updated regularly as new forms are added.

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Table 1-1. IRS Forms in Current 1040 Edition Forms marked with a single asterisk (*) are included only in the Standard and Premium Level software (not Economy).

Forms marked with a double asterisk (**) are included only in the Premium Level software, and their instructions are provided in the separate Premium Level Supplement, not here.

Form 1040 - U.S. Individual Income Tax Return (accepted by IRS in lieu of 1040A or 1040EZ) Form 1040-V- Payment Voucher (printed when tax due, not visible on screen) Schedule A - Itemized Deductions Schedule B - Interest and Dividend Income Schedule C/C-EZ - Profit or Loss From Business (5 copies: one for each business) Schedule D - Capital Gains and Losses (supports unlimited number of transactions) Schedule E - Supplemental Income and Loss (supports unlimited number of activities) Schedule EIC-Earned Income Credit Schedule F - Profit or Loss from Farming (5 copies: one for each farm) Schedule H - Household Employment Taxes (2 copies: one for each spouse) Schedule J - Farm Income Averaging Schedule R - Credit for the Elderly or the Disabled Schedule SE- Self-Employment Tax (2 copies: one for each spouse) *Form 1116 - Foreign Tax Credit (10 copies: one for each category of income)**Form 1310 - Statement of Person Claiming Refund Due a Deceased Taxpayer (2 copies: one for each) Form 2106/2106-EZ - Employee Business Expenses (5 copies: one for each employer)**Form 2120 - Multiple Support Declaration (5 copies: one for each supported person) Form 2210/2210-F - Underpayment of Estimated Tax**Form 2350 - Application for Extension of Time to File (for certain taxpayers abroad) Form 2441 - Child and Dependent Care Expenses**Form 2555/2555-EZ - Foreign Earned Income (2 copies: one for each spouse)**Form 2848 - Power of Attorney & Declaration of Representative Form 3468 - Computation of Investment Credit Form 3800 - General Business Credit Form 3903 - Moving Expenses (3 copies: one for each move)**Form 4136 - Credit for Federal Tax Paid on Fuels**Form 4137 - Social Security & Medicare Tax on Unreported Tip Income (2 copies: one for each spouse)**Form 4255 - Recapture of Investment Credit Form 4562 - Depreciation and Amortization (20 copies: one for each supported form or schedule, plus two unattached copies) Form 4684 - Casualties and Thefts Form 4797 - Sales of Business Property (supports unlimited number of transactions) Form 4835 - Farm Rental Income and Expenses Form 4868 - Automatic Extension of Time to File *Form 4952 - Investment Interest Expense Deduction**Form 4970 - Tax on Accumulation Distribution of Trusts**Form 4972 - Tax on Lump-Sum Distributions (2 copies: one for each spouse) Form 5329 - Additional Tax on Qualified Plans(IRAs), etc. (2 copies: one for each spouse)


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*Form 5695 - Residential Energy Credits**Form 5884 - Work Opportunity Credit**Form 6198 - At-Risk Limitations (10 copies: one for each separate activity) Form 6251 - Alternative Minimum Tax Form 6252 - Installment Sale Income (5 copies: one for each installment-based sale)**Form 6478 - Credit for Alcohol Used as Fuel**Form 6765 - Credit for Increasing Research Activities**Form 6781 - Gains/Losses from Sec. 1256 Contracts & Straddles**Form 8271 - Investor Reporting of Tax Shelter Regis. Number Form 8283 - Noncash Charitable Contributions**Form 8332 - Release of Claim to Exemption for Child (5 copies: one for each custodial parent)**Form 8379 - Injured Spouse Claim and Allocation**Form 8396 - Mortgage Interest Credit Form 8582 - Passive Activity Loss Limitations**Form 8586 - Low-Income Housing Credit**Form 8594 - Asset Acquisition Statement under Section 1060 Form 8606 - Nondeductible IRA Contributions, etc. (2 copies: one for each spouse)**Form 8611 - Recapture of Low-Income Housing Credit (5 copies: one for building) Form 8615 - Tax for Children Under Age 18**Form 8801 - Credit for Prior Year Minimum Tax Form 8812 - Additional Child Tax Credit Form 8814 - Election to Report Child Interest and Dividends (15 copies: one for each child)**Form 8815 - Exclusion of Interest from EE/I US Savings Bonds**Form 8822 - Change of Address**Form 8824 - Like-Kind Exchanges (5 copies: one for each property exchanged)**Form 8828 - Recapture of Federal Mortgage Subsidy Form 8829 - Expenses for Business Use of Your Home (5 copies: one for each Schedule C supported)**Form 8834 - Qualified Electric Vehicle Credit**Form 8839 - Qualified Adoption Expenses**Form 8846 - Credit for Employer Social Security and Medicare Tax Paid on Certain Employee Tips**Form 8853 - Archer MSAs & Long-Term Care Insurance Contracts**Form 8859 - District of Columbia First-Time Homebuyer Credit**Form 8861 - Welfare-to-Work Credit**Form 8862 - Info to Claim EarnedInc.Credit After Disallowance Form 8863 - Education Credits (Hope and Lifetime Learning) Form 8880 - Qualified Retirement Savings Contributions Credit**Form 8885 - Health Coverage Tax Credit (2 copies: one for each spouse)**Form 8889 - Health Savings Accounts (HSAs) (2 copies: one for each spouse) Form 8901 - Info on Qualifying Children Who Are Not Dependents Form 8914 - Exemption Amount for Taxpayers Housing Individuals Displaced by Hurricane Katrina Form 1040X - Amended Income Tax Return Form 1040-ES-Estimated Tax for Individuals *Form 8453 - U.S. Individual Electronic Filing *RAL or QIK � Bank Application (e-file bank products)

Forms not built into the software are available from the IRS through a link on our web page at www.howardsoft.com.

*Included in Standard and Premium Level programs only.

**Included in Premium Level program only. Instructions for these forms appears in the separate Premium Level Supplement.

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Table 1-2. Supporting Data Entry Worksheets in Current 1040 Edition(Economy and Standard)

TYPE OF WORKSHEET FORM AND ACCESS LINE(S) SUPPORTEDDependents' Form 1040, line 6cForm W-2 Form 1040, line 7a or 7b for you or spouseForm 1099-R Form 1040, lines 15a and 16aMortgage Interest Schd A, below line 10Seller-Financed Schd B, line 1 (Seller-financed mortgage)1099-INT (Interest income) Schd B, line 1, and Form 88141099-DIV (Dividend income) Schd B, line 5, and Form 8814Short-term Gain/Loss Schd D, line 1Sch K-1 Short-tm Gain/Loss Schd D, line 5Long-term Gain/Loss Schd D, line 8Sch K-1 Long-tm Gain/Loss Schd D, line 12Rental/Royalty Schd E, lines 3 and 4Partnerships and S Corps Schd E, line 27 (farm & nonfarm; you, spouse)Estates and Trusts Schd E, line 33aREMICs Schd E, line 37EIC Child's Schd EIC, Qualification screenState Fund Contributions Schd H, line 18Vehicle Expense Form 2106, line 12Care Provider Form 2441, line 1Qualifying Person Form 2441, line 2Prior-yr Qualifying Person Form 2441, line 9bSection 179 Form 4562, line 6Section 168(f)(1) Form 4562, line 15Depreciation Form 4562, line 16MACRS/ACRS Form 4562, lines 16, 17, 15a-i, 20a-c, 22Listed Property Form 4562, lines 26 and 27Vehicle Info Form 4562, lines 30 through 36Amortization Worksheet Form 4562, lines 42 and 43Personal Casualty and Theft Form 4684, lines 4 and 10Business Casualty and Theft Form 4684, lines 25 and 31Casualty & Theft Summary Form 4684, lines 32 and 37Long-term Gain/Loss (4797) Form 4797, line 2Sch K-1 Sec 1231 Gain/Loss Form 4797, line 2Ordinary Gain/Loss Form 4797, line 10Sch K-1 Ordinary Gain/Loss Form 4797, line 10Gain/Recapture Form 4797, lines 25, 26, 27, 28, 29 for sec 1245, 1250, 1252, 1254, 1255 propertySection A Donated Property Form 8283, line 1Section B Donated Property Form 8283, line 5Passive Activity Form 8582, Active Rental Real, Other PassiveWorksheets 1 through 7 Form 8582, pages 2 and 3Hope Credit Form 8863, line 1Lifetime Learning Credit Form 8863, line 4New Dependents' Form 1040X, line 33Optional Text for Letters Control Form, last screen


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Table 1-3. IRS Worksheets Built into Calculations(Economy and Standard)

NAME OF IRS WORKSHEET FORM AND LINE(S)NAME OF IRS WORKSHEET FORM AND LINE(S)NAME OF IRS WORKSHEET FORM AND LINE(S)NAME OF IRS WORKSHEET FORM AND LINE(S)

SUPPORTEDSUPPORTEDSUPPORTEDSUPPORTED

Social Security Benefits(*) Form 1040, lines 20a & 20b

Self-Employed Health Insurance Deduction Form 1040, line 29

IRA Deduction Worksheet(*) Form 1040, line 32

Student Loan Interest Deduction Worksheet(**) Form 1040, line 33

Tuition and Fees Deduction Worksheet Form 1040, line 35

Standard Deduction Worksheet for Dependents Form 1040, line 40

Deduction for Exemptions Worksheet Form 1040, line 42

Qualified Dividends and

Capital Gain Tax Worksheet Form 1040, line 44

Worksheet to See If You Should Fill In 6251 Form 1040, line 45

Child Tax Credit Worksheet (***) Form 1040, line 53

Earned Income Credit Worksheets A & B

(plus Questions to See If You Can Take the

Earned Income Credit, including worksheets for

figuring earned and investment income)(****) Form 1040, line 66a

Itemized Deductions Worksheet Schedule A, line 28

Capital Loss Carryover Worksheet Schedule D, line 18

Unrecaptured Section 1250 Gain Worksheet Schedule D, line 19

Schedule D Tax Worksheet Schedule D, line 40

Capital Gain Tax Worksheet Schedule J, line 8

Credit Limit Worksheet Schedule R, line 20

Distance Test Worksheet Form 3903 Qualification

Depreciation Worksheet Form 4562 (see Table 1-2)

Contribution Credit Worksheets Form 5329, lines 10, 19, 27

Excess Contributions Worksheets Form 5329, lines 15, 23, 31

Exemption Worksheet Form 6251, line 22

Passive Loss Worksheets 1 through 6 Form 8582

Maximum Roth IRA Contribution Worksheet Form 8606, line 18b

Roth IRA Basis Worksheet Form 8606, End of form

Child's Investment Income Worksheet Form 8615, line 1

Alternate Worksheet for line 1 of

Form 8615 (in IRS Pub. 929) Form 8615, line 1

Individual Displaced by Katrina Worksheet Form 8914, line 1

2007 Estimated Tax Worksheet Form 1040-ES, lines 1 - 17

Footnotes:

* plus special worksheets in IRS Pub. 590

** plus special worksheets in IRS Pub. 970

*** plus special worksheets in IRS Pub. 972

**** plus special worksheets in IRS Pub. 596

Also see Table 1-2 for worksheets that require data entry

and are completed separately for each separate transaction.

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Form by Form ChangesControl Form. The inflation rate used by the IRS to index tax tables, exemp-tion phaseouts, and a number ceilings from 2005 to 2006 is 3.91%. Thiscontrasts with the lower rate of 3.10% last year.

Form 1040 (Main Form). Many of the changes reflect the confusion causedby the expiration of certain benefits followed by their retroactive reinstate-ment after the forms for 2006 were printed by the IRS:

Educator expenses replaced by Archer MSA deduction at line 23, thenreinstated after the forms were released. Because the deduction forteachers’ expenses expired at the end of 2005, the IRS replaced theuse of this line with the Archer MSA deduction, which was formerlya write-in adjustment for line 36. However, because of the Decem-ber tax bill, the IRS now instructs you to share this line with theeducator expense deduction, even though the form was notchanged to reflect this sharing. The IRS has defined a special proce-dure to identify your use of this line, as described in our details forForm 1040 in Chapter 2.

IRA phaseout regions raised at line 32 and combat pay now included.The maximum nominal IRA deduction remains at $4,000 per tax-payer, but the additional amount for those of age 50 or more is now$1,000 (up from $500). In addition, the income levels at which thephaseout of the deduction starts, for those covered by a retirementplan at work, have been raised. The phaseout level now starts at$75,000 (up from $70,000) for married filing jointly and qualifyingwidow(er), but remains at $50,000 for most others. (It remains at$0 for married filing separately who lived with spouse anytime dur-ing the year.) The phaseout region remains $10,000 wide, resultingin NO deduction when your income is at least $10,000 higher thanthe starting thresholds. In addition, nontaxable combat pay is nowincluded with earned income when computing the phaseout.

Tuition and fees deduction replaced by jury duty pay at line 34. Be-cause the deduction for tuition and fees for higher education expiredat the end of 2005, the IRS replaced the use of this line with thededuction for jury duty pay you gave to your employer, which wasformerly a write-in adjustment for line 36. (The tuition and fees de-duction was retroactively reinstated by the December tax bill but,unlike the educator expense deduction, it is not deducted at it’sformer line. See line 35 instead.)

Domestic production activities deduction now shares its line with thetuition and fees deduction at line 35. With the reinstatement of thetuition and fees deduction coming long after the IRS forms wereprinted, the IRS decided to share line 35 with the tuition and feesdeduction. The IRS has defined a special procedure to identify youruse of this line, as described in our details for Form 1040 in Chapter2. (It may seem counterintuitive to use this line for the reinstated


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deduction, but the IRS chose this line because the tuition and feesdeduction is added back to AGI for most adjusted AGI calculationsin the same way as the domestic production deduction.)

Standard deduction increases at line 40. The new standard deductioncharts for 2006 (for Form 1040) and 2006 (for Form 1040-ES) ap-pear in Table 1-4.

Table 1-4. Standard Deduction Schedules 2006 TAX YEAR 2007 TAX YEAR Base Add for ea. Base Add for ea. amount blind/65&up amount blind/65&up Single $ 5,150 $1,250 $ 5,350 $1,300 Married filing joint $10,300 $1,000 $10,700 $1,050 Married filing separate $ 5,150 $1,000 $ 5,350 $1,050 Head of household $ 7,550 $1,250 $ 7,850 $1,300 Qualifying widow(er) $10,300 $1,000 $10,700 $1,050

For those claimed as greater of $850 and greater of $850 and a dependent on some- $300 plus earned inc, $300 plus earned inc, one else's return: up to above amounts. up to above amounts.

Exemptions and their phaseout indexed with inflation at line 42. Theexemption amount is now $3,300 each for 2006, up from $3,200in 2005, and will increase to $3,400 for tax year 2007. The in-crease reflects the scheduled inflationary increase in $50 incre-ments. However, exemptions begin to phase out at high adjustedgross income (AGI), as shown in Table 1-5. (The rate of phaseout isthe same for all years: a 2% decrease for every $2,500 -- $1,250 ifmarried filing separately -- by which AGI exceeds the shown thresh-olds.)

Table 1-5. Thresholds for Phaseout of Exemptions 2005 2006 2007 TAX YEAR TAX YEAR TAX YEAR Single $145,950 $150,500 $156,400 Married filing joint $218,950 $225,750 $234,600 Married filing separate $109,475 $112,875 $117,300 Head of household $182,450 $188,150 $195,500 Qualifying widow(er) $218,950 $225,750 $234,600

Several changes in the computation of tax at line 44:Tax tables and tax rate schedules indexed with inflation. All tax

brackets for 2006 were indexed with the 3.10% inflation realizedfrom 2005 to 2006. Those for 2007 (for Form 1040-ES) reflect a3.91% inflation rate. The tax rate schedules for both years areshown in Table 1-6.

New tax on income for older children. The tax on children with in-vestment income of more than $1,700 now applies to all childrenunder age 18 rather than just children under age 14. This new ruleapplies whether you elect to include your children’s income on yourreturn through Form 8814, or your children file their own returnsand compute the tax on Form 8615. (This change also applies tothe special calculation for children on Form 6251.)

New complexities in tax calculation for taxpayers who claim exclu-sions for foreign earned income or housing. A new Foreign Earned

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Income Tax Worksheet must now be used by those who claim theforeign earned income exclusion or the foreign housing exclusionthrough Form 2555 or 2555-EZ. This change can result in a highertax for some high-income taxpayers who work abroad. (This work-sheet is automated by the software with the entry of just one num-ber from Form 2555, and is fully automatic with no manual entryfor the Premium Level, which includes Form 2555.)

Table 1-6. Tax Rate Schedules TAX TAXABLE INCOME ABOVE WHICH TAX RATE STARTS RATE single mfj & qw mfs h of h

FOR TAX YEAR 2006: 10% $ 0 0 0 0 15% 7,550 15,100 7,550 10,750 25% 30,650 61,300 30,650 41,050 28% 74,200 123,700 61,850 106,000 33% 154,800 188,450 94,225 171,650 35% 336,550 336,550 168,275 336,550

FOR TAX YEAR 2007: 10% $ 0 0 0 0 15% 7,825 15,650 7,825 12,200 25% 31,850 63,700 31,850 42,650 28% 77,100 128,500 64,250 110,100 33% 160,850 195,850 97,925 178,350 35% 349,700 349,700 174,850 349,700

New residential energy credit at line 52. New credits for improving theenergy efficiency of your home are now available through the newForm 5695, which is built into our Standard and Premium Levelsoftware.

Earned income credit (EIC) indexed with inflation at line 66a. The creditapplies to income less than $38,348 for 2006 for joint filers withtwo qualifying children ($39,783 for 2007), and the maximum pos-sible credit is now $4,536. In addition, the maximum investment in-come you can now have and still get the credit has increased to$2,800 ($2,900 for 2007). (The credit is automatic at line 66abased on your entries for the Dependents Worksheet at line 6c andincome items throughout the return.) The special elections availablelast year for hurricane victims no longer apply and have been re-moved.

Social security maximum increased at line 67. The tax rate for with-holding for the social security tax (and the RRTA Tier 1 equivalent)remains at 6.2%, as it has for several years. But the maximum in-come to which the social security tax applies is $94,200 for 2006,and will be $97,500 for 2007. As a result, the calculations for ex-cess withholding are modified.

Credit for federal telephone excise tax added at line 71. A one-timecredit is available for excise tax paid on long-distance charges forthe period March 1, 2003 through July 31, 2006. If you have thephone bills for this period to prove actual taxes paid, you can usethe new Form 8913 (not built into the software) to claim the credit.


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However, you are not required to prepare any form if you accept thestandard amount (up to $60) as provided by the IRS, which de-pends only on the number of exemptions claimed.

Schedule A (Itemized Deductions). Because the deductibility of general salestax in lieu of state and local income expired at the end of 2005, the IRS re-moved the provision for it at line 5 of Schedule A. However, the provisionwas reinstated retroactively by the December tax bill, long after the form for2006 was printed. As a result, the IRS issued supplemental instructions in anew Pub. 600, including extensive tables that depend on your state, income,and number of exemptions. Although the IRS form now labels line 5 as onlyfor state and local income taxes, the line is to be shared with the generalsales tax deduction, with a code ST to be printed when the sales tax optionis used. (The printing of the code is automated by the software, and a work-sheet is provided for increasing your claim in accordance with your local salestax rate.) In other places on the schedule, the standard mileage rate for medi-cal care is now 18 cents per mile (rising to 20 cents per mile for 2007), andthe standard mileage rate for Katrina-related charitable use of your vehicle isnow 32 cents per mile. (Both of these rates followed a 2-tier schedule lastyear. The standard mileage rate remains at 14 cents per mile for other chari-table use.) The phaseout of itemized deductions at high income is indexedwith inflation in the same manner as the phaseout for exemptions. While theschedule has not changed for these, the instructions reveal stricter rules forgifts to charity.

Schedules C (Profit or Loss From Business) and F (Farm Profit or Loss). Thestandard mileage rate for car expenses is 44.5 cents per mile for tax year2006, and rises to 48.5 cents per mile for 2007. (A 2-tier rate of 40.5 and48.5 cents per mile applied for 2005.)

Schedule SE (Self-Employment Tax). Income subject to the social securityportion of self-employment tax is $94,200 for 2006 (up from $90,000 for2005). It rises to $97,500 for 2007.

Forms 2106 and 2106-EZ (Employee Business Expenses). For 2006 the stan-dard mileage rate for car expenses is 44.5 cents per mile all year, replacingthe former 2-tier rates. (It rises to 48.5 cents per mile for 2007.) For employ-ees subject to Department of Transportation (DOT) hours of service limits,75% of meals and entertainment expenses can now be deducted, up from70% for 2005.

Form 2210 (Underpayment of Estimated Tax). Although the form look similarto the one for 2005, the penalty rates have changed and the dates for therate periods have changed significantly.

Form 3468 (Investment Credit). The section for rehabilitation credit has beenredesigned, even though the data required is unchanged, including separatelines for Gulf Opportunity Zone buildings, to which higher credit rates apply.The credit from this form must now be reported on Form 3800 for all returns,so Part II has been removed and the form is now a 1-page form; Form 3468

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can no longer be filed alone when no other credits are reported on Form3800. (The form no longer carries a tax year designation, and will be changedby the IRS only when necessary in the future. The current revision date is 12-2006.)

Form 3800 (General Business Credit). This form has been extensively redes-igned by the IRS. Lines for certain credits that can come from pass-throughentities (partnerships, etc.) have been expanded with an entry for the pass-through entity’s EIN, and you do not have to file the underlying credit form ifcredit from the pass-through entity is the only credit you have to report onthat form. Several new credits have been added as well. The section that ap-plies only to corporations has been removed, and the section for computingthe allowed credit has been expanded.

Form 3903 (Moving Expenses). The standard mileage rate for car expenses ofmoving to a new home is 18 cents per mile for 2006, in contrast with the 2-tier rates for 2005. It rises to 20 cents per mile for 2007.

Form 4562 (Depreciation and Amortization). The ceiling on special first yeardepreciation, section 179, is $108,000 for tax year 2006, up from $105,000for 2005. In addition, the total cost of section 179 property before furtherlimitations kick in is now $430,000, up from $420,000. The first-year “bo-nus” depreciation allowances are still in effect for 2006 for Liberty Zoneproperty and Gulf Opportunity Zone property, but has expired for most otherproperty. (Although expired for other locations, long production period prop-erty and certain aircraft in the Katrina, Rita, or Wilma GO Zones qualify forthe special allowance if placed in service by December 31, 2006.)

Form 6251 (Alternative Minimum Tax). The exemption amount has increasedsignificantly more than inflation, but the smaller exemption that formerly ap-plied only to children under age 14 now applies to children under age 18. Thecomputation of tax for those who claim foreign earned income or housing ex-clusions now involves a special worksheet, the effect of which is to raise theAMT amount for some high-income taxpayers.

Form 8283 (Noncash Charitable Contributions). The look of the form is un-changed, but the rules have been tightened for many categories of donatedproperty. For example, used clothing and household items can no longer bededucted unless in good condition. There are also new rules for appraisersand potential penalties for incorrect appraisals.

Form 8606 (Nondeductible IRAs). The look of the form is unchanged, but theinstructions change the way some lines are computed. For example, nontax-able combat pay is now included in earned income when computing the IRScontribution limit; qualified charitable distributions are excluded; and the con-tribution limit is now $1,000 higher for those age 50 or older.

Form 8615 (Tax for Children Under Age 18 With Investment Income). Theform now applies only to children with investment income more than $1,700,up from $1,600 for 2005. More significantly for some children, it now ap-plies to children under 18 rather than only to children under 14. Computa-


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tions are more complex for those who claim foreign earned income or housingexclusions; as for the regular tax, the Foreign Earned Income Tax Worksheetmust be used in this case.

Form 8814 (Election to Report Child’s Interest and Dividends). Parents cannow make this election for children under age 18 with gross income less than$8,500 for 2006. The former limits were $8,000 of gross income and ageunder 14.

Form 8863 (Education Credits). The Hope Credit has increased to $1,650($3,300 in the Gulf Opportunity Zone), up from $1,500 ($3,000 in the GulfOpportunity Zone). The income at which the phaseout of the credits startshas been indexed with inflation (now $110,000 if married filing jointly and$55,000 for all others).

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Printouts and Form 1040 Tab SettingsGraphic printing of Form 1040 through Windows. Windows-graphic printing oftax forms is possible for virtually any Windows printer. You just need to makesure that you are using the Windows version of Tax Preparer and that yourprogram settings for fill-in printouts are set to

Special (1=HPLaser,2=Windows): 2

This is the preferred setting for all Windows versions of our programs be-cause it ensures that your Tax Preparer software will take full advantage ofthe printer control that is built into Windows.

Graphic printing of Form 1040 through DOS. Laser-graphic (DOS) printing re-quires that you use a printer that emulates the HP LaserJet printer, that youhave a tax font cartridge or downloadable tax soft-font, and that you canprint through DOS to an LPT or COM port. These capabilities are no longercommon, but if you have used a laser printer for tax forms in the past youmay want to continue to do so for faster printing and better print quality thanis possible with many Windows printers. The proper program setting for fill-inprintouts in this case is


CAUTION: This setting can have disastrous results if you do not have a com-patible printer, so you should use it only when you are confident of yourprinter’s capabilities. (Note that the selection “2=Windows” does not appearon DOS versions of Tax Preparer, because a setting of 2 has no effect onthose versions.)

DO NOT change tab setting changes for Windows-graphic or laser-graphicprinting of Form 1040. The program is delivered with Form 1040 tabs presetfor our computer-generated graphic printouts. Any change to those tab set-tings will result in improper alignment of the data with the form. The abilityto change tab settings is provided only for those who want to print onto apre-printed Form 1040, such as the one you receive from the IRS, or photo-copies thereof, including transparent overlays.

Fill-in of preprinted forms (paper or transparent overlay). If you cannot useeither Windows-graphic or Laser-graphic printing, you can still produce qualityprintouts by printing onto a preprinted IRS Form 1040, or overlaying a print-out with a transparent overlay copy of Form 1040. In either case, your pro-gram setting for fill-in printouts should be


With this setting your data are printed without any form text or graphics, sothat you can print on a preprinted form, or on a blank page for photocopyingwith a transparent overlay of Form 1040. Unfortunately, the IRS form wasnot designed with computers or typewriters in mind, so some adjustmentmay be necessary in order for the data to fit properly on the form. This ad-justment is provided through our “tab settings,” which appear when you


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choose 5 from the Program Settings Menu (Figure 14-1 of the User's Guide).Automatic presets are provided for HowardSoft and IRS forms, but limitedadjustment is possible for other forms through selected vertical and horizontaltabs. Vertical tabs are rounded to the nearest line (1/6-th inch, or 0.17) andhorizontal tabs are rounded to the nearest character (1/10-th inch, or 0.10).

Automatic presets for Form 1040 Tabs. The three preset tab settings areshown in Figures 1-1 through 1-3 and described as follows:! Enter 1 for Facsimile, Laser-graphic, and Windows-graphic printouts to

ensure that our facsimile Form 1040 follows the IRS format and that thecomputer-generated graphic forms are filled in properly.

! Enter 2 for fill-in of IRS Form 1040 to ensure the proper alignment ofdata onto an IRS Form 1040 or photocopy thereof. However, if yourprinter cannot print in the bottom ½” of the page, the paid preparer’scity and state will be missing from the bottom of the page. (This marginrestriction is typical of many ink-jet printers.)

! Enter 3 for fill-in of IRS Form 1040 on margin-limited printers. Use thissetting if the bottom margin of your printer is limited to no less than ½”and you must print the paid preparer’s city and state on the form. Withthis setting the paid preparer’s city and state will print, but you will nolonger see the taxpayer’s name and SSN at the top of page 2.

With any of the above presets you cannot change any tabs yourself. But ifyou enter 0 instead of one of the presets, you can enter your own verticaland horizontal tabs to adjust to some other forms.

Default setting is for HowardSoft computer-generated Form 1040. The soft-ware is delivered using preset 1, which is appropriate for all HowardSoftforms, as noted above. These settings are illustrated in Figure 1-1. Preset 1is the ONLY setting that can produce IRS-accepted, computer-generated Form1040 printouts.

FORM 1040 TABSFORM 1040 TABSFORM 1040 TABSFORM 1040 TABS Enter 1=ALL HowardSoft forms, Enter 1=ALL HowardSoft forms, Enter 1=ALL HowardSoft forms, Enter 1=ALL HowardSoft forms, 2=IRS-printed form ONLY, 2=IRS-printed form ONLY, 2=IRS-printed form ONLY, 2=IRS-printed form ONLY, 3=IRS-printed form alt: 1 3=IRS-printed form alt: 1 3=IRS-printed form alt: 1 3=IRS-printed form alt: 1or ZERO to set tabs below:or ZERO to set tabs below:or ZERO to set tabs below:or ZERO to set tabs below: VERT-Deps on 6c not abve to 6d .33 VERT-Deps on 6c not abve to 6d .33 VERT-Deps on 6c not abve to 6d .33 VERT-Deps on 6c not abve to 6d .33 Line 6d number to line 7 .17 Line 6d number to line 7 .17 Line 6d number to line 7 .17 Line 6d number to line 7 .17 Ln 37(pg1) to ln 38(pg2) 1.50 Ln 37(pg1) to ln 38(pg2) 1.50 Ln 37(pg1) to ln 38(pg2) 1.50 Ln 37(pg1) to ln 38(pg2) 1.50 Designee Yes/No to name. .17 Designee Yes/No to name. .17 Designee Yes/No to name. .17 Designee Yes/No to name. .17 HORIZ-Paper edge to ln 3 name. 2.50 HORIZ-Paper edge to ln 3 name. 2.50 HORIZ-Paper edge to ln 3 name. 2.50 HORIZ-Paper edge to ln 3 name. 2.50 ...to line 4 child name. 5.70 ...to line 4 child name. 5.70 ...to line 4 child name. 5.70 ...to line 4 child name. 5.70 ...to line 6c First name 1.80 ...to line 6c First name 1.80 ...to line 6c First name 1.80 ...to line 6c First name 1.80

Figure 1-1. Tabs for ALL HowardSoft forms: Facsimile,Laser-graphic, and Windows-graphic Form 1040

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Other settings are good for fill-in of IRS-printed Form 1040. If you choose toprint onto the actual IRS Form 1040, or an accurate photocopy thereof (in-cluding transparent overlays), you would normally use preset 2, which is illus-

trated in Figure 1-2.The tabs are verysimilar to those forHowardSoft forms,but the differencesprovide a closeralignment to the ac-tual IRS form. Thetabs for preset 3differ from those forpreset 2 only in thedistance betweenpages 1 and 2, as

illustrated in Figure 1-3. Presets 2 and 3 are the ONLY settings that can pro-duce accurate fill-inof a bona fide IRS-printed Form 1040or photocopythereof. Keep inmind, however, thatthe IRS does nottake care to ensurethat data fields andboxes are posi-tioned at exact mul-tiples of 10 charac-ters per inch across

and 6 lines per inch down. As a result, some settings are unavoidable com-promises that merely approximate the IRS form.

A need for custom tab settings usually means an improperly set up printer.The software provides 3 different preset tab settings for perfect printing onthe appropriate forms, as detailed above. You should never have to use othertab settings unless you are using a form not described here. If you have tocustomize tabs to print onto HowardSoft or IRS forms, either your printer'stypeface is wrong (such as elite size, which is 12 characters per inch, insteadof pica size, which is 10 characters per inch), or your program settings formargin, auto-skip, characters per line, or lines per page are wrong, not yourtab settings. For guidance on how to change the program settings for yourprinter, see Chapter 14 of the separate User’s Guide. Never use the tab set-tings to adjust for improper type size or line spacing of your printer.

FORM 1040 TABSFORM 1040 TABSFORM 1040 TABSFORM 1040 TABS Enter 1=ALL HowardSoft forms, Enter 1=ALL HowardSoft forms, Enter 1=ALL HowardSoft forms, Enter 1=ALL HowardSoft forms, 2=IRS-printed form ONLY, 2=IRS-printed form ONLY, 2=IRS-printed form ONLY, 2=IRS-printed form ONLY, 3=IRS-printed form alt: 2 3=IRS-printed form alt: 2 3=IRS-printed form alt: 2 3=IRS-printed form alt: 2or ZERO to set tabs below:or ZERO to set tabs below:or ZERO to set tabs below:or ZERO to set tabs below: VERT-Deps on 6c not abve to 6d .17 VERT-Deps on 6c not abve to 6d .17 VERT-Deps on 6c not abve to 6d .17 VERT-Deps on 6c not abve to 6d .17 Line 6d number to line 7 .33 Line 6d number to line 7 .33 Line 6d number to line 7 .33 Line 6d number to line 7 .33 Ln 37(pg1) to ln 38(pg2) 1.50 Ln 37(pg1) to ln 38(pg2) 1.50 Ln 37(pg1) to ln 38(pg2) 1.50 Ln 37(pg1) to ln 38(pg2) 1.50 Designee Yes/No to name. .33 Designee Yes/No to name. .33 Designee Yes/No to name. .33 Designee Yes/No to name. .33 HORIZ-Paper edge to ln 3 name. 3.20 HORIZ-Paper edge to ln 3 name. 3.20 HORIZ-Paper edge to ln 3 name. 3.20 HORIZ-Paper edge to ln 3 name. 3.20 ...to line 4 child name. 6.50 ...to line 4 child name. 6.50 ...to line 4 child name. 6.50 ...to line 4 child name. 6.50 ...to line 6c First name 2. ...to line 6c First name 2. ...to line 6c First name 2. ...to line 6c First name 2.

Figure 1-2. Tabs for IRS-printed Form 1040 ONLY

FORM 1040 TABSFORM 1040 TABSFORM 1040 TABSFORM 1040 TABS Enter 1=ALL HowardSoft forms, Enter 1=ALL HowardSoft forms, Enter 1=ALL HowardSoft forms, Enter 1=ALL HowardSoft forms, 2=IRS-printed form ONLY, 2=IRS-printed form ONLY, 2=IRS-printed form ONLY, 2=IRS-printed form ONLY, 3=IRS-printed form alt: 3 3=IRS-printed form alt: 3 3=IRS-printed form alt: 3 3=IRS-printed form alt: 3or ZERO to set tabs below:or ZERO to set tabs below:or ZERO to set tabs below:or ZERO to set tabs below: VERT-Deps on 6c not abve to 6d .17 VERT-Deps on 6c not abve to 6d .17 VERT-Deps on 6c not abve to 6d .17 VERT-Deps on 6c not abve to 6d .17 Line 6d number to line 7 .33 Line 6d number to line 7 .33 Line 6d number to line 7 .33 Line 6d number to line 7 .33 Ln 37(pg1) to ln 38(pg2) 1.33 Ln 37(pg1) to ln 38(pg2) 1.33 Ln 37(pg1) to ln 38(pg2) 1.33 Ln 37(pg1) to ln 38(pg2) 1.33 Designee Yes/No to name. .33 Designee Yes/No to name. .33 Designee Yes/No to name. .33 Designee Yes/No to name. .33 HORIZ-Paper edge to ln 3 name. 3.20 HORIZ-Paper edge to ln 3 name. 3.20 HORIZ-Paper edge to ln 3 name. 3.20 HORIZ-Paper edge to ln 3 name. 3.20 ...to line 4 child name. 6.50 ...to line 4 child name. 6.50 ...to line 4 child name. 6.50 ...to line 4 child name. 6.50 ...to line 6c First name 2. ...to line 6c First name 2. ...to line 6c First name 2. ...to line 6c First name 2.

Figure 1-3. Tabs for IRS-printed Form 1040 Alternate


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Recommended IRS PublicationsFree help from the IRS. In our opinion, IRS publications are a better source ofinformation than most of the privately produced tax publications. Moreover,they are available free-of-charge directly from the IRS. Our recommendationsare listed in Table 1-7, all of which are included on the CD-ROM version ofour Standard and Premium updates (except Pub. 553, which is habitually re-leased later in the tax season). You can also get them at your local IRS FormsDistribution Center or from the IRS web site through the link on our web site:

http://www.howardsoft.comYou may also order them by number from:

Superintendent of DocumentsU.S. Government Printing Office

Washington, DC 20402We highly recommend the comprehensive Publication 17 for individuals, Publi-cation 225 for farm businesses, and Publication 334 for non-farm businesses.

A renewed need for forms and instructions from the IRS. In a misguided at-tempt to save paper and money, the IRS is no longer automatically sendingforms and instructions for Form 1040 returns to taxpayers whose returnshave been printed by computer. It seems that the IRS believes that those whouse computers need no instructions! While that may be flattering to the tax-payer or the software developer, there are so many special cases that cannotbe handled by any software or instructions that accompany them that thisstep merely hinders the taxpayer in fully complying with the complex rules.We strongly recommend that if you received a postcard instead of forms andinstructions, and you will be preparing your own return, request from the IRSthat the forms and instructions be sent to you.

CD-ROM versions of Standard and Premium updates include forms, instruc-tions, and publications. If you ordered Tax Preparer a Standard or Premiumupdate on CD-ROM, you will find a wide selection of IRS forms, instructions,and publications on the CD-ROM in PDF format. All publications listed in Ta-ble 1-7 that have been released by the release date of our software are in-cluded. In addition, forms and instructions for all forms built into the soft-ware and most of those cited in this Tax Forms Guide are included. All ofthese forms and publications in Adobe’s PDF format and can therefore beviewed and printed using the free Adobe Acrobat Reader that is included.

Manual fill-in by computer now available for most IRS forms. If you need tofile forms not built into Tax Preparer, you can now use your computer to pre-pare most of these forms manually thanks to the fill-in versions that the IRShas developed for many of their PDF forms. Using the free Adobe AcrobatReader, you can enter data into preset fields in these special versions of theforms, and print the forms with the data inserted. Moreover, if you useAdobe Acrobat Reader 5.1 or later, you can save the filled-in form with yourdata intact. (Versions prior to 5.1 require you to purchase another Adobeproduct, Adobe Acrobat Approval, to have this capability.) With our Standard

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and Premium Level updates we provide fill-in PDF versions of many of theforms not built into Tax Preparer. However, if there are any additional formsyou need for fill-in, you can access them through the link to the IRS web sitefrom our home page at

http://www.howardsoft.comJust click on our link to the IRS forms, instructions, and publications. (Notethat the IRS’s fill-in forms do not perform any calculations, validation, or veri-fication of entries, but merely allow you to enter data in the regular data entryportions of the form. If you have special situations where you are instructedto write data on a dotted line or beside a line, you will have to handwrite thatdata onto the form after printing it.)

Manual fill-in by computer also available for many state forms. Many statesoffer forms with the same capabilities as the IRS fill-in forms, also based onAdobe Acrobat’s PDF format. If you need a state income tax form, we rec-ommend that you access the state’s web site through the link at the bottomof our home page labeled “Tax forms for other states.“. Forms that can befilled-in by computer will be identified on the state’s web site as “fill-informs” or “fillable forms.”


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Table 1-7. Recommended IRS Publications1 Your R igh ts as a Taxpaye r3 Armed Fo rces Tax Gu ide4 Student Gu ide to Fede ra l I ncome Tax5 Appea l R igh ts and P repa ra t i on o f P ro tes ts fo r Unagreed Cases17 Your Fede ra l I ncome Tax54 Tax Gu ide fo r U .S . C i t i z ens and Res ident A l i ens Abroad225 Fa rmer 's Tax Gu ide334 Tax Gu ide fo r Sma l l Bus inesses378 Fue l Tax C red i t s and Refunds463 Trave l , En te r ta inment , G i f t , and Ca r Expenses501 Exempt ions , S tanda rd Deduct ion , and F i l i ng In fo rmat ion502 Med ica l and Denta l Expenses503 Ch i ld and Dependent Ca re C red i t504 D ivo rced o r Sepa ra ted Ind iv idua l s505 Tax Wi thho ld ing and Es t imated Tax508 Educat iona l Expenses509 Tax Ca lenda rs fo r 2007514 Fore ign Tax C red i t fo r I nd iv idua l s516 U.S. Gove rnment C iv i l i an Emp loyees Sta t i oned Abroad517 Soc ia l Secu r i ty and Othe r I n fo . fo r C l e rgy and Re l i g ious Worke rs519 U.S. Tax Gu ide fo r A l i ens520 Scho la rsh ips and Fe l l owsh ips521 Mov ing Expenses523 Se l l i ng Your Home524 Cred i t fo r the E lde r l y o r the D i sab led525 Taxab le and Nontaxab le Income526 Char i t ab le Cont r i bu t ions527 Res ident i a l Renta l P rope r ty529 Misce l l aneous Deduct ions530 Tax In fo rmat ion fo r F i r s t -T ime Homeowners531 Repor t ing T ip Income533 Se l f -Emp loyment Tax534 Deprec ia t i ng P rope r ty P laced in Se rv ice Be fo re 1987535 Bus iness Expenses536 Net Ope ra t i ng Losses537 Ins ta l lment Sa l es541 Par tne rsh ips544 Sa les and Othe r D i spos i t i ons o f Asse ts547 Casua l t i es , D i sas te rs , and The f ts550 Inves tment Income and Expenses551 Bas i s o f Asse ts552 Record keep ing fo r I nd iv idua l s553 H igh l i gh ts o f 2006 Tax Changes554 Olde r Amer i cans ' Tax Gu ide555 Commun i ty P rope r ty556 Examina t ion o f Re tu rns , Appea l R igh ts , Re fund C la ims560 Ret i rement P l ans fo r the Se l f -Emp loyed561 Dete rm in ing the Va lue o f Donated P rope r ty564 Mutua l Fund D i s t r i bu t ions575 Pens ion and Annu i ty Income587 Bus iness Use o f Your Home590 Ind iv idua l Re t i r ement A r rangements ( IRAs )596 Earned Income C red i t600 Opt iona l S ta te Sa l es Tax Tab les907 Tax H igh l i gh ts fo r Pe rsons Wi th D i sab i l i t i e s908 Bank ruptcy Tax Gu ide925 Pass ive Act i v i ty and At -R i sk Ru les926 Househo ld Emp loye r ' s Tax Gu ide929 Tax Ru les fo r Ch i l d ren and Dependents936 Home Mor tgage In te res t Deduct ion939 Genera l Ru le fo r Pens ions and Annu i t i es946 How to Deprec ia te P rope r ty968 Tax Benef i t s fo r Adopt ion969 Med ica l Sav ings Accounts972 Ch i l d Tax C red i t

Chapter 2

Form by Form Details

Form by Form Details 2007

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How to Use This ChapterLine-by-line details. This chapter provides line-by-line details for all forms andschedules built into the software, including

expanded descriptions for each line, to help you understand the brieflabels that appear on the screen,

operating details, identifying the IRS forms and worksheets that sup-port a line and highlighting movement among the forms,

description of automatic calculations, to let you know what to expectand why, and

clarification of tax regulations, with examples of the kind of informa-tion that must be supplied.

Forms appear in this chapter in the same as they appear on the Forms Menuthat you see when you choose "ENTER Forms/Schedules" after choosing“PREPARE 1040 Tax Returns” from the Main Menu.

Refer to Chapter 7 for keyboard help. Throughout this chapter we refer toseveral special keys for controlling movement through the forms and theircomputations. Please refer to Chapter 7 of the separate User’s Guide if youdo not know how to identify these keys on your computer.

How special lines are flagged in the manual. Special lines are identified inthis manual as follows.

auto-calc identifies a fully-automatic calculated line. An auto-calc linecan generally be overridden by use of the Override Key, but this israrely recommended.

Road Map line, supported by Form ____ or Schedule __ identifies a linethrough which a supporting IRS form or schedule is accessed withthe Itemize Key. The entry for the line comes automatically from thesupporting form. You can make an entry directly on the line for taxplanning purposes, but your entry is overridden by the number fromthe supporting form, if it exists, during final calculations.

Supported by the _______ Worksheet identifies a line through which aworksheet customized to the line is accessed. While the main ac-cess line is flagged as described in the next paragraph, worksheetstypically support several lines near the main access line as well.

Lines that carry none of the above designations are supported by a genericitemized list, as described in Chapter 12 of the separate User’s Guide. (Notethat auto-calc and Road Map lines are visible during data entry only when youuse the Road Map or normal, full-screen methods of data entry, and not whenyou use one of the high-volume data entry methods.)

How special lines are flagged on the screen. Special lines like the ones de-scribed above are easily identified on 80-column screens, where the lines arewide enough to hold special flags.

▒▒▒▒ (shaded block) flags an auto-calc line. The block appears in thecolumn where the cursor would normally lie on an entry line, andprevents the cursor from stopping at that line.

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r flags a Road Map line before the supporting form is created. Whenyou press the Itemize Key at a Road Map line, the supporting formis accessed, and thereby created, and the "r" turns into an "i" to in-dicate that the supporting form exists.

w flags a worksheet line before the worksheet is created. When youpress the Itemize Key at a worksheet a line, the supporting work-sheet is accessed, and thereby created, and the "w" turns into an"i" when you return to the supported form.

i flags that the line is supported, either through the Road Map, aworksheet, or a general itemized list. As implied above, the "i" in-dicates that support for a line exists, and its entry is determined bythe supporting entity.

d flags a detached itemized line. If you press the Detach Support Keyon a line flagged by an “i”, or you manually change the entry for theline, a "d" appears beside the entry and the corresponding supportis no longer printed with the official return. You can reattach thesupport by pressing the Itemize Key at the line anew, and the totalprovided by the support is restored. (Note that you cannot detach asupporting IRS form from a Road Map line.)

o flags an overridden line. If you change an entry on an auto-calc lineby invoking the Override Key, your entry for that line is flagged byan "o" to the right of the new entry, and the shaded block disap-pears. If you later invoke the Detach Override Key, the "o" disap-pears, the shaded block reappears, and the line is recalculatedanew.

Refer to Chapter 11 for Reference Numbers. If you use a high-volume methodof data entry you will want to know the internal reference numbers for high-volume data entry. They are not shown here but are available from printoutsof data input sheets described in Chapter 11 of the separate User’s Guide.

Override possible, but don't get carried away. The Override Access Keygives you manual access to auto-calc lines, but its use is intentionally limited:

1 A return cannot have more than 20 overrides. (CAUTION: If you needto override more than 20 lines on any one return, you are eithermisusing the software or you misunderstand the tax law.)

2 Lines that get their entry from a supporting form cannot be overrid-den. To avert inconsistencies with the supporting form, you mustoverride numbers on the supporting form instead.

3 Worksheet lines cannot be overridden, but many worksheets providea means for manual entry when it makes sense to do so.

CAUTION: Whenever you use the Override feature you materially affect thecalculations, so we strongly recommend that you refrain from using it. It is in-tended for emergency situations only.


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Where to Report Income and DeductionsWhere to report income. The IRS requires that you report income from ALLsources. However, it is not always obvious where to report income other thanwages. So we provide Table 2-1 to guide you by type of income, and Table2-2 to guide you by the IRS form you receive from the payer.

Table 2-1. Where to Report Income (by type of income) INCOME ITEMINCOME ITEMINCOME ITEMINCOME ITEM WHERE TO REPORTWHERE TO REPORTWHERE TO REPORTWHERE TO REPORT Advance Payment of Wages Form 1040, line 7 Alimony Received Form 1040, line 11 Alaska Permanent Fund Dividends Form 1040, line 21 Amortizable bond premium acquired after 12/31/87 Sch. B, ln 1 (1099-INT) acquired before 10/23/86 Schedule A, line 27 Annuities Form 1040, line 16 Awards Form 1040, line 21 Back Pay Form 1040, line 7 Bad Debts Recovered Form 1040, line 21 Beneficiary Income Schedule E, Part III Bonuses Form 1040, line 7 Business Income, partnership Schedule E, Part II self-employed Schedule C, Part I Cancellation of debt (1099-C) Form 1040, line 21 Capital Gains Schedule D or Form 4797 Commissions Form 1040, line 7 Dividend Income, taxpayer's Schedule B, line 5 child's Form 8814 Education Savings Accounts, taxable distributions from Form 1040, line 21 Executors' Fees Form 1040, line 21 Expense Allowances Form 1040, line 7 Farm Income, partnership Schedule E, Part II self-employed Schedule F, I or III Fees, nonprofessional, directors, election board Form 1040, line 21 Fishing Income, partnership Schedule E, Part II self-employed Schedule C, Part I Gambling Winnings Form 1040, line 21 Home sale, if taxable gain Schedule D, line 8 Illegal Business Profits Form 1040, line 21 Installment sales Form 6252 Interest Income, taxpayer's Schedule B, line 1 child's Form 8814 IRA Distributions Form 1040, line 15 Jury Fees Form 1040, line 21 Nontaxable interest Sch. B, ln 1 (1099-INT) Nontaxable income Form 1040, after line 22 Partnership Income Schedule E, Part II Pensions Form 1040, line 16 Prizes Form 1040, line 21 Punitive Damages Form 1040, line 21 Qualified Tuition Programs, taxable distributions from Form 1040, line 21 Raffle Winnings Form 1040, line 21 Recapture, clean-fuel deduc'n Form 1040, line 21 Refunds, State/Local Inc Tax Form 1040, line 10 Real Estate Tax Form 1040, line 21 Reimbursemt of prior deductions Form 1040, line 21 Rents Received Schedule E, Part I Rewards Form 1040, line 21 Royalties Received Schedule E, Part I Sale of Business Property Form 4797 Home, Stocks, Bonds Schedule D Salaries, Tips, Wages Form 1040, line 7

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Table 2-2. Where to Report Income (by IRS form received)

FORMFORMFORMFORM WHERE TO REPORTWHERE TO REPORTWHERE TO REPORTWHERE TO REPORT

Schedule K-1 Schedule B (for line 8a or 9 of 1040), Schedule D (for line 13 of 1040), Form 4797 (for line 11 of Schedule D or line 14 of 1040), or Schedule E (for line 17 of 1040), as instructed by the payer on Schedule K-1.

Form W-2 Line 7a and 7b of Form 1040. (enter nontaxable earned below line 22)

Form W-2G Line 21 of Form 1040.

Form 1099-B Schedule D (for line 13 of 1040) for sales of personal property, Form 4797 (for line 14 of 1040) for sales of business property, Schedule B (for line 13 of Schedule D for capital gain distributions, Sch C, C-EZ, D, E, or F, or line 21 of Form 1040, depending on the activity for which the bartering was in trade.

Form 1099-DIV Schedule B (for line 9 of Form 1040), or Form 8814 (for line 44 of Form 1040)

Form 1099-INT Schedule B (for line 8a or 8b of 1040), or Form 8814 (for line 44 of Form 1040)

Form 1099-G Line 10 of Form 1040 for state and local tax refunds if deducted in a prior year, Line 19 of Form 1040 for unemployment compensation, Line 21 of From 1040 for real estate tax refunds if deducted in a prior year. Schedule F for farm-related payments (agricultural program payments and disaster payments)

Form 1099-MISC Schedule C or C-EZ (for line 12 of 1040) for business or professional income, Schedule E (for 17 of 1040) for royalties, Schedule F (for ln 18 of 1040) for farms, Form 1040 line 21 for most other income. Also include withholding in line 64 of Form 1040.

Form 1099-OID Line 1 of Schedule B (for line 8a of 1040), for your share only.

Form 1099-R Line 15a and 15b of Form 1040 if an IRA distribution, line 16a and 16b if another form of pension or annuity.

Form 1099-S Schedule D or Form 4797.

Form SSA-1099 Line 20a of Form 1040.

Form RRB-1099 Line 20a of Form 1040.


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Where to report deductions. Some deductions reduce income before the ad-justed gross income (AGI) is totaled at line 37 of form 1040, and are detailedin Table 2-3. Other deductions reduce income after line 38 through itemizeddeductions on Schedule A, and are detailed later, in our instructions forSchedule A.

Table 2-3. Where to Report Deductions DEDUCTIBLE ITEM WHERE TO REPORT Alimony & Separate Maintenance Payments Form 1040, line 31a Amortizable bond premium acquired before 10/23/86 Schedule A, line 27 Amortization Form 4562, Part VI Bad Debts, Farm business Schedule F, line 34 Non-farm business Schedule C, line 9 Other than business Schedule D, ln 1 (worksheet) Business Credits Form 3800 Business Expenses, Employee's Form 2106 Business Expenses, fee-basis state/local gov't officials Form 1040, line 24 Business Expenses & Losses Schedule C, Part II Business Use of Home Form 8829 Capital Asset Loss Schedule D Capital Construction Fund Form 1040, line 43 (use override to reduce tax by amt contributed to fund) Capital Loss Carryover Schedule D Casualty Loss Form 4684 Clean Vehicle Fuel, business use Sch C, line 27, or F, line 34 Clean Vehicle Fuel, nonbusiness Form 1040, line 36 Depletion Schedule E Depreciation of Business Form 4562 and the Property (Including ACRS applicable schedule & Section 179 Deduction) (A, C, E, F, 2106) Farm Expenses Schedule F, Part II Foreign housing deduction Form 1040, line 36 Foreign income/housing exclusion Form 1040, line 21 (negative) IRA contributions, Deductible Form 1040, line 32 Nondeductible Form 8606 Interest penalty for early withdrawal of savings Schedule B, ln 1 (worksheet) Investment Credit Form 3468 Jury pay given to employer Form 1040, line 34 Lump-sum Distributions Form 4972 or 5544 Moving Expenses Form 3903 Net Operating Loss Carryover Form 1040, ln 21 (negative) Nontaxable income Form 1040, after line 22 Performing arts expense Form 2106 (for 1040 line 24) Self-employment Health insurance Form 1040, line 29 Other expenses, nonfarm Schedule C, Part II Other expenses, farm Schedule F, Part II Self-employed SEP, SIMPLE, and other qlfd plan contributions Form 1040, line 28 Worthless Securities Schedule D

NOTE: Most deductions not included above should be shown on Schedule A, detailed in Tables 2-6 to 2-9.

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Control FormOptional form for more control. This form provides the overall control of thereturn, but rarely requires your attention unless you have estimated tax pay-ments to report. Among the purposes of this form are the entry of data for:

" Tax year – for tax planning in future years.

" Dollar rounding – to ensure consistency throughout the return when theIRS-preferred rounding is used.

" Estimated taxes paid – including both federal amounts for Form 1040and state amounts for Schedule A.

" Blocking auto-creation of selected forms – for rare exceptions thatmake you eligible to omit the selected forms from the return.

" Summarizing prior-year and current tax details for Form 2210 – for anaccurate determination of penalties for underpayment.

" Paid Preparer Control – for control of the look of cover and billing let-ters to clients.

The form also provides a tax summary for the return, which will appear onany cover letters to clients you choose to print. This form is accessiblethrough the Road Map by pressing the Itemize Key (F10 or I) at the first lineof Form 1040, where Tax Year is shown.

TAX YEAR CONTROL. This section controls the assumptions under which thereturn is calculated.

Tax year (enter 2006 or later). This entry controls the tax year assumedin all calculations. It is automatically 2006 unless you enter a lateryear. The entry 2006 results in an official return for the 2006 taxyear. If you enter a later year, an unofficial return for the later yearis produced using currently scheduled changes in the tax regulationsthat are built into the software. (HINT: You should be sure to makea copy of the 2006 return with our file manager before you alter thereturn for tax planning.) The tax year entry also controls how dataare transferred to next year's return with the software's "translate"feature. If you leave the entry at 2006, next year's "translate" willknow to shift certain amounts to different lines, as required for suchdate-sensitive forms as Form 4562. CAUTION: Supporting work-sheets are NOT automatically recalculated after you change the taxyear. You must access each affected worksheet to force its recal-culation based on the new entry for tax year.

Monetary amounts rounded to $'s. (auto-calc) This entry shows therounding rule under which the return is calculated. When you start areturn by translating a prior-year return, the setting for the prior-yearreturn is used here. But when you start a return from scratch, thesetting in your program setting for "Round to the nearest dollar?" isused. (See Chapter 14 of the separate User’s Guide for further in-


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formation on this program setting.) The IRS prefers rounding to thenearest dollar, but only if you apply it consistently throughout thereturn. However, the IRS specifically instructs you to round ONLYthe total amount to be entered on the IRS form, and NOT the indi-vidual components that make up that amount. So, the software in-tentionally refrains from rounding amounts on individual supportingstatements, even when the answer here is Yes. If you change thisentry in the midst of preparing a return, which you can do by in-voking the Override Key, unacceptable rounding inconsistenciescould result. You should therefore refrain from changing the settingexcept when starting the return. TIP: We recommend dollar round-ing for all returns to minimize the potential for computational inaccu-racies in the penny amounts for returns with entries that exceed$100,000.

Indexing % used for 2007 plans. (auto-calc) Tax tables, earned incomecredit tables, exemption rates, and the standard deduction are allindexed with inflation by law. While the precise amounts for futureyears are not known until the IRS sets the new amounts based onthe inflation experienced, a reasonable estimate can be made usingthis entry. The software is delivered with the proper indexing ratefor next year already entered based on figures released by the IRS(3.91% for 2007 relative to 2006). This entry must be 3.91% foran accurate estimate of 2007 taxes and a valid Form 1040-ES.

FEDERAL ESTIMATED TAX PAYMENTS. Payments of estimated tax to theIRS and the application of refund from the prior-year return are both creditedto the return at line 65 of Form 1040 based on the following details.

Tax applied from 2005 return. For a translated return with tax year re-tained at 2005, this entry will already be correct. If not translated,or if translated from a tax planning return (tax year already set to2006), you must enter the amount that appears on line 74 of your2005 return, which is the part of your refund applied to estimatedtaxes for 2006.

Estimated tax paid for 1st, 2nd, 3rd, 4th quarter of 2006. (4 lines.) Enteractual payments made by each quarterly due date. Enter late pay-ments in the quarter they are paid, not the quarter they were due.

TOTAL for Form 1040 line 65. (auto-calc) Computed as the sum of the abovefive lines, and posted to Form 1040 as indicated.

STATE ESTIMATED TAX PAYMENTS. Payments of estimated tax to the stateare deductible on Schedule A for the year the payments are actually made.You could make your total entry directly on Schedule A on the line above line5 labeled "Other non-fed tax paid," but the Control Form provides an easyway to reconcile the differences between what you deduct and what yourstate return reflects, and ensures the proper automation of HowardSoft'sCalifornia Supplement for those who prepare California state returns.

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Prior 4th quarter 2005 estimated tax paid in 2006. Enter any 2005fourth quarterly payment made after 12/31/05. An entry here iscommon because the due date for this payment was 1/15/06.

State estimated tax paid in 1st quarter. Enter the first quarterly pay-ment to the state for the tax year, including any amount appliedfrom a refund on the prior-year state return.

State estimated tax paid in 2nd quarter. Enter the second quarterlypayment to the state here for the tax year.

State estimated tax paid in 3rd quarter. Enter the third quarterly pay-ment to the state here for the tax year.

State estimated tax paid in 4th quarter. Enter the fourth quarterly pay-ment for the tax year whether it was paid before January 1 or not.

Part of 4th quarter estimated tax paid in 2007. Enter the part of thepreceding entry that was not actually paid until after December 31,2006. An entry here is common because the due date for this pay-ment is January 15, 2007 for most taxpayers.

TOTAL for Schedule A, line 5. (auto-calc) Computed as the sum of the firstfive lines less the last line. This result is posted to Schedule A as one compo-nent of the deduction for taxes on line 5 of Schedule A. The middle four linesshould be reported as tax paid in advance on the state tax return.

AUTO-CREATION OVERRIDE. A number of forms are automatically generatedand completed upon the final recalculation of the return when they appearnecessary based on your data. If the calculations on the completed, auto-matically-generated form indicate that the form is indeed required, the formbecomes a permanent part of the return. You can defeat this automatic fea-ture for a particular form by answering Yes to the corresponding "Block auto-creation?" question, below. But we generally recommend against it becausethe built-in automation is your safeguard against inadvertent omissions onyour return, and very rarely is a bypass of the automation legitimate.

Block Schedule A auto-creation? Unless you answer Yes, Schedule A isgenerated when the estimated state tax payments entered on theControl Form plus the state tax withholding entered on the W-2 and1099-R Worksheets for Form 1040 lines 7, 15, and 16 total morethan the standard deduction, and the total deduction on the sched-ule exceeds the standard deduction that would otherwise apply.CAUTION: Even though this schedule is automatically generatedbased on state taxes, you will have to access it to supply informa-tion on other deductions.

Block Schedule EIC auto-creation? Unless you answer Yes, the earnedincome credit is computed and Schedule EIC is generated if it ap-pears from your dependent claims, earned income, age, and AGIthat you may be eligible for the Earned Income Credit, but is re-tained with the return only if a credit results. Note that even if youqualify for the childless credit, Schedule EIC is still required to per-form the computations, even though it is not printed with the returnin this case.


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Block Schedule R auto-creation? Unless you answer Yes, Schedule R iscomputed when it appears from the return that you may get a creditbased on age, but is retained with the return only if a credit actuallyresults from a detailed calculation. CAUTION: Even though thisschedule is automatically generated, you may have to access it tosupply information on nontaxable pensions not reported on line 16aor 20a of Form 1040 or information on disabilities.

Are YOU SE-exempt via Form 4029? If you filed Form 4029 as a con-scientious objector to social security tax and you received IRS ap-proval for it, you are not subject to the tax and should answer Yes.

Are YOU SE-exempt via Form 4361? If you filed Form 4361 as amember of a minister, member of a religious order, or Christian Sci-ence practitioner, and you received IRS approval for it, you are notsubject to the SE on your ministerial income. Answer Yes here ifthis is your only self-employment income. But answer No if you re-ceived other self-employment income, and make the proper entrieson Schedule SE to exempt the ministerial income alone.

Block YOUR SE auto-creation? The answer is automatically Yes if youanswered Yes to either of the above two questions, but you canalso answer Yes yourself for special cases. Unless you answer Yes,Schedule SE is generated for you when your earned income lesswages is more than $433.13 ($433 for a rounded return). You maylegitimately block the auto-creation under only very limited circum-stances, including the preceding two questions.

Is SPOUSE SE-exempt via Form 4029? As above, but for spouse.Is SPOUSE SE-exempt via Form 4361? As above, but for spouse.

Block SPOUSE SE auto-creation? As above, but for spouse's income.

Block Form 2210 auto-creation? Unless you answer Yes, Form 2210(along with 2210-F) is generated when the amount of underpay-ment (line 63 less line 72 of Form 1040) is $1000 or more. (Thesoftware decides whether 2210 or 2210-F is applicable.)

Block YOUR Form 5329 auto-creation? Unless you answer Yes, Form5329 is generated when the IRA deductions allowed on Form 1040are less than the actual IRA contributions AND a penalty resultsfrom the excess contribution. A Yes is acceptable here if you areunder 59-1/2 years of age and any 1099-R you received for theyear has distribution code 2, 3, or 4 properly shown in box 7.These codes indicate an exception to the 59-1/2 age rule, an excep-tion due to disability, or an exception due to death, respectively.Otherwise you should complete Form 5329 and identify any appli-cable exception yourself at line 2 of Form 5329. CAUTION: If youhave a distribution from a Roth IRA or a Coverdell ESA, or you haveexcess contributions to either, you should NOT block the autocrea-tion of Form 5329 because special penalties apply.

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Block SPOUSE Form 5329 auto-creation? The same considerations ap-ply to the spouse as noted above for the principal taxpayer.

Block Form 6251 auto-creation? Unless you answer Yes, Form 6251 isgenerated when a minimum tax exists based on your adjusted grossincome, exemptions, and filing status, or a minimum tax limitationexists on your credit from Schedule R or Form 2441. CAUTION:This form is required under many more circumstances than thatcause it to be created automatically. You should therefore accessthe form yourself if you have any tax preferences not automaticallyposted to Form 6251.

Block Form 8582 auto-creation? Unless you answer Yes, Form 8582 isgenerated when Schedule E has any passive losses or Schedules C,D, F, or Form 4797 have a net passive activity loss.

Block YOUR Form 8606 auto-creation? Unless you answer Yes, Form8606 is generated when the IRA deductions allowed on Form 1040are less than the actual IRA contributions. CAUTION: Even thoughthis form is automatically generated, you will have to access it toreport the current value and past basis of your IRA accounts if youever made nondeductible contributions to it.

Block SPOUSE Form 8606 auto-creation? The same considerations ap-ply to the spouse as noted above for the principal taxpayer.

Block Form 8812 auto-creation? Unless you answer Yes, Form 8812 isgenerated when your Child Tax Credit at line 53 of Form 1040 isless than the full amount and it appears that you can gain at leastsome of that credit back as a refundable tax credit at line 68.

Block Form 8880 auto-creation? Unless you answer Yes, Form 8880 isgenerated when you have an IRA deduction at line 32 of Form 1040and it appears that you are eligible for a credit for your contributionto the IRA.

Block Form 8901 auto-creation? Unless you answer Yes, Form 8901 isgenerated when you have entered information for non-dependents(for a Child Tax Credit claim) on a Dependents Worksheet for Form1040, line 6c for nondependents. Only depedents appear on line 6cof the printed Form 1040, but information for both dependents andnon-dependents is collected on the worksheets in order to automatethe computation of the child tax credit. Because line 6c of Form1040 shows no information about non-dependents, the IRS requiresyou to file Form 8901 to provide the information. The generation,completion, and printing of this form is fully automatic as long asyou do not block its auto-creation here.

Note that forms are automatically generated only upon the final recalculationof the return: when you exit the return, you press the Recalculate Key, or youchoose Recalculate from the Preparation Menu. CAUTION: Once generated,


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such forms become a permanent part of the return. You CANNOT removethem merely by answering Yes to the above questions, but you can later re-move them using the File Manager, as detailed in Chapter 9 of the User’sGuide. However, when you remove the form you do not automatically re-move the numbers it may have already posted to other forms.

Schedules B, D, and E, and Form 4797 also automatically generated. You arenot allowed to block their automatic creation because they are generated onlywhen they are needed for a result to be reflected in the totals for Form 1040:• Schedule B is needed when an amount for foreign tax paid or a Yes an-

swer to a foreign account question appears on Form 8814.• Schedule D is needed when a qualified dividend or capital gain distribu-

tion is reported on a 1099-DIV worksheet for Schedule B or Form 8814,or when a gain or loss from a sale on Form 4797 or 6252, or a casualtyor theft on Form 4684, must be reported there. (Note that even thoughthe IRS now allows you to omit Schedule D under some special circum-stances, the software still generates it in order to perform the proper taxcalculations. However, the schedule is automatically omitted from print-ing when allowed under the new IRS rules.)

• Schedule E is needed when farm rental income is shown on Form 4835.• Form 4797 is needed when a gain on an installment sale (Form 6252) or

casualty or theft (Form 4684) must be reported there.

INFORMATION FOR FORM 2210. The computation of the penalty on under-payments of estimated tax is based on both current-year and prior-year taxescomputed in a special way. Prior-year information shown here is translatedfrom the prior-year return, and current-year information is posted from Form1040 amounts:

Filed full-year return in PRIOR year? If you answer Yes, the amount onthe next line is used on Form 2210 as the amount of prior-year tax.If you answer Yes, you MUST enter the tax in the next entry or elsethe software will assume the tax was really zero.

PRIOR-year tax paid (unadjusted). For a translated return with tax yearretained at 2005, this entry will already be correct. It is taken fromthe amount computed on the prior-year Control Form for Form1040-ES, line 14b (at the bottom of the same screen as this entry).If not translated, or if translated from a tax planning return (tax yearalready set to 2006), you must determine the amount to enter here.You can compute it in the same way as we compute the amount forForm 1040-ES line 14b. This is the same as tax that would appearat line 9 of the prior-year Form 2210.

PRIOR-year filing status (1-5). You must enter the prior filing statushere unless it has already been translated from the prior-year returnor the filing status is the same in 2006.

PRIOR-year Adjusted Gross Income. You must enter the prior AGI hereunless it has already been translated from the prior-year return.

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Adjustment for changed filing status. (Applicable only if the PRIOR-year filing status above differs from the one on the current Form1040.) You may need to make an adjustment if your prior-year taxwould have differed had you used the current-year filing status.See IRS Pub. 505 for details.

PRIOR-year tax for Form 2210 line 8. (auto-calc) Computed as the un-adjusted tax plus the above adjustment. For most taxpayers, this isthe PRIOR-year tax to be used on Form 2210 for penalty excep-tions. However, the amount used on Form 2210 may be 110% ofthis amount if prior-year AGI exceeds $150,000 ($75,000 if marriedfiling separately).

Tax on 1040 lines 58, 61, and special in line 63. (auto-calc) This entry iscomputed from Form 1040 as the sum of other taxes on lines 58,61, and the “Special taxes” total above line 63 of Form 1040.

Less Mortgage subsidy in Form 1040 line 63. (auto-calc) Taken as thepart of line 63 of Form 1040 that is identified on Form 1040 asstemming from the recapture of a federal mortgage subsidy (FMSR).

Plus Early distribution part of Form 1040 line 60. (auto-calc) Takenfrom line 4 of Form 5329.

Plus ESA/QTP distribution in Form 1040 line 60. (auto-calc) Takenfrom line 8 of Form 5329.

Plus Household employment tax on Form 1040 line 62. (auto-calc)Taken as the amount on Form 1040, line 62, from Schedule H.

Plus Excluded Advance EIC payments in above. (auto-calc) Takenfrom line 7 of Schedule H.

Plus Other adjustments for Form 2210 line 3. Enter any other adjust-ment to the amount to be entered on line 3 of Form 2210.

Tax for Form 2210 line 2. (auto-calc) Computed as the sum of othertaxes noted above modified by the above adjustments, this is the"Other taxes" entry to be added to the regular tax after credits atline 57 of Form 1040 in computing the CURRENT-year tax to beused on Form 2210 for penalty computations.

Less Earned Income Credit on Form 1040 line 66a. (auto-calc)Less Additional child tax credit on Form 1040 line 68. (auto-calc)Less Fuel tax credit on Form 1040 line 70b. (auto-calc)Plus Net tax on Form 1040 line 57. (auto-calc)

Tax for Form 1040-ES line 14b. (auto-calc) Computed from the abovelines as the tax after credits on Form 1040 line 57 plus other taxesfor Form 2210 line 2 less the three credits shown above. This is theamount to be used NEXT year on Form 2210 in computing the pen-alty exceptions. It is therefore used in the current Form 1040-ES inestimating next year's tax subject to penalty.

The results in the above section are posted to lines 2 and 8 of Form 2210,and line 14b of Form 1040-ES, as indicated.

OPTIONS FOR PAID PREPARERS. The next few lines relate to the cover andbilling letters that are printed by tax professionals for their clients.


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DATE FOR LETTERS TO CLIENT. Enter the salutation date to appear on thecover and billing letters. It is printed in the center of the page below the pre-parer's letterhead.

SUBSTITUTE SALUTATION. The standard salutation for letters is a concate-nation of the first and last names for you and spouse, such as “Dear Jona-than A. & Marilyn M. Sample.” You can provide your own salutation to beused after the word “Dear” by entering it here in 35 characters or less.

OPTIONAL COVER LETTER TEXT. Samples of the cover letter appear at theend of Chapters 4 of the separate User’s Guide.

Tax summary always prints. The letter always starts with the taxsummary, then general instructions on signing, dating, and mailingthe return. But the remainder of the letter is under your control.

Print joint filer instructions. (auto-calc lines) Answered Yes if the filingstatus on the return is married filing jointly, but you can overridethis line to omit the reminder that both spouses must sign.

Print payment instructions. (auto-calc lines) Answered Yes if the taxsummary shows an amount due, but you can override this answer ifto omit instructions to “send a check to the IRS identified with yoursocial security number.”

More cover letter lines (itemize). (Supported by the Worksheet for Op-tional Text for Letters, Figure 2-1.) Up to 5 additional lines of textcan be added to the letter for this client through the worksheet thatsupports this line. Typical uses for these lines include additional in-structions to the taxpayer or a personalized message. The 61-character lines are entered as two 25-character entries plus one 11-character entry. When making these entries be aware that they en-tries are appended without spaces, so you can start a word at theend of one entry and complete the word at the beginning of thenext entry. However, you must add any intentional spaces yourself.(You should hyphenate split words at the end of the 11-characterfields because they are printed at the end of the line.)

A standard closing is also printed along with the tax preparer's name.

OPTIONAL BILLING LETTER TEXT. Samples of the billing letter appear at theend of Chapters 4 and 13.

List of forms always prints. A list of forms prepared for the client al-ways prints, but the remainder of the letter is under your control.

More billing letter lines (itemize). (Supported by the Worksheet for Op-tional Text for Letters, Figure 2-1.) Up to five additional lines of textcan be added to the letter for this client through the worksheet thatsupports this line, which is identical in form but separate in contentfrom the worksheet that supports the cover letter. Typical uses forthese lines are to list additional forms or state returns prepared thatare not built into the software, or to list other services rendered.The 61-character lines are entered as two 25-character entries plusone 11-character entry. These three entries are appended without

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spaces, so you canstart a word at theend of the first 25-character field andcomplete the word atthe beginning of thesecond 25-characterfield. You must addany intentional spacesyourself. (You shouldhyphenate split wordsat the end of the 11-character fields be-cause they are printedat the end of the line.)

Fee for services renderedis $. Enter the invoiceamount to appear on the billing letter for the return. If you enterzero, the line stating the fee is omitted from the billing letter.

A standard closing is also printed along with the tax preparer's name.

SIGNATURE BLOCK (1040, etc). The paid preparer information you supply inthe program settings is generally printed at the bottom of page 2 of Form1040 and certain other signature forms. However, you can choose, by a Yesanswer here, to omit the printing of the paid preparer information for this re-turn alone.

TAX SUMMARY. The detailed tax summary shown here is determined fromthe results on Form 1040. It is used on printed cover letters to clients. INCOME. (auto-calc lines) Income is summarized as follows:

Total Income. Posted from line 22 of Form 1040....less adjustments. Posted from line 36 of Form 1040.

Adjusted Gross Income. Posted from line 38 of Form 1040....less deductions. The sum of lines 40 and 42 of Form 1040.

Taxable Income. Posted from line 43 of Form 1040. TAXES. (auto-calc lines) Taxes are summarized as follows:

Regular plus minimum tax. Posted from line 46 of Form 1040....less credits. Posted from line 56 of Form 1040....plus other taxes. Computed as line 63 less line 57 of Form 1040.

Total 2006 Tax. Posted from line 63 of Form 1040....less payments. Posted from line 72 of Form 1040.

Amount Overpaid. Line 72 less line 63 of 1040, but no less than zero.Amount Underpaid. Line 63 less line 72 of 1040, but no less than zero.Penalty. Posted from line 77 of Form 1040.

OPTIONAL TEXT FOR LETTERSOPTIONAL TEXT FOR LETTERSOPTIONAL TEXT FOR LETTERSOPTIONAL TEXT FOR LETTERS The following e The following e The following e The following ennnntries print ontries print ontries print ontries print on the letters as 5 61-char rows: the letters as 5 61-char rows: the letters as 5 61-char rows: the letters as 5 61-char rows: Line 1 - start...... Line 1 - start...... Line 1 - start...... Line 1 - start...... middle..... middle..... middle..... middle..... end of line 1........ end of line 1........ end of line 1........ end of line 1........ Line 2 - start...... Line 2 - start...... Line 2 - start...... Line 2 - start...... middle..... middle..... middle..... middle..... end of line 2........ end of line 2........ end of line 2........ end of line 2........ Line 3 - start...... Line 3 - start...... Line 3 - start...... Line 3 - start...... middle..... middle..... middle..... middle..... end of line 3........ end of line 3........ end of line 3........ end of line 3........ Line 4 - start...... Line 4 - start...... Line 4 - start...... Line 4 - start...... middle..... middle..... middle..... middle..... end of line 4........ end of line 4........ end of line 4........ end of line 4........ Line 5 - start...... Line 5 - start...... Line 5 - start...... Line 5 - start...... middle..... middle..... middle..... middle..... end of line 5........ end of line 5........ end of line 5........ end of line 5........

Figure 2-1. Optional Text for Letters


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Only non-zero lines among the last three lines are printed on the cover letter.

REFUND OR AMOUNT YOU OWE. (auto-calc lines) Net tax is summarizedhere:

TOTAL REFUND available. Computed as Amount Overpaid less Penalty,but no less than zero.

TOTAL YOU OWE to I.R.S. Computed as Amount Underpaid plus Penaltyless Amount Overpaid, but no less than zero.

Only one of these lines will be non-zero, and it is the only line printed.

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Form 1040 / Main FormFORM 1040 PAGE 1. Form 1040 is now shown on the Forms Menu as twoseparate forms: Form 1040 page 1 and Form 1040 page 2, although the cal-culations and navigation back and forth through Form 1040 is virtually un-changed. Form 1040 page 1 is used to identify the taxpayer(s) and report theFiling Status, Exemptions, Income, and Adjustments for the return, as fol-lows.

Start of the Road Map. Form 1040 page 1 is the home base for the built-inRoad Map. You should ALWAYS start a new return with Form 1040 page 1,regardless of what method you use. The taxpayer information is critical toseveral calculations throughout the return, so you should complete Form1040 through line 6d even if you do not file Form 1040.

Tax year (Control Form access). (Road Map line, supported by Control Form.)This entry shows the tax year assumed in all calculations, and is automati-cally 2006 unless you enter a later year on the Control Form. You should ac-cess the Control Form if you need to report any estimated tax paymentsmade for the tax year, block the automatic creation of forms by the software,report prior-year taxes for Form 2210 exceptions, or customize cover andbilling letters. Reminder: For this and all other Road Map lines you must pressthe Itemize Key (i or F10) to access the supporting form.

SPECIAL HANDLING INDICATOR. A 25-character entry is provided here to letyou alert the IRS of any special handling. The entry can be used to indicateda decedent return, an active duty military taxpayer, or any other phrase thatyou may be instructed to write across the top of the return. Your entry isprinted above your name in the top section of Form 1040. For a paper returnyou can indicate qualification for disaster relief by entering, for example,HURRICANE KATRINA, if appropriate. CAUTION: For e-file, you can enterhere only certain military indicators defined in IRS Pub. 1346, such asCOMBAT ZONE, OPERATION ALLIED FORCE, etc.

INFORMATION ON TAXPAYER. The principal taxpayer is identified here, in-cluding any special circumstances that could affect calculations on the return.

Your 1st name & initial. You must enter the names even if you use anIRS address label on Form 1040 because the names are required inthe headers of all other forms and schedules. For the first name andinitial you should omit any titles like Mr., Mrs., or Dr., and enter thefirst name without spaces. Enter each name in 25 characters orless, keeping in mind that the IRS typically compresses first namesto 10 characters.

Your last name. Even though 25 characters are allowed by the soft-ware, you should abbreviate long names in the same way that theyare abbreviated by the IRS in IRS-supplied address labels, includingthe omission of apostrophes and other punctuation marks. The IRStypically compresses last names to 15 characters. However, if youabbreviate, be sure to retain the first 4 characters of the last name


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without abbreviation because the IRS uses them in its computerizedname controls.

Your social security number (SSN). Enter your valid 9-digit social secu-rity number here. If you enter 9 digits without spaces or dashes, thesoftware will reformat them into the standard 11-character format(000-00-0000). An SSN is now mandatory; there are no longer anyallowed exceptions. If you fail to enter an SSN here, the softwarewill warn you “SSN required!” Moreover, if the SSN starts with a 9,indicating that it is not an SSN that allows you to work, the soft-ware will prevent you from claiming the Earned Income Credit.

Your occupation. Enter the occupation in 11 characters or less. It willbe printed at the bottom of page 2 of the Official Form 1040.

You want $3 to go to the Presidential Election Campaign Fund? A Yesanswer has no effect on your taxes, but rather earmarks $3 of thetax collected from you to be spent on the campaign funds of majorcandidates. Congress established this fund in 1971 as a part ofcampaign reform with the intent of reducing the reliance of presi-dential candidates on large individual or group contributors, to placecandidates on an equal financial footing in the general election, andto free candidates from fund-raising duties. Candidates who acceptmoney from the fund must agree to limit their spending and, forcandidates who run in November, to not accept any contributionsfrom individuals or private groups.

Your age at year-end. This entry affects built-in calculations on Form1040 (including IRA deductions because the limits are now higherfor those 50 and over), Schedules A, EIC, and R, and Forms 5329,6251, 8606, and 8615. CAUTION: Do not round your entry. In-stead, enter age as a decimal (such as 59.5 for age 59 years, 6months) because some calculations depend on the precise age atyear-end. (Although you would normally enter your age as of De-cember 31 of the tax year, the IRS instructs you to use the age youwill be on January 1 of the following tax year, which can certainlyaffect calculations for those born on New Years day.)

You 65 or over at year-end. (auto-calc) Answered based on the entry foryour age, above, and used in the count for line 39a of Form 1040.

You blind at year-end? Answer Yes to claim blindness for you, which isalso used in the count for line 39a of Form 1040.

You dependent on another's return? Answer Yes if YOU can be claimedas a dependent on another person's return. When you answer Yes,your personal exemption is automatically eliminated and the stan-dard deduction is automatically limited in accordance with specialIRS rules. You are also ineligible for certain credits.

You EIC-qualified child of another? If a qualifying child of another per-son for the Earned Income Credit, you cannot claim it for yourself.The software ensures this through your answer here.

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You student 5 months or more? If you were a student for any 5 monthsof the tax year, you do not qualify for a credit through Form 8880for your contributions to an IRA or other qualified plan. The soft-ware ensures this through your answer here.

You non-resident for 6 months or more? If your main home is not in theUnited States for more than 6 months, you cannot qualify for thechildless version of the Earned Income Credit. The software ensuresthis through your answer here.

If deceased, enter date (mm-dd-yyyy). For decedent returns the date ofdeath must be printed on Form 1040 near the top of the form. Thesoftware ensures this through your entry here.

INFORMATION ON SPOUSE. You must also complete this section if filingstatus will be married filing jointly. (HINT: Even if filing status will be marriedfiling separately, you must still supply the spouse’s SSN below. You supplythe spouse’s name, however, only at line 3 of Form 1040.)

Spouse’s 1st name & initial. Enter the first name in 25 characters orless, preferably in 10 characters or less.

Spouse’s last name (if different). If you make no entry, it is assumed tobe the same as “Your last name.” Although you can enter as manyas 25 characters here, it is preferable to abbreviate to 15 charactersas the IRS typically does. However, if you abbreviate, be sure to re-tain the first 4 characters of the last name without abbreviation be-cause the IRS uses them in its computerized name controls. Whenthe composite of all names is too long to be printed in the availablespace on the forms, the first names are shortened to accommodatethe restriction first, then the last names. (If married filing jointly,your entry is deleted upon a recalculation of the return if preciselythe same as your entry for “Your last name.” This feature obviates apotential problem for e-filed returns and ensures the intended aes-thetics for paper returns.)

Spouse’s SSN (required if married). Enter spouse’s valid 9-digit socialsecurity number here. It will be checked and formatted like the SSNfor the principal taxpayer. Moreover, if the SSN starts with a 9, in-dicating that it is not an SSN that allows you to work, and your fil-ing status is married filing jointly, the software will prevent you fromclaiming the Earned Income Credit. You must enter spouse’s SSNhere if married, whether filing jointly or separately.

Spouse’s occupation. Enter the occupation in 11 characters or less. Itwill be printed at the bottom of page 2 of the Official Form 1040.

Spouse wants $3 to go to the Presidential Election Campaign Fund?The question is answered separately for you and spouse, but themeaning is the same. See our details for “You want $3 to go to…”for more information.

Spouse’s age at year-end. See our details for “Your age at year-end”for hints on entering fractional years and the usage of this entry bythe software.


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Spouse 65 or over at year-end. (auto-calc) Answered based on the entryfor spouse’s age, and used in the count for line 39a of Form 1040.

Spouse blind at year-end? Answer Yes to claim blindness for spouse,and used in the count for line 39a of Form 1040.

Spouse dependent on another's return? Answer Yes if SPOUSE can beclaimed as a dependent on another person's return. When you an-swer Yes, the spouse’s personal exemption is automatically elimi-nated and the standard deduction is automatically limited in accor-dance with special IRS rules.

Spouse EIC-qualified child of another? If spouse is a qualifying child ofanother person for the Earned Income Credit, you cannot claim theEarned Income Credit on this return. The software ensures thisthrough your answer here.

Spouse student 5 months or more? If spouse was a student for any 5months of the tax year, the spouse does not qualify for a creditthrough Form 8880 for contributions to an IRA or other qualifiedplan. The software ensures this through your answer here.

Spouse non-resident for 6 months or more? If spouse’s main home isnot in the United States for more than 6 months, you cannot qualifyfor the childless version of the Earned Income Credit. The softwareensures this through your answer here.

If deceased, enter date (mm-dd-yyyy). For decedent returns the date ofdeath must be printed on Form 1040 near the top of the form. Thesoftware ensures this through your entry here.

HOME ADDRESS. Enter the address for the return here, complete with thespecial indicators and entries shown below.

In care of (or additional addressing information). This supplementaryline is a required entry under some circumstances. For example, fora decedent return you must enter the name of the executor or otherrepresentative who is filing the return. If using the Premium Leveland you prepared a Form 1310 for the return, the person claiming arefund through the form appears here automatically.

Present home address (number and street or rural route). Enter thestreet address here in 35 characters or less. Enter P. O. Box insteadonly if the post office does not deliver mail to your street address.To keep the address short, use the same abbreviations that the IRSuses in its address labels, without periods, as listed in Table 2-4.The address, including city, state, and ZIP code, below, are used incover and billing letters as well as the address block of Form 1040.

Apt., Suite, Bldg., etc. If applicable, enter an apartment or suite here.You need make an entry unless it is required by the post office.

City, town, or post office. Enter city in 25 characters or less.State. Enter the standard two-letter code for the state as shown in Ta-

ble 2-5. CAUTION: The city and state entries were not separate en-tries last year, so this entry may be incorrect if you did not use a 2-letter code for the state last year.

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ZIP code. Enter ZIP code in the standard five-number (00000) or nine-number (00000-0000) format.

Daytime phone number. The taxpayer’s phone number appears on theofficial Form 1040 in the signature block at the bottom of page 2.

APO or FPO? Answer Yes if the address is of the indicated type.Stateside military? Answer Yes if the address is an address in the U.S.

for a member of the military stationed outside of the U.S.Foreign? Answer Yes if the address is a foreign address.

Foreign address (if e-file). If the return will be e-filed, you must enter a for-eign address here in order to produce the special format required by the IRSfor foreign addresses. You should generally leave these entries blank for a pa-per return to prevent the name and address at the top of the printed Form1040 from becoming cluttered.

Street address. Enter the address in 35 characters or less.City, state or province, postal code. Enter this information in the format

used by the country of residence.Country. Enter the country in 25 characters or less.Foreign phone number. Enter in 25 characters or less.

Table 2-4. Abbreviations for Address Entry ABBREV ORIGINAL WORD ABBREV ORIGINAL WORD & AND 1/2 One-half AFB Air Force Base 1/4 One-quarter APT Apartment PKY Parkway AVE Avenue PL Place BLVD Boulevard PO BOX Post Office Box % Care of RT Route, Rte. CL Circle RD Road CT Court R D Rural Delivery, R.F.D., DR Drive R.D., Rural Route, etc E East S South GEN DEL General Delivery SE Southeast, S.E. HWY Highway SW Southwest, S.W. LN Lane ST Street N North TER Terrace NE Northeast, N.E. W West NW Northwest, N.W.

Table 2-5. Official State Codes AL Alabama IL Illinois MO Missouri PA Pennsylvania AK Alaska IN Indiana MT Montana RI Rhode Island AZ Arizona IA Iowa NE Nebraska SC S Carolina AR Arkansas KS Kansas NV Nevada SD S Dakota CA California KY Kentucky NH New Hamp. TN Tennessee CO Colorado LA Louisiana NJ New Jersey TX Texas CT Conn. ME Maine NM New Mexico UT Utah DE Delaware MD Maryland NY New York VT Vermont DC Washington, D.C. NC N Carolina VA Virginia FL Florida MA Mass. ND N Dakota WA Washington GA Georgia MI Michigan OH Ohio WV W Virginia HI Hawaii MN Minnesota OK Oklahoma WI Wisconsin ID Idaho MS Miss. OR Oregon WY Wyoming

For APO or FPO addresses, state codes are AA, AE, or AP.


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FILING STATUS. Filing status is identified first:Filing Status: 1=Sgl,2=MFJ,3=MFS,4=HoH,5=QW. Enter the number

that reflects the filing status in accordance with the IRS types: 1 forSingle (S), 2 for Married Filing Jointly (MFJ), 3 for Married FilingSeparately (MFS), 4 for Head of Household (HH), and 5 for Qualify-ing Widow(er) (QW). If in doubt about which filing status to use,consult the IRS Instructions for From 1040 for detailed qualifica-tions for each.

The next few entries are relevant ONLY for the filing status noted:MFS: Spouse lived APART ALL YEAR? Answer Yes only if you are mar-

ried and did NOT live with your spouse ANYTIME during the taxyear. WARNING: This answer is critical to several calculations in-cluding those on Schedule R, Form 2106, 8582, 8606, and lines20b and 32 of Form 1040.

MFS: Enter spouse's full name. If you chose filing status 3 (Married Fil-ing Separately), enter spouse's name here in 25 characters or less.CAUTION: You MUST also enter the spouse's social security num-ber on screen 2 of Form 1040. By IRS rules the spouse’s SSN mustappear at the top of Form 1040 even if you file separately. For e-fileMFS returns you must also enter the spouse’s name on screen 2 ofForm 1040.

H-of-H: If qualifying child not your dependent, child’s SSN and name. Ifyou chose filing status 4 (Head of Household) and the person whoqualifies you for this status is your child, and this child is not a de-pendent listed in line 6c below, enter the child’s SSN and full nameon the two lines provided here. HINT: To avert delays in processingthe return, you should enter one and only one name and SSN here ifno dependents are listed in line 6c.

QW: Enter year spouse died. To qualify for the Qualifying Widow(er)filing status, you must have a dependent child (other than a fosterchild) and your spouse must have died in either of the prior 2 years(2004 or 2005 for tax year 2006 returns). See the IRS Instructionsfor Form 1040 for other requirements. If qualified, enter the yearthe spouse died. (Although you cannot use this filing status if theSpouse died during the tax year, the survivor qualifies to use theMFJ filing status for that year, with the deceased spouse’s nameentered on Form 1040 if he or she did not remarry during the year.You also cannot use the Qualifying Widow(er) filing status if thespouse died more than two years before the filing tax year.)

EXEMPTIONS. Personal and dependency exemptions are claimed here. Notethat age and blindness do not provide personal exemptions. Instead, they areshown at line 39a and used to increase your standard deduction at line 40.(They are of no benefit if you itemize deductions.)

6a Exemption claimed: YOURSELF. (auto-calc) Given automatically un-less you answered Yes to the earlier dependency question.

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b Exemption claimed: SPOUSE. (auto-calc) Automatically Yes whenmarried filing jointly, unless your answer to the earlier dependencyquestion is Yes. (If married filing separately but the spouse does notfile, has no income, and is not a dependent of another, you canclaim an exemption for the spouse and override this line with a Yesanswer.)

Number of exemptions on 6a and b. (auto-calc) Computed as thenumber of Yes answers above (zero, one, or two), but reduced bythe number who are a dependent on someone else’s return.

c Children who: lived with you. (Supported by the Dependents' Work-sheet, Figure 2-2.) Detailed information on ALL dependents is re-quired. You must press the Itemize Key (i or F10) at this or any ofthe following lines, and enter the information in the Dependents'Worksheet, detailed next. The same set of worksheets is accessedno matter which line you itemize. The separate lines shown hereare the separate totals from all the worksheets.

…not with you due to divorce or separation. (Supported by the De-pendents' Worksheet, Figure 2-2.) See details for 6c, above.

Dependents on 6c not above. (Supported by the Dependents' Work-sheet, Figure 2-2.) See details for 6c, above.

Number qualified for child tax credit. (Supported by the Dependents'Worksheet, Figure 2-2.) Qualification for this credit is determinedindependently for each child on the supporting worksheets. Thecredit depends on a number of other factors as well, and is com-puted automatically by the software at line 53 of Form 1040.CAUTION: You MUST view all worksheets and answer all questionsin order for a claim for the child tax credit of up to $1,000 per childto be considered.

Number qualified for earned income credit. (Supported by the De-pendents' Worksheet, Figure 2-2.) Qualification for this credit is alsodetermined independently for each child on the supporting work-sheets. The credit depends on a number of other factors as well,and is computed automatically by the software at line 66a of Form1040 upon the final recalculation of the return. Schedule EIC isautomatically printed with the return when a child qualifies you forthe credit, as required by the IRS. CAUTION: You MUST view allworksheets and answer all questions in order for a claim for theearned income credit based on your children to be considered.

d Number of exemptions claimed. (auto-calc) Computed as the sum ofexemptions on lines 6a, 6b, and 6c.

> INVALID FILING STATUS OR MISSING DATA? (auto-calc) A Yes answerhere indicates that something is wrong with your claims for filing status ordependents. Conditions that can lead to a Yes answer here include:

MFS. Spouse’s SSN is not entered on Form 1040, or the spouse’sname is not entered below the filing status.


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H-of-H. There is neither a dependent claimed nor a child’s name enteredfor H-of-H below the filing status.

QW. There is no claim for a dependent child who lived with you, oryour entry below the filing status for year spouse died is not 2004or 2005.

CAUTION: Use Dependents’ Worksheet for non-dependents as well. Our De-pendents’ Worksheets are used to automate the Earned Income Credit (line66a) and Child Tax Credit (lines 53 and 68) in addition to dependent claims atline 6c. You must therefore supply all information on children you claim forthose credits on the worksheets, irrespective of whether they are claimed atline 6c. Once you complete the worksheets and exit from the return, thecredits are automatically computed and any appropriate forms are automati-cally created (such as Schedule EIC, Form 8812, and Form 8901).

Special dependent claims. If your dependent claims at line 6c include anyclaims for dependents partially supported by others or you are not the custo-dial parent, you may have to file Form 2120 and/or Form 8332 with the re-turn. These forms have no amounts to post to Form 1040, but are just infor-mational forms. However, the following two lines provide convenient accessto these forms for those using the Premium Level software.

Form 2120 if multiple supporters. (If Premium Level, supported by Form2120.) If you claim a dependent at line 6c for whom no-one pro-vides more than half of his or her support, you must file Form 2120with the return to identify the others who provide more than 10%of the support and verify that you have signed statements fromthem agreeing not to claim this dependent for the tax year.

Form 8332 if not custodial parent. (If Premium Level, supported by Form8332.) If you claim a dependent at line 6c for whom you are notthe custodial parent, you must generally file Form 8332 signed bythe custodial parent which releases his or her claim to the exemp-tion for that dependent.

Dependents' Worksheet, Figure 2-2. You must fully identify each dependenton a separate worksheet page. (The same set of worksheets is accessed fromall lines under 6c.) The questions on this worksheet help determine qualifica-tion of the person as a dependent for exemption purposes, a child qualifyingyou for the Child Tax Credit, and a child qualifying you for the Earned IncomeCredit. For more details on specific eligibility tests and income limits, see IRSPub. 501 (Exemptions, Standard Deduction, and Filing Information), IRS Pub.596 (Earned Income Credit), IRS Pub. 929 (Tax Rules for Children and De-pendents), and IRS Pub. 972 (Child Tax Credit).

1 First Name. Enter dependent's first name in 10 characters or less.Last Name. Enter dependent's last name in 15 characters or less.This and the preceding line may seem unduly restrictive, but the IRShas made it clear in their specifications for e-file that it wants veryshort names in specific fields.

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e-file name.(auto-calc)The name isreformattedfor e-file asdefined inIRS Pub.1346.

e-file namecontrol.(auto-calc)The namecontrol is a4-charactercode for thelast name,usually thefirst fourcharactersof the lastname, asdefined inIRS Pub.1346.

Year born. En-ter year ofbirth as a 4-digit num-ber, such as1999. Theentry mustbe 1987 orlater for thechild toqualify for the Child Tax Credit for 2006.

Months NOT alive in tax year. If a dependent child died during the taxyear, you can still claim that child as a dependent for the entireyear, and certain other tests relate only to the months the child wasalive. Enter the number of months NOT alive here to ensure that notests are unduly restrictive.

2 Dependents' social security number. You must now ALWAYS havean entry here. You must provide an Identifying number for the de-pendent no matter what his or her age, even if born at the end ofthe year. The only exception now allowed is that if the dependentwas born and died during the tax year, you may enter DIED in placeof the SSN, but you must also attach a copy of the child’s birth cer-

DEPENDENTS (Screen 1 of 2)DEPENDENTS (Screen 1 of 2)DEPENDENTS (Screen 1 of 2)DEPENDENTS (Screen 1 of 2)1 1st name..................1 1st name..................1 1st name..................1 1st name.................. Last name................. Last name................. Last name................. Last name................. e-file name..... e-file name..... e-file name..... e-file name..... e-file name control....... e-file name control....... e-file name control....... e-file name control....... > Year borm................. 0 > Year borm................. 0 > Year borm................. 0 > Year borm................. 0 Months NOT alive in tax yr 0 Months NOT alive in tax yr 0 Months NOT alive in tax yr 0 Months NOT alive in tax yr 0 2 Dependent's soc sec no. 2 Dependent's soc sec no. 2 Dependent's soc sec no. 2 Dependent's soc sec no. 3 Relation to you .......... 3 Relation to you .......... 3 Relation to you .......... 3 Relation to you .......... > U. S. citizen or resid alien? No > U. S. citizen or resid alien? No > U. S. citizen or resid alien? No > U. S. citizen or resid alien? No Resident of Canada or Mexico? No Resident of Canada or Mexico? No Resident of Canada or Mexico? No Resident of Canada or Mexico? No > # months lived in your home. 0 > # months lived in your home. 0 > # months lived in your home. 0 > # months lived in your home. 0 Dep�s gross inc under $3,300? No Dep�s gross inc under $3,300? No Dep�s gross inc under $3,300? No Dep�s gross inc under $3,300? No Student at least 5 mos of yr? No Student at least 5 mos of yr? No Student at least 5 mos of yr? No Student at least 5 mos of yr? No Dep married filing jointly..? No Dep married filing jointly..? No Dep married filing jointly..? No Dep married filing jointly..? No > Do you meet the Support Test? No > Do you meet the Support Test? No > Do you meet the Support Test? No > Do you meet the Support Test? No Gave exmp right to other par? No Gave exmp right to other par? No Gave exmp right to other par? No Gave exmp right to other par? No Dep married filing jointly..? No Dep married filing jointly..? No Dep married filing jointly..? No Dep married filing jointly..? No EXEMPTION ALLOWED ON 1040. EXEMPTION ALLOWED ON 1040. EXEMPTION ALLOWED ON 1040. EXEMPTION ALLOWED ON 1040.▒ No▒ No▒ No▒ No[PgDn or > for EIC/CTC credit][PgDn or > for EIC/CTC credit][PgDn or > for EIC/CTC credit][PgDn or > for EIC/CTC credit] ________________________________________ ________________________________________ ________________________________________ ________________________________________

Type of Dependent:Type of Dependent:Type of Dependent:Type of Dependent: Depnd child who lived w/ you? No Depnd child who lived w/ you? No Depnd child who lived w/ you? No Depnd child who lived w/ you? No Dep child nonres due to sepn? No Dep child nonres due to sepn? No Dep child nonres due to sepn? No Dep child nonres due to sepn? No Other dependent............. Other dependent............. Other dependent............. Other dependent.............▒ No▒ No▒ No▒ NoCHILD TAX CREDITCHILD TAX CREDITCHILD TAX CREDITCHILD TAX CREDIT Child�s age at end of tax yr Child�s age at end of tax yr Child�s age at end of tax yr Child�s age at end of tax yr▒ 0▒ 0▒ 0▒ 0 4 DEP & CHILD TAX CREDIT QLFD. 4 DEP & CHILD TAX CREDIT QLFD. 4 DEP & CHILD TAX CREDIT QLFD. 4 DEP & CHILD TAX CREDIT QLFD.▒ No▒ No▒ No▒ No NONDEP & CHILD TAX CRED QLFD NONDEP & CHILD TAX CRED QLFD NONDEP & CHILD TAX CRED QLFD NONDEP & CHILD TAX CRED QLFD▒ No▒ No▒ No▒ No (See Form 8901 for nondep�s) (See Form 8901 for nondep�s) (See Form 8901 for nondep�s) (See Form 8901 for nondep�s)EARNED INCOME CREDITEARNED INCOME CREDITEARNED INCOME CREDITEARNED INCOME CREDIT # mos in your home NOT in US 0 # mos in your home NOT in US 0 # mos in your home NOT in US 0 # mos in your home NOT in US 0 Perm/tot. disabled in tax yr? No Perm/tot. disabled in tax yr? No Perm/tot. disabled in tax yr? No Perm/tot. disabled in tax yr? No Dependent ma Dependent ma Dependent ma Dependent marrrrried...........? Yesried...........? Yesried...........? Yesried...........? Yes EIC-qlfd to othr ta EIC-qlfd to othr ta EIC-qlfd to othr ta EIC-qlfd to othr taxxxxpayer(s)? Nopayer(s)? Nopayer(s)? Nopayer(s)? No Any of them w/higher mod AGI? No Any of them w/higher mod AGI? No Any of them w/higher mod AGI? No Any of them w/higher mod AGI? No EARNED INCOME CREDIT QLFD. EARNED INCOME CREDIT QLFD. EARNED INCOME CREDIT QLFD. EARNED INCOME CREDIT QLFD.▒ No▒ No▒ No▒ No [Press PgUp or < for d [Press PgUp or < for d [Press PgUp or < for d [Press PgUp or < for deeeetails.]tails.]tails.]tails.]

Figure 2-2. Dependents' Worksheet


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tificate to the return. If you fail to comply, your claim for an exemp-tion for the dependent may be denied. If you enter 9 digits withoutspaces or dashes, the software will format your entry into the stan-dard 11-character format for SSN (000-00-0000). If you make noentry of nine characters or more, the warning "SSN req'd!" will ap-pear. (Note that you may use a temporary number issued to you bythe IRS, such as an ITIN or ATIN, if you have no SSN. But the for-mer exceptions for conscientious objectors are no longer allowed.)

3 Relation to you. Enter relationship. Any relationship is allowed for de-pendency, even including parent, grandparent, aunt, or uncle..However, a child must live with you all year if not related (such as afoster child) or a cousin. To qualify for the Child Tax Credit or theEarned Income Credit, the entry must be son, daughter, adopted,grandchild, stepchild, brother, sister, stepbrother, stepsister, niece,nephew, or foster child. CAUTION: If you are going to e-file the re-turn, you MUST enter ONLY one of the following or else the returnwill be rejected by the IRS: child, son, daughter, fosterchild, grand-child, parent, grandparent, sister, brother, niece, nephew, aunt, un-cle, none, or other. (Yes, such common entries as mother, father,grandmother, grandfather, grandson, and granddaughter are disal-lowed. Instead you must enter parent, grandparent, or grandchild.)

U.S. citizen or resident alien? To be qualified for the Child Tax Creditthe answer here must be Yes. To be qualified as a dependent, un-less the relationship is adopted the answer to this or then nextquestion must be Yes.

Resident of Canada or Mexico? A resident of Canada or Mexicoqualifies as a dependent.

> Number of months lived in your home. If the only absences of thedependent during the tax year were temporary, such as vacation orschool, enter 12. Otherwise enter the actual number of months.

Dependent’s gross income under $3,300? To qualify as a dependent,the person must generally have less than $3,300 of income. How-ever, this condition need not be met if the child is under age 19 oris a student under age 24

Student at least 5 months of the year? If the child is under age 24,the income test need not be met if you can answer Yes here.

> Do you meet the Support Test? For a dependency exemption or aChild Tax Credit, you must have provided more than half the sup-port of the child, unless divorced or there are more than two care-takers.

Gave exemption right to other parent? If you don’t claim the child asyour dependent only because you gave the right to the other parent,you may still qualify for the Earned Income Credit even for a marriedchild.

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Dependent is married filing jointly? If married filing jointly, the childcannot qualify as your dependent. However, the child may stillqualify you to claim the child tax credit, as explained later.

You or spouse dependent of another? (auto-calc) Automatically de-termined from your answers on screens 1 and 2 of Form 1040 foreach spouse. If Yes, you cannot claim any dependents yourself.However, you may still qualify to claim the child tax credit, as ex-plained later.

EXEMPTION ALLOWED ON 1040. (auto-calc) Automatically Yes as longas the person qualifies as your dependent based on the above en-tries. An exemption is then reflected in line 6c of Form 1040. Notethat you may still qualify for the Earned Income Credit even whenthis answer is No. But the answer must be Yes to claim the ChildTax Credit.

The remaining entries for the worksheet are contained on the second screenof the worksheet, illustrated in the bottom half of Figure 2-2.

Type of Dependent:Dependent child who lived with you. Answer Yes if the child livedwith you more than six months of the tax year.

Dependent child nonresident due to separation or divorce? AnswerYes if the dependent is a dependent child but did not live with youbecause of separation or divorce.

Other dependent. (auto-calc) This answer is Yes only if the precedingtwo answers are No but the result for “EXEMPTION ALLOWED ON1040” is Yes.

CHILD TAX CREDIT:Child’s age at end of tax year. (auto-calc) Computed as the tax yearless the year born, this result must be less than 17 to be qualifiedfor the Child Tax Credit.

4 DEPENDENT AND CHILD TAX CREDIT QUALIFIED. (auto-calc) Toqualify the child must generally be your dependent (with 2 excep-tions, detailed below) AND must be your one of the relationshipsidentified for this credit in our details for line 3, must be a U.S. citi-zen or resident alien, and must be under age 17.

NON-DEPENDENT AND CHILD TAX CREDIT QUALIFIED. (auto-calc) Ifthe child was not your dependent only because either (a) you orspouse can be claimed as a dependent by someone else, or (b) thechild is married and files jointly with spouse, and qualifies for thechild tax credit in all other respects, a Yes appears here. If Yes, theinformation on the child is not printed at line 6c of the official Form1040. Instead, the software automatically creates and prints Form8901 to show the required information on the child.

EARNED INCOME CREDIT:Months lived in your home NOT in the U.S. To qualify for the EarnedIncome Credit the child must have lived with you more than 6


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months in the U.S. (or the entire time alive). Therefore, this entry issubtracted from the previous entry for months lived in your home todetermine months lived in the U.S. with you.

Permanently and totally disabled the entire tax year? If disabled,the age test need not be met for the Earned Income Credit. Other-wise, the child must be under age 19 or a student under age 24.

Dependent is married? If married, the child qualifies you for theEarned Income Credit only if your dependent, or not your dependentonly because you gave the right to the other parent.

EIC-qualified to other taxpayer(s)? Answer Yes if the child can qual-ify someone else for the Earned Income Credit. If so, only the onewith the highest AGI can claim the credit.

Any of them with higher modified AGI? If the preceding answer isYes and any of the other taxpayers has a higher AGI (as modifiedfor EIC calculations), you must answer Yes here and cannot claimthe credit based on this child.

EARNED INCOME CREDIT QUALIFIED. (auto-calc) Answered Yes onlyif the child qualifies based on all the preceding answers.

When you escape from the worksheets and return to Form 1040, the numberof worksheets for each class is counted, and the totals are posted to theseparate 6c lines.

WAGES, SALARIES, TIPS, ETC. Wages and other compensation from employ-ers are reported here. You should include in W-2 worksheets for lines 7a and7b not only wages and tips reported to you on a W-2, but also all moving ex-pense allowances that exceed actual expenses, whether or not you receive aW-2 form for these items.

7a YOUR wages, etc. on W-2. (Supported by the W-2 Worksheet, Fig-ures 2-3a through 2-3e.) To report wages reported to you on aForm W-2, you must itemize this line (by pressing I or F10) andcomplete the supporting W-2 Worksheets – one for each Form W-2received. Critical totals from the worksheets are displayed on-screenbelow line 7a and are used throughout the return.

7b SPOUSE wages, etc. on W-2. (Supported by the W-2 Worksheet, Figures2-3a through 2-3e.) If filing as married filing jointly, report wages re-ported to the other spouse in the W-2 Worksheets that support this line.They serve the same role as the worksheets noted above, but for thespouse alone. Note that amounts you enter here are ignored if the filingstatus for the return is not married filing jointly.

TOTAL INCOME FOR LINE 7. Some other income you receive may be classi-fied as wages even though they are not reflected in box 1 of the Forms W-2you received. Examples include excessive reimbursements from your em-ployer, income as a household employee, and certain taxable scholarships.

Wages on W-2s (7a plus 7b). (auto-calc) Wages reported to you on W-2s are shown here, taken from the worksheets for lines 7a and 7b.

Non-W-2 household employee (HSH). Enter here wages received as ahousehold employee for which you did not receive a Form W-2. The

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employer is not required to send you a Form W-2 if total wagesfrom that employer is less than $1,500. If you enter the unreportedwages here, a special code HSH will be printed on the official Form1040 to flag the amount to the IRS. These wages will then be in-cluded in earned income throughout the return. As a result, it couldincrease your Earned Income Credit. Be sure to include spouse’snon-W2 household employee wages if married filing jointly.

SPOUSE part of the above. Enter only the spouse’s part of the pre-ceding entry. You must include in the preceding line any wage youenter here, or else the calculations in the return for earned incomewill be incorrect.

Non-W-2 taxable scholarships (SCH). Enter here scholarships you re-ceived that are taxable even though they were not reported to youon a W-2 and therefore are not reported on the W-2 worksheets.(The amount of a scholarship NOT spent on books and tuition isgenerally taxable.) These wages will be flagged to the IRS by a spe-cial code SCH printed on the official Form 1040. These wages willgenerally be included in earned income, but NOT for the purposes ofthe Earned Income Credit at line 66a. Be sure to include spouse’snon-W2 household employee wages if married filing jointly.

SPOUSE part of the above. Enter only the spouse’s part of the pre-ceding entry. You must include in the preceding line wages you en-ter here or else calculations for earned income will be incorrect.

Excess reimbursed on Form 2106. (Road Map line, supported by Form2106.) Employer reimbursements that exceed actual expenses areposted here from Form 2106. You must complete a separate Form2106 for each separate employer of each spouse. Five copies ofForm 2106 are available, all of which are accessible here. The totalfor both spouses appears here for a joint return.

SPOUSE part of the above. (Road Map line, supported by Form2106.) The part of the preceding line from the spouse’s Form(s)2106 appears here.

Excess on Form 2441 from Dependent Care Benefits (DCB). (Road Mapline, supported by Form 2441.) Employer payments for child anddependent care that exceed actual expenses or the maximumamount eligible for the child care credit are posted here from Form2441. The total for both spouses appears here for a joint return.HINT: Be sure to report the amount in box 10 of your Forms W-2 inthe W-2 Worksheets for line 7. This amount will then flow to Form2441, and only the excess taxable amount will be return here forinclusion in income.

SPOUSE part of the above. (Road Map line, supported by Form2441.) The part of the preceding line attributable payments fromthe spouse’s employer appears here.

Excess reimbursed on Form 3903. (Road Map line, supported by Form3903.) If an employer reimbursed you for more than your actual


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moving costs, and did not include it in box 1 of the W-2 for the job,the excess appears here to be taxed like any other wages. The totalfor both spouses appears here for a joint return.

SPOUSE part of the above. (Road Map line, supported by Form3903.) The part of the preceding line attributable TO payments fromthe spouse’s employer appears here.

Taxable benefits on Form 8839. (If Premium Level, supported by Form8839.) Depending on your income, some of the employer-providedadoption assistance may be taxable. The taxable amount is figuredon Form 8839 (Qualified Adoption Epenses). The result on line 31of Form 8839 is reported here.

SPOUSE part of the above. (Road Map line, supported by Form8839.) The part of the preceding line attributable to assistance fromthe spouse’s employer appears here.

7 Wages, salaries, tips, etc. (auto-calc) Computed as the sum of all taxableincome reported in the preceding wages section, including the totals for line7a and 7b, non W-2 household employee income, non W-2 taxable scholar-ships, and excess reimbursements from Forms 2106, 2441, and 3903.(Spouse parts are excluded from this total if not married filing jointly.)

W-2 Worksheet, Figures 2-3a through 2-3e. You must complete a worksheetfor all sources of taxable income that must be reported on line 7 unless theyare separately entered or transferred above. Use a separate worksheet pagefor each employer. All information on the worksheets is available from theidentified boxes on the W-2s. Only lines marked with an asterisk (*) are re-quired entries for a paper return. All other entries are required for e-file re-turns only, and should match the amounts shown on the W-2s received. TheW-2 Worksheet is now displayed on 5 separate screens in order to accom-modate all the entries required for e-file. Use the PageDown key to view suc-cessive screens (and the PageUp key to go back).

Screen 1 of 5:a Control number. This number appears in the upper left corner of a

Form W-2.Void. Answer Yes only if a void box appears near the top of theform.

Corrected. Answer Yes only if this W-2 replaces one previously re-ceived.

b Employer ID number (*). Enter the employer's federal ID numbershown in box b in the standard 00-0000000 format.

c Employer’s name (*). Enter the name shown in box c in 25 charactersor less. The remaining parts of box c are required only for an e-filedreturn:

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...e-file name con-trol. If you planto e-file the re-turn you MUSTenter a 4-character namecontrol here.This is usuallythe first 4 char-acters of thepreceding name,but there arespecial rules forcertain types ofbusiness names.If you have anydoubts, see our5-page docu-ment Instruc-tions for Entry of Name Controls for Businesses, which is availableonline on the E-FILE ALERTS page of our “Check Web for Updates”site (accessible from the Tax Preparer Control Panel).

...name line 2. Use this line for in care of addresses or an addresscontinuation.

...address. Enter address in 25 characters or less. ...city. Enter city in 25 characters or less. ...state. Enter 2-letter state code. ...ZIP code. Enter ZIP code in 10 characters or less.d Employee’s SSN. Enter in standard XXX-XX-XXXX format.e Employee’s name. Enter name in 25 characters or less.f Employee’s address. Enter address in 25 characters or less. ...address. Enter address in 25 characters or less. ...address continued. CAUTION: This line is reserved by the IRS for

foreign addresses. If you use this line you must enter a period forthe state or else the e-file return will be rejected. See Sec. 7.06 ofIRS Pub. 1346, Part I, for details.

...city. Enter city in 25 characters or less. ...state. Enter 2-letter state code. ...ZIP code. Enter ZIP code in 10 characters or less.

FORM W-2 (Screen 1 of 5)FORM W-2 (Screen 1 of 5)FORM W-2 (Screen 1 of 5)FORM W-2 (Screen 1 of 5) Only (*) reqd for paper return Only (*) reqd for paper return Only (*) reqd for paper return Only (*) reqd for paper return a Control number............ a Control number............ a Control number............ a Control number............ Void......................? No Void......................? No Void......................? No Void......................? No Corrected.................? No Corrected.................? No Corrected.................? No Corrected.................? No b Employer ID nu b Employer ID nu b Employer ID nu b Employer ID nummmmber.......(*)ber.......(*)ber.......(*)ber.......(*) c Employer's name(*) c Employer's name(*) c Employer's name(*) c Employer's name(*) '' e-file name control... '' e-file name control... '' e-file name control... '' e-file name control... '' name line 2. '' name line 2. '' name line 2. '' name line 2. '' address..... '' address..... '' address..... '' address..... '' city........ '' city........ '' city........ '' city........ '' state................. '' state................. '' state................. '' state................. '' ZIP code.............. '' ZIP code.............. '' ZIP code.............. '' ZIP code.............. d Employee�s SSN............ d Employee�s SSN............ d Employee�s SSN............ d Employee�s SSN............ e Employee�s name. e Employee�s name. e Employee�s name. e Employee�s name. f '' address..... f '' address..... f '' address..... f '' address..... '' '' cont�d '' '' cont�d '' '' cont�d '' '' cont�d '' city........ '' city........ '' city........ '' city........ '' state................. '' state................. '' state................. '' state................. '' ZIP code.............. '' ZIP code.............. '' ZIP code.............. '' ZIP code..............

Figure 2-3a. W-2 Worksheet, Screen 1


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Screen 2 of 5:1 Wages, tips, etc.

(*). Enterwages, tips,and othercompensationshown in box1. You mustinclude any de-ferred com-pensation oremployer con-tributions toretirementplans that ex-ceed the al-lowed limit,which is gen-

erally $15,000 for 2006, but can be as high as $18,000 for em-ployees with at least 15 years of service to a public school, hospi-tal, welfare agency, church, etc. Also include earned income that isnot shown on a W-2 but is associated with the job and not reportedelsewhere on the return, including the value of certain living benefitsand tips not reported to the employer.

Box 3 and 5 same as box 1? For a data entry short-cut, answer Yeshere if boxes 3 and 5 show the same amount as box 1, except forthe $94,200 limit on box 3 for tax year 2006. A Yes answer willcause the box 3 entry to be the lesser of box 1 or $94,200 and willcause the box 5 entry to equal box 1.

Prison inmate income above. If box 1 includes any amount paid to aprison inmate for work, enter the amount here. The software elimi-nates this income from taxable earned income when computing theEarned Income Credit

2 Federal tax withheld (*). Enter total federal withholding of income taxshown in box 2.

3 Social security wages (*). Enter wages shown in box 3, which is thatpart of wages in box 1 that was subject to the social security tax.The amount shown on W-2 should already include SEP contribu-tions, even though they are not included as wages in box 1. This a-mount should be no more than $94,200 for 2006. (This entry isautomatic if you answered Yes to the question below box 1, asnoted above.)

Clergy social security wages NOT reflected in box 3 (*). For clergy, ifthe employer is exempt from deducting social security tax yet theemployee is still liable for the tax, enter the amount here. This

FORM W-2 (Screen 2 of 5)FORM W-2 (Screen 2 of 5)FORM W-2 (Screen 2 of 5)FORM W-2 (Screen 2 of 5) 1 Wages, tips, etc.........(*) 0 1 Wages, tips, etc.........(*) 0 1 Wages, tips, etc.........(*) 0 1 Wages, tips, etc.........(*) 0 Box 3 & 5 same as box 1.? No Box 3 & 5 same as box 1.? No Box 3 & 5 same as box 1.? No Box 3 & 5 same as box 1.? No Prison inmate inc. above 0 Prison inmate inc. above 0 Prison inmate inc. above 0 Prison inmate inc. above 0 2 Fed tax withheld.........(*) 0 2 Fed tax withheld.........(*) 0 2 Fed tax withheld.........(*) 0 2 Fed tax withheld.........(*) 0 3 Soc security wages.......(*) 0 3 Soc security wages.......(*) 0 3 Soc security wages.......(*) 0 3 Soc security wages.......(*) 0 Clergy soc sec NOT in 3..(*) 0 Clergy soc sec NOT in 3..(*) 0 Clergy soc sec NOT in 3..(*) 0 Clergy soc sec NOT in 3..(*) 0 4 Soc sec tax w/h..........(*) 0 4 Soc sec tax w/h..........(*) 0 4 Soc sec tax w/h..........(*) 0 4 Soc sec tax w/h..........(*) 0 Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER▒ 0▒ 0▒ 0▒ 0 5 Medicare wage&tips.......(*) 0 5 Medicare wage&tips.......(*) 0 5 Medicare wage&tips.......(*) 0 5 Medicare wage&tips.......(*) 0 6 Medicare tax w/h.........(*) 0 6 Medicare tax w/h.........(*) 0 6 Medicare tax w/h.........(*) 0 6 Medicare tax w/h.........(*) 0 Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER▒ 0▒ 0▒ 0▒ 0 7 Soc security tips........(*) 0 7 Soc security tips........(*) 0 7 Soc security tips........(*) 0 7 Soc security tips........(*) 0 8 Allocated tips...........(*) 0 8 Allocated tips...........(*) 0 8 Allocated tips...........(*) 0 8 Allocated tips...........(*) 0 Adjust to 8 for 1040.(*) 0 Adjust to 8 for 1040.(*) 0 Adjust to 8 for 1040.(*) 0 Adjust to 8 for 1040.(*) 0 9 Advance EIC payment......(*) 0 9 Advance EIC payment......(*) 0 9 Advance EIC payment......(*) 0 9 Advance EIC payment......(*) 0 10 Dependent care beni.....(*) 0 10 Dependent care beni.....(*) 0 10 Dependent care beni.....(*) 0 10 Dependent care beni.....(*) 0 Part NOT included in 1.. Part NOT included in 1.. Part NOT included in 1.. Part NOT included in 1..▒ 0▒ 0▒ 0▒ 0

Figure 2-3b. W-2 Worksheet, Screen 2

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amount will be used in the computation of Schedule SE to help per-form the special computations for clergy.

4 Social security tax withheld (*). Enter the withholding shown in box4, which is the social security tax withheld from wages by the em-ployer in your behalf, which should be 6.2% of the sum of boxes 3and 7, but no more than $5,449.80. Do not include any RRTA taxwithheld because it will be entered later, at box 14.

Excess DUE FROM EMPLOYER. (auto-calc) If the social security taxwithheld exceeds allowed amounts for this employer, the excess isshown here. This is the amount that you must collect from the em-ployer, not the IRS. You can collect from the IRS only the overwith-holding that resulted from having more than one employer, whichthe software automatically shows on line 67 of Form 1040, not anyamount appearing here due to an employer's error. (The allowedamount for line 4 is 6.2% of the sum of boxes 3 and 7 or$5,840.40, whichever is less.) This maximum does not include theamounts allowed for RRTA, railroad retirement, taxes, which arehandled at box 14 instead.

5 Medicare wages, tips, etc. (*). Enter the wages shown in box 5. (Thisentry is automatic if you answered Yes to the question below box1, as noted above.)

6 Medicare tax withheld (*). Enter the withholding shown in box 6,which is the Medicare tax withheld from your wages by the em-ployer in your behalf, which should be 1.45% of the amount in box5.

Excess DUE FROM EMPLOYER. (auto-calc) If the Medicare tax with-held exceeds allowed amounts for this employer, the excess isshown here. This is the amount that you must collect from the em-ployer, not the IRS. (The allowed amount for line 6 is 1.45% of box5.) This maximum does not include any amounts allowed for RRTA,railroad retirement, taxes, which are handled at box 14 instead.

7 Social security tips (*). Enter the tips shown in box 7 that were sub-ject to the social security or Medicare tax. Do not include amountsfor allocated tips or unreported tips, even though they must be re-ported with wages, because social security tax on those tips is re-ported separately through Form 4137 (which is built into PremiumLevel software only) in support of line 59 of Form 1040.

8 Allocated tips (*). Enter tips shown in box 8, which are tips allocatedby your employer. CAUTION: If you have an amount for this lineyou must complete Form 4137 to determine the amount of socialsecurity tax due on these tips, and report the result on line 59 ofForm 1040.

Adjustment to box 8 for 1040 (*). If the above amount does not accu-rately reflect the tips you collected, and you can prove it, you canenter an adjustment here (plus or minus) to correct the amount tobe included as wages in line 7 of Form 1040.


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9 Advance EIC payments (*). Enter the payments shown in box 9,which are advances on your Earned Income Credit that were paid toyou by your employer. This amount will be posted to line 61 ofForm 1040 along with the amounts from box 9 of all other W-2worksheets for the return.

10 Dependent care benefits (*). Enter employer-paid dependent carebenefits shown in box 10. Up to $5,000 of this amount is notcounted as wages because it covers deductible expenses for childcare.

Part NOT included in line 1. (auto-calc) Computed as the lesser of thepreceding amount and $5,000, this is the amount not considered astaxable wages. This amount automatically flows to Form 2441 forcomputing the credit for child and dependent care.

Screen 3 of 5:11 Nonqualified

plans (*). Enterthe totalshown in box11 of W-2,which includesdeferrals fromnonqualifiedplans that aretaxable as in-come in 2006,and thereforereflected inbox 1, and de-ferrals that be-came taxable

in 2006 for the social security and medicare taxes, and therefore re-flected in boxes 3 and 5.

Amount NOT included in box 1 (*). Enter part of box 11 that is notreflected in box 1 because it is reflected in boxes 3 and 5 instead.

Deferred compensation in box 1. (auto-calc) This amount is used toreduce the amount of wages used in computing the IRA limitationsat line 32.

12a through 12d, Code and amount. These four pair of lines are for e-file reporting only and are not used in any computations in the re-turn. They are solely intended for cross-checking by the IRS withthe W-2s they receive from the employer. The code is a 1-lettercode from A through V only, each of which represent an IRS-defined item. However, software allows you to enter 3 characters inorder to enter a 2-digit year after the code. The year entry applies

FORM W-2 (Screen 3 of 5)FORM W-2 (Screen 3 of 5)FORM W-2 (Screen 3 of 5)FORM W-2 (Screen 3 of 5) 11 Nonqualified plans......(*) 0 11 Nonqualified plans......(*) 0 11 Nonqualified plans......(*) 0 11 Nonqualified plans......(*) 0 Amt NOT included in 1(*) 0 Amt NOT included in 1(*) 0 Amt NOT included in 1(*) 0 Amt NOT included in 1(*) 0 Deferred comp in box 1.. Deferred comp in box 1.. Deferred comp in box 1.. Deferred comp in box 1..▒ 0▒ 0▒ 0▒ 0 12a Code(+year if USERRA): CYY 12a Code(+year if USERRA): CYY 12a Code(+year if USERRA): CYY 12a Code(+year if USERRA): CYY 12a $ amount.................. 0 12a $ amount.................. 0 12a $ amount.................. 0 12a $ amount.................. 0 12b Code(+year if USERRA): CYY 12b Code(+year if USERRA): CYY 12b Code(+year if USERRA): CYY 12b Code(+year if USERRA): CYY 12b $ amount.................. 0 12b $ amount.................. 0 12b $ amount.................. 0 12b $ amount.................. 0 12c Code(+year if USERRA): CYY 12c Code(+year if USERRA): CYY 12c Code(+year if USERRA): CYY 12c Code(+year if USERRA): CYY 12c $ amount.................. 0 12c $ amount.................. 0 12c $ amount.................. 0 12c $ amount.................. 0 12d Code(+year if USERRA): CYY 12d Code(+year if USERRA): CYY 12d Code(+year if USERRA): CYY 12d Code(+year if USERRA): CYY 12d $ amount.................. 0 12d $ amount.................. 0 12d $ amount.................. 0 12d $ amount.................. 0 CodeD,E,F,G,Sdeferrals in12(*) 0 CodeD,E,F,G,Sdeferrals in12(*) 0 CodeD,E,F,G,Sdeferrals in12(*) 0 CodeD,E,F,G,Sdeferrals in12(*) 0 13 Statutory employee.........? No 13 Statutory employee.........? No 13 Statutory employee.........? No 13 Statutory employee.........? No If Yes, reporting on C(*)? No If Yes, reporting on C(*)? No If Yes, reporting on C(*)? No If Yes, reporting on C(*)? No Retirement plan............? No Retirement plan............? No Retirement plan............? No Retirement plan............? No Third-party sick pay.......? No Third-party sick pay.......? No Third-party sick pay.......? No Third-party sick pay.......? No

Figure 2-3c. W-2 Worksheet, Screen 3

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only for prior-year USERRA contributions (which are makeupamounts for an employee returning after military service).

Code D,E,F,G, & S deferrals in 12 (*). Enter the part of amounts in 12athrough 12d that represents salary deferrals identified by the citedcodes. Up to $15,000 can be deferred for 2006 ($18,000 if youqualify for the 15-year rule in IRS Pub. 571). Your entry here is in-cluded as wages when determining allowed withholding for theRRTA equivalent of social security and Medicare taxes. CAUTION:You must enter the cited deferrals yourself; they are not automati-cally transferred from any amounts you entered in lines 12a through12d above. Furthermore, neither your entry here nor your entries onlines 12a through 12d are used elsewhere in the return.

13 Statutory employee? Answer Yes if the box for statutory employeeis checked on the W-2, whether or not you choose to report incomeon Schedule C.

If Yes, reporting on C (*)? If the preceding box is checked, you havethe option of reporting the income shown on this form on ScheduleC rather than 1040 line 7, so that you can deduct expenses directlyagainst income rather than through Schedule A (which has manylimitations). CAUTION: When you answer YES here, the income isautomatically excluded from line 7 of Form 1040, so you MUST re-port it on Schedule C for a valid return, yet credit for social securitypayments are ensured so that you are not liable for the self-employment tax on this income.

Retirement plan? Answer Yes if the box for retirement plan ischecked on the W-2 received from the employer. If Yes, be sure toidentify the person to which the plan applies on the line above line32 of Form 1040 in order for the proper IRA limitations to be ap-plied.

Third-party sick pay? Answer Yes if the box for third-party sick payis checked on the W-2 received from the employer.

Screen 4 of 5:14a through 14c,

Type and a-mount. Exceptfor California(explained atthe end of thisparagraph),these four pairof lines are fore-file reportingonly and arenot used inany computa-

FORM W-2 (Screen 4 of 5)FORM W-2 (Screen 4 of 5)FORM W-2 (Screen 4 of 5)FORM W-2 (Screen 4 of 5) 14a Other deduc/ben. -- type: 14a Other deduc/ben. -- type: 14a Other deduc/ben. -- type: 14a Other deduc/ben. -- type: '' '' amount: '' '' amount: '' '' amount: '' '' amount: 14b Other deduc/ben. -- type: 14b Other deduc/ben. -- type: 14b Other deduc/ben. -- type: 14b Other deduc/ben. -- type: '' '' amount: '' '' amount: '' '' amount: '' '' amount: 14c Other deduc/ben. -- type: 14c Other deduc/ben. -- type: 14c Other deduc/ben. -- type: 14c Other deduc/ben. -- type: '' '' amount: '' '' amount: '' '' amount: '' '' amount: 14 From amts in 14a,b,c: 14 From amts in 14a,b,c: 14 From amts in 14a,b,c: 14 From amts in 14a,b,c: RRTA Tier1 SocSec-equiv tax 0 RRTA Tier1 SocSec-equiv tax 0 RRTA Tier1 SocSec-equiv tax 0 RRTA Tier1 SocSec-equiv tax 0 Soc sec equiv allowed... Soc sec equiv allowed... Soc sec equiv allowed... Soc sec equiv allowed...▒ 0▒ 0▒ 0▒ 0 Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER▒ 0▒ 0▒ 0▒ 0 RRTA Tier1 Medicare-eqv tax 0 RRTA Tier1 Medicare-eqv tax 0 RRTA Tier1 Medicare-eqv tax 0 RRTA Tier1 Medicare-eqv tax 0 Medicare equiv allowed.. Medicare equiv allowed.. Medicare equiv allowed.. Medicare equiv allowed..▒ 0▒ 0▒ 0▒ 0 Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER Excess DUE FROM EMPLOYER▒ 0▒ 0▒ 0▒ 0 State/local taxes in box 14 0 State/local taxes in box 14 0 State/local taxes in box 14 0 State/local taxes in box 14 0

Figure 2-3d. W-2 Worksheet, Screen 4


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tions in the return. They are solely intended for cross-checking bythe IRS with the W-2s they receive from the employer. No amountsin box 14 are required by the IRS to be reported. The are amountsthe employer wants you to know or is required to report because ofsome local law. IMPORTANT EXCEPTION FOR CALIFORNIA: If youplan to translate this federal return into a California Form 540 returnusing our California Supplement software, you must use line 14aONLY for reporting the state disability insurance (SDI) (and relatedamounts). It will be translated from this federal return to the Cali-fornia return and automatically placed on an SDI line of our W-2Worksheets for both Form 540 and Form 8453 (for e-file returns).The amount will be used in calculations for excess SDI, in printoutsof FTB Schedule W-2 CG, and in an FTB-defined spot in the e-fileoutput. For an e-file return your entry for Type for line 14a mustidentify the fund as SDI, CASDI, VD, VP, VPDI, or VI. No other en-tries are allowed for California e-file returns, irrespective of anyvariation of these abbreviations that may appear on the actual FormW-2.

14 From amounts in 14a, b, c. By contrast, the following lines ARE usedin calculations for the return, and are amounts generally reported toyou in box 14 of the W-2. CAUTION: You must enter all amountsbelow yourself; they are not automatically transferred from anyamounts you entered in lines 14a through 14c above.

RRTA Tier 1 Social Security-equivalent tax (*). Enter the amount re-ported to you as the social security equivalent part of the Tier 1withholding. This is generally 6.2% of wages plus deferrals up to$94,200 for 2006.

Social security equivalent allowed (*). (auto-calc) Generally com-puted as 6.2% of wages plus deferrals, but no more than$5,840.40 for 2006. However, if you entered an amount in box 3or box 7, the software concludes that you reported the RRTAamount there and no amount is allowed here.

Excess DUE FROM EMPLOYER. (auto-calc) Like the regular social se-curity tax, overwithholding for the RRTA social security equivalenttax must be collected from the employer, not the IRS. You can col-lect from the IRS only the overwithholding that resulted from havingmore than one employer, which the software automatically showson line 67 of Form 1040, not any amount appearing here due to anemployer's error.

RRTA Tier 1 Medicare-equivalent tax (*). Enter the amount reported toyou as the Medicare-equivalent part of the Tier 1 withholding. Thisis generally 1.45% of wages plus deferrals.

Medicare equivalent allowed (*). (auto-calc) Generally computed as1.45% of wages plus deferrals. However, if you entered an amountin box 5, the software concludes that you reported the RRTAamount there and no amount is allowed here.

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Excess DUE FROM EMPLOYER. (auto-calc) Like the regular Medicaretax, overwithholding for the RRTA Medicare-equivalent tax must becollected from the employer, not the IRS.

State and local tax in box 14 (*). Non-federal taxes shown in box 14should be entered here. For a California job this could include with-holding for state disability insurance (SDI). This entry will be re-flected in itemized deductions on Schedule A of Form 1040.

Screen 5 of 5:15 State (*). Enter

the employer's2-letter statecode.

Employer stateID number (*).Enter the em-ployer's stateID numbershown in box15, in thestate's stan-dard format.

2nd state. Asabove if foranother state.

Employer IDNfor 2nd state.As above if for another state.

16 State wages, tips, etc. Usually the same as box 1, enter the wagesthat apply to the first state.

2nd State wages, tips, etc. As above if for another state.17 State income tax (*). Enter regular state income tax withholding

shown in box 17 here.2nd State income tax withheld. As above if for another state.

Special instructions for California e-file. If you plan to e-file a Form 540 re-turn translated from this Form 1040 return, we recommend that you roundyour entries for lines 16 and 17 to the nearest dollar to ensure acceptance ofthe return by the FTB. This approach averts a quirk in FTB error checking thatfails to recognize the inevitability of small rounding discrepancies, and willhave no effect on the federal return as long as the return is set on the ControlForm to round to the nearest dollar (as required for both federal and Californiae-file).

18 Local wages, tips, etc. An amount would appear here only if subjectto a local income tax.

2nd Local wages, tips, etc. As above if for another locality.

FORM W-2 (Screen 5 of 5)FORM W-2 (Screen 5 of 5)FORM W-2 (Screen 5 of 5)FORM W-2 (Screen 5 of 5) 15 State...................(*) 15 State...................(*) 15 State...................(*) 15 State...................(*) Employer state IDN......(*) Employer state IDN......(*) Employer state IDN......(*) Employer state IDN......(*) 2nd state.................. 2nd state.................. 2nd state.................. 2nd state.................. Employer IDN for 2nd state. Employer IDN for 2nd state. Employer IDN for 2nd state. Employer IDN for 2nd state. 16 State wages, tips, etc. ... 0 16 State wages, tips, etc. ... 0 16 State wages, tips, etc. ... 0 16 State wages, tips, etc. ... 0 2nd State wages, tips, etc. 0 2nd State wages, tips, etc. 0 2nd State wages, tips, etc. 0 2nd State wages, tips, etc. 0 17 State income tax........(*) 0 17 State income tax........(*) 0 17 State income tax........(*) 0 17 State income tax........(*) 0 2nd State income tax wthld. 0 2nd State income tax wthld. 0 2nd State income tax wthld. 0 2nd State income tax wthld. 0 18 Local wages, tips, etc. ... 0 18 Local wages, tips, etc. ... 0 18 Local wages, tips, etc. ... 0 18 Local wages, tips, etc. ... 0 2nd Local wages, tips, etc. 0 2nd Local wages, tips, etc. 0 2nd Local wages, tips, etc. 0 2nd Local wages, tips, etc. 0 19 Local income tax........(*) 0 19 Local income tax........(*) 0 19 Local income tax........(*) 0 19 Local income tax........(*) 0 2nd Local income tax wthld. 0 2nd Local income tax wthld. 0 2nd Local income tax wthld. 0 2nd Local income tax wthld. 0 20 Locality................... 0 20 Locality................... 0 20 Locality................... 0 20 Locality................... 0 2nd Locality............... 0 2nd Locality............... 0 2nd Locality............... 0 2nd Locality............... 0 State/local tax in 14 & 19. State/local tax in 14 & 19. State/local tax in 14 & 19. State/local tax in 14 & 19.▒ 0▒ 0▒ 0▒ 0 Soc sec & equiv Tier 1 tax. Soc sec & equiv Tier 1 tax. Soc sec & equiv Tier 1 tax. Soc sec & equiv Tier 1 tax.▒ 0▒ 0▒ 0▒ 0 Soc sec & equiv Tier 1 wage Soc sec & equiv Tier 1 wage Soc sec & equiv Tier 1 wage Soc sec & equiv Tier 1 wage▒ 0▒ 0▒ 0▒ 0 Medicare& equiv Tier 1 tax. Medicare& equiv Tier 1 tax. Medicare& equiv Tier 1 tax. Medicare& equiv Tier 1 tax.▒ 0▒ 0▒ 0▒ 0 Source (S=Standard,N=Non-Std): Source (S=Standard,N=Non-Std): Source (S=Standard,N=Non-Std): Source (S=Standard,N=Non-Std):

Figure 2-3e. W-2 Worksheet, Screen 5


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19 Local income tax (*). Enter here any local tax withheld from wagesas shown in box 19.

2nd Local income tax withheld. As above if for another locality.20 Locality. Identify the locality for the first entry in lines 18 and 19.

2nd Locality. Identify the locality for the 2nd entry in lines 18 and19.

State and local tax in boxes 14 and 19. (auto-calc) Computed as thesum of the total in box 19 and the state/local tax part of box 14.

Social security & equivalent Tier 1 tax. (auto-calc) Computed as thesum of properly withheld amounts for social security tax and theTier 1 equivalent. This amount flows through to Form 1040 for usein computing excess withholding at line 67.

Social security & equivalent Tier 1 wage. (auto-calc) Computed asthe sum of wages used in figuring the allowed social security tax.This amount flows through to Schedule SE for reducing self-employment wages by amounts already withheld for social security.

Medicare & equivalent Tier 1 tax. (auto-calc) Computed as the sumof properly withheld amounts for Medicare tax and the Tier 1equivalent. This amount is used in Form 8812 in determining theavailable additional child tax credit when the credit at line 53 is lim-ited.

Source (S=Standard, N=Non-Standard). This entry is required for e-fileonly, and is normally S. Enter N only if the W-2 is altered, typed, orhandwritten rather than computer-generated.

When you escape from the worksheets the totals are posted to lines 7a (or7b) and the lines that follow them. These worksheets are NOT printed as apart of the official return because the IRS requires you to file bona fide copiesof W-2s with the return. They can be printed when viewed, however, usingthe Quick Print key, or as a part of a printout of "PERSONAL & Other Sup-port," described in Chapter 4.

OTHER INCOME. In addition to wages at line 7, all other income is reportedin lines 8 through 21 of Form 1040. Most lines are supported by another IRSform or schedule or a special worksheet. You are required to report all incomeyou receive. You should take special care to report all income reported to youon various forms of Form W-2, Form 1099, and Schedule K-1, because cop-ies are sent by the payers to the IRS. See Tables 1-1 and 1-2 at the begin-ning of this chapter for guidelines.

8a through 9b, Interest and dividends. (Road Map lines, supported by Sched-ule B.) You MUST prepare a Schedule B if you have taxable interest or tax-able dividends of more than $1,500, or you have any capital gains distribu-tions or excludable series EE savings bond interest to report. If you don'tneed to prepare a Schedule B, however, you can enter the numbers directlyon the following three lines when you use the Road Map or normal full-screenmethod of data entry.

8a TAXABLE interest income (Schedule B). If you don't prepare aSchedule B, you can enter interest here directly; otherwise line 4 of

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Schedule B will be posted here and will override your entry. (Sched-ule B includes Form 1099-INT Worksheets for your to completebased on the 1099-INT forms received by the taxpayer.)

8b TAX-EXEMPT interest income. With few exceptions, all tax-exemptinterest is reported here, even though it is not taxed. If you don'tprepare a Schedule B, enter tax-exempt interest here directly; oth-erwise the amount reported on Schedule B will be posted here andwill override your entry. You should include all interest from munici-pal bonds and exempt-interest dividends from a mutual fund orother regulated investment company, but do NOT include other non-taxable dividends nor interest earned on your IRA. (Excluded interestfrom series EE savings bonds now appears in our section titled “Cer-tain Nontaxable Income” following line 22, not here.)

9a Ordinary dividends (Schedule B). If you don't prepare a Schedule B,enter all taxable dividends here directly (excluding capital gain distri-butions); otherwise line 10 of Schedule B and/or Form 8814 will beposted here and will override your entry. (Schedule B includes Form1099-DIV Worksheets for you to complete based on the 1099-DIVforms received by the taxpayer.)

9b Qualified dividends. If you don't prepare a Schedule B, enter hereordinary dividends that qualify to be taxed at capital gains tax rates;otherwise qualified dividends entered on 1099-DIV worksheets forSchedule B and/or Form 8814 will be posted here and will overrideyour entry. This entry must be no more than line 9a because it isthe part of line 9a that qualifies under the new tax rules.

Even if you aren’t required to file Schedule B, we recommend completing it toensure the full automation of the return when there are any special types ofinterest or dividends.

Modification of lines 9a and 9b by Form 8814. If you file Form 8814 to reportyour childrens’ interest and dividends on your own return and those dividendsinclude any qualified dividends, the amounts on lines 9a and 9b are bothraised by a fraction of those dividends in accordance with IRS Pub. 929.When this is the case you must use Schedule B to report any other dividends,and Schedule B is automatically created if it does not already exist. See ourinstructions for Form 8814 for details.

10 Taxable refunds of state and local income taxes. Refunds received for anytaxes that were deducted on Schedule A in a prior year, such as a state or lo-cal income tax refund, may be taxable income. The full refund is reported toyou by the taxing agency on a Form 1099-G. But your entry here may be lessthan the amount shown on that form, as follows:

If you did not itemize deductions for the year to which the refund ap-plies, you should enter zero here. None of the refund is taxable be-cause you did not deduct the taxes previously paid.


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If your itemized deduction for the year to which the refund applies ex-ceeds the standard deduction by less than the refund, you shouldenter the itemized deduction less the standard deduction.

If your itemized deduction for the year to which the refund applies ex-ceeds the standard deduction by the refund or more, you shouldenter the full refund here.

See IRS Form 1040 Instructions for more information on computing theamount to enter, including qualifications for the Tax Benefit Rule for high-income taxpayers. (Property tax refunds are entered at line 21, not here.)

11 Alimony received. You must generally report as taxable income any ali-mony or separate maintenance payments you received. Nevertheless, somepayments are not considered taxable alimony, so you should check IRS Pub.504 (Divorced or Separated Individuals) if in doubt. (You must give the payeryour social security number or else you may be liable for a $50 penalty.)

SPOUSE part of line 11. If any of the payments shown in line 11 arepaid to the spouse, enter that amount here.

12 Business income or loss (C/C-EZ). (Road Map line, supported by ScheduleC.) Five separate Schedules C are available for reporting income and lossesfrom five separate businesses. The sum of net profit or loss from all copies isposted here. If any of the copies are spouse's copies and the filing status ismarried filing jointly, the sum includes spouse amounts and the spouseamounts are stated separately on the next line as well. If any copies ofSchedule C qualify for the short Schedule C-EZ, those copies are automati-cally printed as Schedule C-EZ when the official return is printed. NOTE: Evenwhen you press the Itemize Key at the spouse line, you gain access to all fivecopies of Schedule C, not just the spouse's copies.

13 Capital gain or loss (Schedule D). (Road Map line, supported by ScheduleD.) The sale of stocks and bonds is reported on Schedule D. After you com-plete Schedule D, the net amount is posted to this line, subject to a $3,000limit on losses ($1,500 if married filing separately).

Schedule D can be omitted. (auto-calc, supported by Schedule D.) The IRSnow allows you to omit Sch. D from the return if the income to be reportedon the schedule is only from box 2a of Forms 1099-DIV, boxes 2b, 2c, and2d are zero, and, if filing Form 4952, the amount on line 4g of that form in-cludes all net capital gain from investments if the form includes any qualifieddividends. The software makes this determination for you and answers thisquestion accordingly. If the answer is Yes, the corresponding box is checkedon the official Form 1040 and Schedule D is intentionally omitted from theprinted return.

14 Other gains or losses (Form 4797). (Road Map line, supported by Form4797.) Sales of business property are reported on Form 4797. After youcomplete the form, the amount on line 18b of Form 4797 is posted here. Ifyou have no Form 4797 for the return but you have an amount on line 34 or41a of Form 4684, the Form 4684 amount appears here and the code

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"F4684" is printed next to line 14 on the official printout for the IRS. Other-wise the Form 4684 amount is posted to line 15 of Form 4797 and reflectedin the result posted here from Form 4797.

15a through 16b, IRA distributions, rollovers, pensions, and annuities. All buttwo of the following lines are supported by the 1099-R Worksheet. Which-ever line you itemize, the same set of worksheets is accessed. You mustcomplete a separate worksheet page for each separate Form 1099-R that youreceive.

15a Total IRA distributions. (Supported by the 1099-R Worksheet, Fig-ures 2-4a through 2-4c.) The total of gross IRA distributions from allworksheets, described below, appears here.

Spouse's part of line 15a. (Supported by the 1099-R Worksheet.) Thetotal of gross IRA distributions from spouse worksheets alone ap-pears here. (Your and spouse's distributions are separated so thatForm 8606 can be properly automated.)

15b Taxable amount of IRA distributions. (Road Map line, supported byForm 8606.) Form 8606 is automatically created under a wide vari-ety of conditions, as detailed in our instructions for Form 8606. Be-fore a Form 8606 exists for you, this line is taken from the taxableIRA distributions on all 1099-R Worksheets. Once a Form 8606 ex-ists, however, the taxable amounts computed on Form 8606 areused here in place of the worksheet amount for the correspondingspouse. CAUTION: If conversions are involved, be sure to identifythem on Form 8606 so that you are not improperly taxed or undulypenalized. If under age 59-1/2, also see our instructions for Form5329 to ensure that no penalty is assessed. (Even if you are notrequired to file a Form 1040, you must still file a Form 8606 if dur-ing the tax year you made any nondeductible contributions to anIRA, you received distributions and made any nondeductible contri-butions to any IRA in the past, you converted a traditional IRA to aRoth IRA, received any Roth distributions or recharacterized anyRoth contributions.)

Spouse's part of line 15b. (Road Map line, supported by Form 8606.)Before a Form 8606 exists for spouse, this line is taken from thetaxable IRA distributions on spouse's 1099-R Worksheets. Once aForm 8606 exists for spouse, however, the taxable amounts com-puted on Form 8606 override any spouse amount from the work-sheets.

16a Total pensions and annuities. (Supported by the 1099-R Work-sheet.) The sum of total pensions and annuities from all worksheetsappears here.

Spouse's part of line 16a. (Supported by the 1099-R Worksheet.) Thesum of total pensions and annuities from all worksheets for spouseappears here.


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16b Taxable amount of pensions and annuities. (Supported by the1099-R Worksheet.) The sum of taxable pensions and annuitiesfrom all worksheets appears here.

Spouse's part of line 16b. (Supported by the 1099-R Worksheet.) Thesum of taxable pensions and annuities from all worksheets forspouse appears here.

In addition to the visible lines above, the federal and state taxes withheld areseparately summed from all the worksheets. The totals for federal tax with-held are then used in line 64 of Form 1040, and the totals for state tax with-held is used in line 5 of Schedule A. HINT: Line 15a or 16a may be zero onthe official printout of Form 1040 even though line 15b or 16b is not, in or-der to conform with a strange IRS requirement to enter zero on line 15a or16a if the IRA or pension is fully taxable. CAUTION: If you had any loansagainst your pension or annuity, see IRS Pub. 575 (Pension and Annuity In-come) for information on additional taxes you may owe.

1099-R Worksheet, Figures 2-4a through 2-4c. Most information for the work-sheets is available from the identified boxes on Form 1099-R. However, the boxfor taxable amount may be blank or wrong, as noted below. Only lines markedwith an asterisk (*) are required entries for a paper return. All other entries arerequired for e-file returns only, and should match the amounts shown on the1099-Rs received. The 1099-R Worksheet is now displayed on 3 separatescreens in order to accommodate all the entries required for e-file. Use thePageDown key to view successive screens (and the PageUp key to go back).

Screen 1 of 3:If SPOUSE'S, check

here. You mustanswer Yes ifthis worksheet iscompleted forspouse, so thatthe distributionsfor you andspouse are sepa-rately identifiedas required forthe properautomation ofForms 5329 and8606.

PAYER'S name. En-ter the payer's

name in 25 characters or less. The remaining items in the PAYER’Sbox of Form 1099-R are required only for an e-filed return:

...e-file name control. If you plan to e-file the return you MUST entera 4-character name control here. This is usually the first 4 charac-

FORM 1099-R Screen 1 of 3FORM 1099-R Screen 1 of 3FORM 1099-R Screen 1 of 3FORM 1099-R Screen 1 of 3 Only (*) reqd for paper return Only (*) reqd for paper return Only (*) reqd for paper return Only (*) reqd for paper return If SPOUSE'S, check here....(*)? No If SPOUSE'S, check here....(*)? No If SPOUSE'S, check here....(*)? No If SPOUSE'S, check here....(*)? No Corrected form....? No Corrected form....? No Corrected form....? No Corrected form....? No PAYER'S name.....(*) PAYER'S name.....(*) PAYER'S name.....(*) PAYER'S name.....(*) '' e-file name control... '' e-file name control... '' e-file name control... '' e-file name control... '' name line 2. '' name line 2. '' name line 2. '' name line 2. '' address..... '' address..... '' address..... '' address..... '' city........ '' city........ '' city........ '' city........ '' state................. '' state................. '' state................. '' state................. '' ZIP code.............. '' ZIP code.............. '' ZIP code.............. '' ZIP code.............. PAYER'S Fed ID nu PAYER'S Fed ID nu PAYER'S Fed ID nu PAYER'S Fed ID nummmmber......(*)ber......(*)ber......(*)ber......(*) RECIPIENT�S Fed ID nu RECIPIENT�S Fed ID nu RECIPIENT�S Fed ID nu RECIPIENT�S Fed ID nummmmber.....ber.....ber.....ber..... '' name........ '' name........ '' name........ '' name........ '' address..... '' address..... '' address..... '' address..... '' '' cont�d '' '' cont�d '' '' cont�d '' '' cont�d '' city........ '' city........ '' city........ '' city........ '' state................. '' state................. '' state................. '' state................. '' ZIP code.............. '' ZIP code.............. '' ZIP code.............. '' ZIP code..............

Figure 2-4a. 1099-R Worksheet, Screen 1

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ters of the preceding name, but there are special rules for certaintypes of business names. If you have any doubts, see our 5-pagedocument Instructions for Entry of Name Controls for Businesses,which is available online on the E-FILE ALERTS page of our “CheckWeb for Updates” site (accessible from the Tax Preparer ControlPanel).


...address. Enter address in 25 characters or less. ...city. Enter city in 25 characters or less. ...state. Enter 2-letter state code. ...ZIP code. Enter ZIP code in 10 characters or less.PAYER'S Federal ID number. Enter payer's federal identification number

in the standard XX-XXXXXXX format.RECIPIENT’S Federal ID number. Enter the employee’s SSN in the

standard XXX-XX-XXXX format. This and the remaining parts of theRECIPIENT’S box of Form 1099-R are required only for an e-filed re-turn:...name. Enter name in 25 characters or less....address. Enter address in 25 characters or less.

...address continued. CAUTION: This line is reserved by the IRS forforeign addresses. If you use this line you must enter a period forthe state or else the e-file return will be rejected. See Sec. 7.06 ofIRS Pub. 1346, Part I, for details.

...city. Enter city in 25 characters or less. ...state. Enter 2-letter state code. ...ZIP code. Enter ZIP code in 10 characters or less. ...Account number. Enter the recipient’s account number from which

the distribution was made, id one appears on the 1099-R received.


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Screen 2 of 3:1 Gross distribu-

tion. Enter thetotal distribu-tions shown inbox 1. This in-cludes rollo-vers and pre-mature distri-butions as wellas regular dis-tributions.However, doNOT includeany lump-sumdistributionsthat you reporton Form 4972

for special treatment under 5 or 10-year averaging (in Part III ofForm 4972). However, if you elect only Part II of Form 4972 (20%capital gain election for certain taxpayers born before 1936) but notPart III, you should complete this worksheet and identify the amountfor Form 4972 below line 3. (To qualify for special treatment onForm 4972 the taxpayer must meet certain age requirements andthe distribution must be of a qualified type which excludes IRAs andany distributions with a partial rollover.)

Amount rolled over within 60 days. If the gross amount was immedi-ately all rolled over into another qualified plan IRA, or will be rolledover within 60 days after receiving it, none of it is taxable. Youmust identify the amount rolled over here so that it will be excludedfrom taxable income at line 15b or 16b. If the distribution is froman IRA, the rollover will be reflected in Form 8606 as well for propertax treatment of IRA contributions and distributions. Any amountyou enter here will be flagged to the IRS in the official Form 1040printout by the word ROLLOVER beside the appropriate line (15a or16a) so that the appearance of reduced taxable amount on line 15bor 16b is explained.

2a Taxable amount. Enter the taxable part of the above distributionhere. (Note that the amount you elect to report in Part II of Form4972 will be excluded below line 3 of this worksheet, so you shouldenter the full taxable amount before the exclusion here.) This isgenerally the amount reported in box 2a of Form 1099-R, but thetaxable amount shown on Form 1099-R could be wrong, and mighteven be zero if there was no attempt by the payer to determine theamount! It is YOUR responsibility to enter the correct amount here.If part of your IRA contribution for the year is not deductible on line

FORM 1099-R Screen 2 of 3FORM 1099-R Screen 2 of 3FORM 1099-R Screen 2 of 3FORM 1099-R Screen 2 of 3 1 Gross distribution......(*) 0 1 Gross distribution......(*) 0 1 Gross distribution......(*) 0 1 Gross distribution......(*) 0 Amt rolled ovr in 60days(*) 0 Amt rolled ovr in 60days(*) 0 Amt rolled ovr in 60days(*) 0 Amt rolled ovr in 60days(*) 0 2a Taxable amount..........(*) 0 2a Taxable amount..........(*) 0 2a Taxable amount..........(*) 0 2a Taxable amount..........(*) 0 2b Taxable amt not determined.? No 2b Taxable amt not determined.? No 2b Taxable amt not determined.? No 2b Taxable amt not determined.? No Total distribution....? No Total distribution....? No Total distribution....? No Total distribution....? No 3 Capital gain............(*) 0 3 Capital gain............(*) 0 3 Capital gain............(*) 0 3 Capital gain............(*) 0 Reporting box 3 on 4972 (*)? No Reporting box 3 on 4972 (*)? No Reporting box 3 on 4972 (*)? No Reporting box 3 on 4972 (*)? No 4 Fed tax wthld...........(*) 0 4 Fed tax wthld...........(*) 0 4 Fed tax wthld...........(*) 0 4 Fed tax wthld...........(*) 0 5 Employee contribn.......(*) 0 5 Employee contribn.......(*) 0 5 Employee contribn.......(*) 0 5 Employee contribn.......(*) 0 6 Net unrealized appreciat�n. 0 6 Net unrealized appreciat�n. 0 6 Net unrealized appreciat�n. 0 6 Net unrealized appreciat�n. 0 7 Distribution code.......... 7 Distribution code.......... 7 Distribution code.......... 7 Distribution code.......... IRA/SEP/SIMPLE.........(*)? No IRA/SEP/SIMPLE.........(*)? No IRA/SEP/SIMPLE.........(*)? No IRA/SEP/SIMPLE.........(*)? No Roth(even if not above)(*)? No Roth(even if not above)(*)? No Roth(even if not above)(*)? No Roth(even if not above)(*)? No 7 IRA/SEP/SIMPLE/ROTH distrbn 7 IRA/SEP/SIMPLE/ROTH distrbn 7 IRA/SEP/SIMPLE/ROTH distrbn 7 IRA/SEP/SIMPLE/ROTH distrbn▒ No▒ No▒ No▒ No 8 Other...................... 0 8 Other...................... 0 8 Other...................... 0 8 Other...................... 0 Your % of other........ Your % of other........ Your % of other........ Your % of other........ 9a Your % of total distributn 0 9a Your % of total distributn 0 9a Your % of total distributn 0 9a Your % of total distributn 0 9b Total employee contributns 0 9b Total employee contributns 0 9b Total employee contributns 0 9b Total employee contributns 0

Figure 2-4b. 1099-R Worksheet, Screen 2

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32, part of the distribution may be nontaxable even though it is nota rollover. Exception: If the distribution is an IRA (identified by yourentry for box 7, below), any amount you enter here will be ignoredif you have a Form 8606 for this taxpayer. The taxable amount willbe computed on Form 8606 and posted to line 15b upon final recal-culation of the return.. Instructions for computing the taxableamount appear in various IRS publications, and depend on the spe-cifics of the payments. See:IRS Pub. 525, Taxable and Nontaxable Income, for military disability pensions,IRS Pub. 575, Pension and Annuity Income, for survivors under a joint and survivor's annuity,IRS Pub. 590, Individual Retirement Arrangements (IRAs), for all types of IRAs, including the new ones,IRS Pub. 721, Tax Guide to U.S. Civil Service Retirement Benefits, for annuities starting before July 2, 1986,IRS Pub. 939, Pension General Rule (Nonsimplified Method),

for annuities starting after July 1, 1986 that do not qualify for the Simplified General Rule, andIRS Instructions for Form 1040, line 16b, for lump-sum distributions and for annuities starting after 7/1/86 that do qualify for the Simplified General Rule.

2b Taxable amount not determined? A Yes answer means that thepayer did not or could not determine the taxable amount for box 2aand therefore left box 2a blank. This and the next answer are usedonly for e-file output.

Total distribution? A Yes answer means that this distribution closedout your account.

3 Capital gain. This is the part of 2a that stems from capital gains. Ifthe distribution is a lump-sum distribution and the pension ownerwas born before 1936, this amount could received favorable taxtreatment, as described next. (This box will be blank for IRAs be-cause IRAs are not eligible for the special treatment.)

Reporting box 3 on Form 4972? If you qualify as described above, youmay elect to report the amount on line 3 as a capital gain in part IIof Form 4972, rather than including it in the taxable amount for line16b of Form 1040. If you make this election, answer Yes here sothat the amount will be excluded from line 16b of Form 1040. TIP:If you elect 10-year averaging in Part III of Form 4972, you shouldnot be completing this worksheet at all because the entire distribu-tion will be taxed through Form 4972 instead. .

4 Federal income tax withheld. Enter the withholding shown in box 4.This amount will be reflected in Form 1040 line 64. You must at-tach a copy of the Form 1099-R to the return if it shows ANY Fed-eral income tax withheld.


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5 Employee contribution. The amount shown in box 5 of Form 1099-Ris the amount of any pension contributions taxable to you whenmade. By entering the amount here you ensure that the amount isnot included in taxable income for line 16b of Form 1040.

6 Net unrealized appreciation. This amount represents securities of theemployer’s company received with the distribution, and is not gen-erally taxed until the securities are sold.

7 Distribution code. This will be a number or letter that describes thetype of distribution to the IRS. If the code is 2, 3, 4, G, or H, yourdistribution is generally not taxable. See the box titled “You may bequalified to omit Form 5329” in our instructions for Form 5329 tosee how to ensure that distributions for these codes are subject to apenalty tax on Form 5329.

IRA/SEP/SIMPLE? Answer Yes if the distribution is from a traditionalIRA, a SEP, or a SIMPLE.

Roth (even if not above)? Answer Yes if the distribution is from a RothIRA. Although some payers may check the IRA/SEP/SIMPLE box forthese distributions, but the IRS intends that box to indicate only tra-ditional IRAs. CAUTION: If you answer Yes, be sure to ALSO iden-tify the IRA distributions as a Roth IRA distribution on Form 8606 (ifthere is a Form 8606 in the return for the recipient); otherwise thesoftware will assume the distribution is from a traditional IRA.

7 IRA/SEP/SIMPLE/ROTH distribution? (auto-calc) Based on the pre-ceding two answers, if a Yes appears here the distribution flows toForm 8606 for the appropriate spouse, for the proper computationof tax for line 15b.

8 Other. This is the value any annuity contract received as a part of thedistribution. It is not taxable in the current year, but is needed forForm 4972 if you choose the 10-year averaging method for a lump-sum distribution.Your % of other. If the annuity contract reported in line 8 was madeto more than one person, this is the percentage of the annuity con-tract distribution attributable to you.

9a Your % of total distribution. If the distribution was part of a total dis-tribution made to more than one person, the percentage you re-ceived is shown here.

9b Total employee contributions. This is the amount of the employee’stotal investment in certain annuities.

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Screen 3 of 3:10 State income

tax withheld.Enter anywithholdingshown in box10 for the firststate identifiedin line 11.2nd State taxwithheld. Enterthe withhold-ing shown inbox 10 for thesecond stateidentified inline 11.

11 State. Enter the2-letter statecode for distributions subject to state income tax.1st State Payer IDN. Enter the payer's state ID number shown inbox 11.2nd State. Enter the 2-letter state code for the second state.2nd State Payer IDN. Enter the payer's state ID number shown inthe bottom half of box 11.

12 State distribution. Enter the distribution subject to state income taxfor the 1st state. This will usually be blank or the same as box 1.2nd State distribution. Enter the distribution subject to state incometax for the 2nd state.

13 Local tax withheld. Enter the withholding for a locality as shown inbox 13.2nd Local income tax withheld. Enter the withholding for the 2ndlocality, if any.

14 Locality. Enter the locality shown in the top half of box 14.2nd Locality. Enter the locality shown in the bottom half of box 14.

15 Local distribution. Enter the distribution subject to local income taxfor the 1st locality.2nd Local distribution. Enter the distribution subject to local in-come tax for the 2nd locality.

Gross IRA distributions for 15a. (auto-calc) Taken from the entry forgross distributions (box 1) when the answer to theIRA/SEP/SIMPLE/ROTH question is Yes. Even though the IRS in-structions state that no entry is required here when the distributionis fully taxable, the amount is posted here to ensure the properautomation of Forms 5329 and 8606.

FORM 1099-R Screen 3 of 3FORM 1099-R Screen 3 of 3FORM 1099-R Screen 3 of 3FORM 1099-R Screen 3 of 3 10 State tax withheld......(*) 0 10 State tax withheld......(*) 0 10 State tax withheld......(*) 0 10 State tax withheld......(*) 0 2nd State tax withheld.... 0 2nd State tax withheld.... 0 2nd State tax withheld.... 0 2nd State tax withheld.... 0 11 State...................(*) 11 State...................(*) 11 State...................(*) 11 State...................(*) 1st state Payer IDN....... 1st state Payer IDN....... 1st state Payer IDN....... 1st state Payer IDN....... 2nd state.................. 2nd state.................. 2nd state.................. 2nd state.................. 2nd state Payer IDN....... 2nd state Payer IDN....... 2nd state Payer IDN....... 2nd state Payer IDN....... 12 State distribution......... 0 12 State distribution......... 0 12 State distribution......... 0 12 State distribution......... 0 2nd State distribution.... 0 2nd State distribution.... 0 2nd State distribution.... 0 2nd State distribution.... 0 13 Local tax withheld......(*) 0 13 Local tax withheld......(*) 0 13 Local tax withheld......(*) 0 13 Local tax withheld......(*) 0 2nd Local inc tax withheld 0 2nd Local inc tax withheld 0 2nd Local inc tax withheld 0 2nd Local inc tax withheld 0 14 Locality................(*) 0 14 Locality................(*) 0 14 Locality................(*) 0 14 Locality................(*) 0 2nd Locality............... 0 2nd Locality............... 0 2nd Locality............... 0 2nd Locality............... 0 15 Local distribution......... 0 15 Local distribution......... 0 15 Local distribution......... 0 15 Local distribution......... 0 2nd Local distribution.... 0 2nd Local distribution.... 0 2nd Local distribution.... 0 2nd Local distribution.... 0 Gross IRA distrb for 15a Gross IRA distrb for 15a Gross IRA distrb for 15a Gross IRA distrb for 15a▒ 0▒ 0▒ 0▒ 0 Taxable IRA dist for 15b Taxable IRA dist for 15b Taxable IRA dist for 15b Taxable IRA dist for 15b▒ 0▒ 0▒ 0▒ 0 Gross pensns,etc for 16a Gross pensns,etc for 16a Gross pensns,etc for 16a Gross pensns,etc for 16a▒ 0▒ 0▒ 0▒ 0 Taxbl pensns,etc for 16b Taxbl pensns,etc for 16b Taxbl pensns,etc for 16b Taxbl pensns,etc for 16b▒ 0▒ 0▒ 0▒ 0 Tip: Use 8606 for min. taxable Tip: Use 8606 for min. taxable Tip: Use 8606 for min. taxable Tip: Use 8606 for min. taxable Source (S=Standard,N=Non-Std): Source (S=Standard,N=Non-Std): Source (S=Standard,N=Non-Std): Source (S=Standard,N=Non-Std):

Figure 2-4c. 1099-R Worksheet, Screen 3


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Taxable IRA distributions for 15b. (auto-calc) Taken as the lesser of line2a or line 1 less rollovers when the answer to theIRA/SEP/SIMPLE/ROTH question is Yes. However, any amountposted from this worksheet to Form 1040 is overridden by compu-tations on Form 8606 for this spouse.

Gross pensions, annuities, etc., for 16a. (auto-calc) Taken from the en-try for gross distributions (box 1) when the answer to theIRA/SEP/SIMPLE/ROTH question is No. Even though the IRS instruc-tions state that no entry is required here when the distribution isfully taxable, the amount is posted here to ensure the proper auto-mation of Schedule R and Form 5329.

Taxable pensions, annuities, etc., for 16b. (auto-calc) Taken as thelesser of line 2a or line 1 less rollovers or contributions on line 5when the answer to the IRA/SEP question is No.

The posting to lines 15a, 15b, 16a, 16b, and the withholding lines is auto-matic once you complete the worksheets.

17 Rents, royalties, partnerships, estates, trusts, etc. (Schedule E). (RoadMap line, supported by Schedule E.) Rental income and most regular incomereported to you on a Schedule K-1 is typically reported on Schedule E. Thesingle Schedule E that is built into the software supports an unlimited numberof properties.

18 Farm income or loss (Schedule F). (Road Map lines, supported by ScheduleF.) Five separate Schedules F are available for reporting income and lossesfrom five separate farms. The sum of net profit or loss from all copies isposted here. If any of the copies are spouse's copies and the filing status ismarried filing jointly, the sum includes spouse amounts and the spouseamounts are stated separately on the next line as well. NOTE: Even when youpress the Itemize Key at the spouse line, you gain access to all five copies ofSchedule F, not just the spouse's copies.

19 Unemployment compensation. Unemployment compensation is fully tax-able. You should receive a Form 1099-G from the government unemploymentagency, from which you can determine the following entries:

Unemployment compensation (1099-G, box 1). Enter the total amountshown on box 1 of the Form 1099-G that you receive from the un-employment agency.

2006 overpayment REPAID. Enter here any amount you paid back tothe government during the tax year only if it is for an overpaymentreceived in the same year. This amount will be flagged on the offi-cial printout of Form 1040 and subtracted from the preceding in-come. (Repayment of unemployment compensation that was re-ported as income in an earlier year is not reported here. Instead, it isusually reported as a deduction on line 20 of Schedule A, or, forsome repayments over $3,000, a specially computed tax credit isclaimed on the "Other special payments" line following line 71 ofForm 1040, as detailed in IRS Pub. 525, Taxable and NontaxableIncome, in its section on Repayments.)

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Federal tax withheld on Form 1099-G. Enter any backup withholdingshown in box 4 of the Form 1099-G. This entry will be reflecting inthe total withholding at Form 1040 line 64.

19 Unemployment compensation. (auto-calc) Computed as the aboveunemployment compensation less the above repayment.

20 Social security benefits. The taxable part of any social security benefits iscomputed automatically based on your entry:

20a Social security benefits, total received. Enter total benefits shownon all Forms SSA-1099 and RRB-1099 received, less any 2006benefits repaid in 2006.

Federal tax withheld on Form SSA-1099. Enter withholding shown onForm SSA-1099 or RRB-1099. This amount will be reflected in Form1040 line 64.

20b Taxable amount of social security benefits. (auto-calc) Computedautomatically using the IRS Social Security Benefits Worksheet,which is built into the software and fully automatic. The result canbe as high as 85% of the amount on line 20a, but a combination oflow income, low amount on 20a, and a filing status other than mar-ried filing separately can substantially reduce this amount.

CAUTION: The law may be more complex than you realize, so you should re-frain from overriding the result on line 20b, unless one of the special circum-stances cited below apply. The automatic calculation includes often-overlooked subtleties, including a special calculation for those covered by aretirement plan at work (including self-employment) who also receive socialsecurity benefits and contribute to an IRA. It also takes into account requiredadditions to AGI, including foreign earned income exclusion, foreign housingdeduction or exclusion, and excluded income from U.S. possessions. TheONLY taxpayers who are justified in overriding this line are those who (1) re-paid benefits in 2006 in excess of the actual benefits received or (2) exercisea special lump-sum election. See IRS Pub. 915 for details and applicableworksheets.

21 Other income. All taxable unearned income not reported elsewhere is re-ported here. ONLY UNearned income should be reported here. The IRS re-quires you to use Schedule C, E, or F for earned income, no matter how smallthe amount. The first few lines are reserved for specific types of unearned in-come so that the software can automate their impact on certain other deduc-tions, taxes, and credits.

Forms 2555 and 2555-EZ. (If Premium Level, supported by Form 2555.)The amount to report here is the amount of foreign income andhousing allowance excluded from taxation through Form 2555. It isentered here as a negative number so that it reduces taxable in-come. It is used in the modified AGI of several calculations on thereturn. The amounts for these lines are shown on line 43 of Form2555 and line 18 of Form 2555-EZ. (Note that Form 2555-EZ is asimplified form of Form 2555 which is printed in place of Form2555 when appropriate.)


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Gambling income. (Supported by the W-2G Worksheet, Figures 2-5aand 2-5b.) Only the gambling winnings are reported here, not re-duced by gambling losses. (Gambling losses are claimed at line 27of Schedule A, not here, but you can deduct on Schedule A nomore than the winnings reported here.) Your winnings may havebeen reported to you on a Form W-2G. If you received a Form W-2G, you MUST file a copy of it with the return. The gross winningsentered in line 1 of the W-2G Worksheets is shown here and re-flected in the total for Form 1040 line 21.

Federal tax withheld on Form W-2G. (Supported by the W-2G Work-sheet.) Any backup withholding entered in line 2 of the W-2GWorksheets is shown here and reflected in Form 1040 line 64.

State tax withheld on Form W-2G. (Supported by the W-2G Work-sheet.) Any backup withholding entered in line 14 of the W-2GWorksheets is shown here and reflected in Schedule A line 5.

Form 8814 income. (Road Map line, supported by Form 8814.) Form8814 is used to report investment (unearned) income of your chil-dren when you are not required to file a separate return for thechild. Fifteen separate copies of Form 8814 are built into the soft-ware for reporting the qualifying unearned income of up to 15 chil-dren. The sum of investment income reported on all such Forms8814, excluding capital gains distributions, is posted here.

HSA income. (If Premium Level, supported by Form 8889.) Taxable dis-tributions from Health Savings Accounts (HSAs) are reported here,from Form 8889, line 14.

MSA income. (If Premium Level, supported by Form 8853.) Taxable dis-tributions from Archer Medical Savings Accounts (MSAs) are re-ported here, from Form 8853, line 10.

MedMSA income. (If Premium Level, supported by Form 8853.) Taxabledistributions from Medicare Advantage MSAs are reported here,from Form 8853, line 14.

LTC income. (If Premium Level, supported by Form 8853.) Taxablepayments from Long-Term Care (LTC) Insurance Contracts are re-ported here, from Form 8853, line 28.

Personal rental income. This is income from rental of personal propertyif you were not in the business of renting such property. You mustenter the gross rental income here. Expenses related to this incomeare deducted above line 36, not here. These amounts affect thecomputation of the Earned Income Credit, which depends on amodified version of AGI.

Jury duty. Enter all jury duty fees received. Do NOT reduce your entryby any amount given to an employer; instead, report these amountsas an adjustment at line 34.

You: ESA/QTP distributions. Enter here any taxable distributions YOUreceived from Coverdell Education Savings Accounts (ESAs) andtaxable earnings received from Qualified Tuition Programs (QTPs).

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An entry here is subject to a 10% penalty through our automaticallycreated Form 5329, although you may qualify for an exception onForm 5329 .

Spouse: ESA/QTP distributions. Enter here the same type of income asabove when paid to the SPOUSE. It is treated the same way as de-scribed above, but using the spouse’s Form 5329.

All other taxable UNEARNED income not reported elsewhere should be re-ported on the following two lines, including reimbursed medical expenses, re-covered bad debts that were deducted in a prior Schedule D, and incomefrom prizes, election board duty, and any refund of property tax deducted in aprior year. Enter net operating loss (NOL) carried over (forward or back) fromanother tax year on the following lines as a negative unearned income, eventhough it may have been negative EARNED income in the year it occurred,because it cannot be used to reduce earned income in other tax years.

TIP: There are intentionally no lines for EARNED income for line 21 becausethe IRS requires you to report all earned income other than wages in theseparate schedules to which they relate:

Self-employment income from a sole-proprietorship must be reportedon Schedule C or F,

Self-employment from a partnership must be reported in Part II ofSchedule E.

All other earned income must be included in line 7 of Form 1040.

You: Other (unearned) income. Enter here any taxable unearned incomefor YOU not reported in lines 7 through 20, providing details in asupporting statement for this line. See Table 2-1 for examples.

Spouse: Other (unearned) income. Enter here taxable unearned incomefor SPOUSE not reported in lines 7 through 20, providing details in asupporting statement for this line. See Table 2-1 for examples.

Other income (except Form 2555). (auto-calc) The sum of all incomeitems shown above without any reduction from Form 2555 or2555-EZ. (The amounts from Forms 2555 and 2555-EZ are shownseparately in the official printout of Form 1040 even though theyare included in the below total for line 21.)

21 Other income. (auto-calc) Computed as the preceding line reduced by theexclusions shown previously from Forms 2555 and 2555-EZ.

22 TOTAL INCOME. (auto-calc) The sum of all totals on lines 7 through 21.


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W-2G Worksheet, Figures 2-5a and 2-5b. All information for the worksheets isavailable from the identified boxes on Form W-2G. Only lines marked with anasterisk (*) are required entries for a paper return. All other entries are re-quired for e-file returns only, and should match the amounts shown on theW2-Gs received. The W-2G Worksheet is displayed on 2 separate screens inorder to accommodate all the entries required for e-file. Use the PageDownkey to view successive screens (and the PageUp key to go back).

Screen 1 of 2:If SPOUSE'S, check

here. AnswerYes if spousewas the recipi-ent of the gam-bling income.

PAYER'S name. En-ter the payer'sname in 25characters orless. The re-maining items inthe PAYER’Sbox of Form W-2G are requiredonly for an e-filed return:

...e-file name control. If you plan to e-file the return you MUST entera 4-character name control here. This is usually the first 4 charac-ters of the preceding name, but there are special rules for certaintypes of business names. If you have any doubts, see our 5-pagedocument Instructions for Entry of Name Controls for Businesses,which is available online on the E-FILE ALERTS page of our “CheckWeb for Updates” site (accessible from the Tax Preparer ControlPanel).


...address. Enter address in 25 characters or less. ...city. Enter city in 25 characters or less. ...state. Enter 2-letter state code. ...ZIP code. Enter ZIP code in 10 characters or less. ...telephone number. Enter in the (XXX) XXX-XXXX format. No

more than 10 numbers are recognized by the IRS for e-file.PAYER'S Federal ID number. Enter payer's federal identification number

in the standard XX-XXXXXXX format.

FORM W-2G (Screen 1 of 2)FORM W-2G (Screen 1 of 2)FORM W-2G (Screen 1 of 2)FORM W-2G (Screen 1 of 2) Only (*) reqd for paper return Only (*) reqd for paper return Only (*) reqd for paper return Only (*) reqd for paper return If SPOUSE'S, check here....(*)? No If SPOUSE'S, check here....(*)? No If SPOUSE'S, check here....(*)? No If SPOUSE'S, check here....(*)? No PAYER'S name.....(*) PAYER'S name.....(*) PAYER'S name.....(*) PAYER'S name.....(*) '' e-file name control... '' e-file name control... '' e-file name control... '' e-file name control... '' name line 2. '' name line 2. '' name line 2. '' name line 2. '' address..... '' address..... '' address..... '' address..... '' city........ '' city........ '' city........ '' city........ '' state................. '' state................. '' state................. '' state................. '' ZIP code.............. '' ZIP code.............. '' ZIP code.............. '' ZIP code.............. '' telephone number...... '' telephone number...... '' telephone number...... '' telephone number...... PAYER'S Fed ID nu PAYER'S Fed ID nu PAYER'S Fed ID nu PAYER'S Fed ID nummmmber......(*)ber......(*)ber......(*)ber......(*) WINNER�S name....... WINNER�S name....... WINNER�S name....... WINNER�S name....... '' address..... '' address..... '' address..... '' address..... '' '' cont�d '' '' cont�d '' '' cont�d '' '' cont�d '' city........ '' city........ '' city........ '' city........ '' state................. '' state................. '' state................. '' state................. '' ZIP code.............. '' ZIP code.............. '' ZIP code.............. '' ZIP code.............. [Press PgDn or > for lns 1-14] [Press PgDn or > for lns 1-14] [Press PgDn or > for lns 1-14] [Press PgDn or > for lns 1-14]

Figure 2-5a. W-2G Worksheet, Screen 1

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WINNER’S name. Enter the winner’s full name in 25 characters or less.This and the remaining parts of the WINNER’S box of Form W-2Gare required only for an e-filed return:...address. Enter address in 25 characters or less.

...address continued. CAUTION: This line is reserved by the IRS forforeign addresses. If you use this line you must enter a period forthe state or else the e-file return will be rejected. See Sec. 7.06 ofIRS Pub. 1346, Part I, for details.

...city. Enter city in 25 characters or less. ...state. Enter 2-letter state code. ...ZIP code. Enter ZIP code in 10 characters or less.

Screen 2 of 2:1 Gross winnings.

Enter totalwinningsshown in box1.

2 Federal incometax withheld.Enter with-holding shownin box 2.

3 Type of wager.Enter the typeas shown inbox 3.

4 Date won. Enterin the standard mm/dd/yyyy format.

5 Transaction. Enter as indicated.6 Race. Enter as indicated.7 Winnings from identical wagers. Enter as indicated.8 Cashier. Enter as indicated.9 WINNER’S SSN. Enter in the standard XXX-XX-XXXX format.10 Window. Enter as indicated.11 First I.D. Enter as indicated.12 Second First I.D. Enter as indicated.13 PAYER’S state. Enter the standard 2-letter code for the state.

PAYER’s state IDN. Enter as indicated.14 State income tax withheld. Enter withholding for the state indicated

in line 13.Source (S=Standard, N=Nonstandard). Normally S, enter N only if

modified.

FORM W-2G (Screen 2 of 2)FORM W-2G (Screen 2 of 2)FORM W-2G (Screen 2 of 2)FORM W-2G (Screen 2 of 2) 1 Gross winnings..........(*) 0 1 Gross winnings..........(*) 0 1 Gross winnings..........(*) 0 1 Gross winnings..........(*) 0 2 Fed income tax withheld.(*) 0 2 Fed income tax withheld.(*) 0 2 Fed income tax withheld.(*) 0 2 Fed income tax withheld.(*) 0 3 Type of wager.............. 0 3 Type of wager.............. 0 3 Type of wager.............. 0 3 Type of wager.............. 0 4 Date won................... 4 Date won................... 4 Date won................... 4 Date won................... 5 Transaction................ 5 Transaction................ 5 Transaction................ 5 Transaction................ 6 Race....................... 6 Race....................... 6 Race....................... 6 Race....................... 7 Winnings identical wages... 0 7 Winnings identical wages... 0 7 Winnings identical wages... 0 7 Winnings identical wages... 0 8 Cashier.................... 8 Cashier.................... 8 Cashier.................... 8 Cashier.................... 9 WINNER�S SSN............... 9 WINNER�S SSN............... 9 WINNER�S SSN............... 9 WINNER�S SSN............... 10 Window..................... 10 Window..................... 10 Window..................... 10 Window..................... 11 First I.D.................. 11 First I.D.................. 11 First I.D.................. 11 First I.D.................. 12 Second I.D................. 12 Second I.D................. 12 Second I.D................. 12 Second I.D................. 13 PAYER�s state.............. 13 PAYER�s state.............. 13 PAYER�s state.............. 13 PAYER�s state.............. PAYER�s state IDN.......... PAYER�s state IDN.......... PAYER�s state IDN.......... PAYER�s state IDN.......... 14 State income tax wthheld(*) 0 14 State income tax wthheld(*) 0 14 State income tax wthheld(*) 0 14 State income tax wthheld(*) 0 Source (S=Standard,N=Non-Std): Source (S=Standard,N=Non-Std): Source (S=Standard,N=Non-Std): Source (S=Standard,N=Non-Std):

Figure 2-5b. W-2G Worksheet, Screen 2


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CERTAIN NONTAXABLE INCOME. Selected nontaxable income is reportedhere to ensure the proper limitations on various credits and deductions.

Nontaxable combat pay (see Form W-2). If you (or spouse if filingjointly) were a member of the U.S. Armed Forces who served in acombat zone during the tax year, certain pay is excluded from in-come as shown in box 14 of your Form W-2 as code Q. You mustenter that amount here. It affects the computation of earned incomefor the Earned Income Credit (line 66a), the Additional Child TaxCredit (Form 8812), and the Dependent Care Credit (Form 2441),subject to certain elections. The amount you enter here is shownbelow line 66a in the software, but is used for line 66b only if youmake an election there to include it in earned income when com-puting the EIC. It is used in Form 8812 if not used in the EIC, andit is always used in Part II of Form 2441. (It is normally used in PartIII of Form 2441 as well, but you can elect out of its use there.)Enter on this line the total for both spouses combined.

Spouse part of above. If any of the total amount entered above isfrom the spouse’s Form W-2, enter that amount here.

Excluded benefits from Form 8839. (If Premium Level, supported byForm 8853.) Excluded benefits are employer-paid amounts for adop-tion expenses, from line 30 of Form 8839 (Adoption Credit). Thisentry affects modified AGI used in computations of taxable socialsecurity benefits, IRA deductions, student loan deductions, andtaxes and limitations on all kinds of IRAs on Form 8606.

Scholarships, etc., not reported. Enter all scholarships, fellowships, as-sistance allowance, etc., that are not included in taxable income.(Do not include gifts or inheritances.) This entry can affect yourstudent loan interest deduction at line 33.

U.S. possessions income not reported. This is income not reportable onyour U.S. return due to an agreement with the U.S. possession orterritory. It generally applies to income earned in Guam, Puerto Rico,American Samoa, and American Northern Mariana Islands. It af-fects the modified AGI used in the computation of the child taxcredit, taxable social security benefits, and student loan deductions.

Nontaxable earnings from ESAs and QTPs. Earnings from CoverdellEducation Savings Accounts (ESAs) and Qualified Tuition Programs(QTPs) must be reported here, even though nontaxable, becausethey affect the proper application of limitations on education deduc-tions: Educator Expenses at line 23, Student Loan Interest Deduc-tion at line 33, and Tuition and Fees Deduction at line 35.

Excluded bond interest (Schedule B, line 3). (Auto-calc line, supportedby Schedule B.) The excludable interest on series EE savings bondsis posyed here from line 3 of Schedule B. You must use Form 8815to figure the amount for Schedule B and file the schedule with yourreturn, even if total taxable interest and dividends is under $1,500.This entry is used in modified AGI for several computations, includ-

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ing IRA limitations on Forms 1040 and 8606, and the education de-ductions cited for the preceding entry.

ADJUSTMENTS TO INCOME. Deductions that directly reduce adjusted grossincome are claimed in lines 23 through 36 of Form 1040.

Archer MSA and educator expenses. Because the deduction for teachers’ ex-penses expired at the end of 2005, the IRS replaced the use of this line withthe Archer MSA deduction, which was formerly a write-in adjustment for line36. However, because of the December tax bill, the IRS now instructs you toshare this line with the educator expense deduction, even though the IRSform has not been changed to reflect this sharing. Our form therefore pro-vides data entry for both deductions at this line:

Educator expenses. If you were an eligible educator in 2006, you candeduct up to $250 of your unreimbursed (out-of-pocket) expenses atthis line. You must be a grade K through 12 teacher and the expensemust have been for books, supplies, and other supplementary materials.

YOUR qualified educator expenses. Enter qualified expenses if youwere an eligible educator. CAUTION: To satisfy IRS reporting re-quirements, you must itemize this line and enter the amount in thesupport if also claiming a deduction for Archer MSA below.

SPOUSE qualified educator expenses. Enter qualified expenses if thespouse was an eligible educator. CAUTION: To satisfy IRS reportingrequirements, you must itemize this line and enter the amount in thesupport if also claiming a deduction for Archer MSA below.

Allowed deduction – code E. (auto-calc) No more than $250 is al-lowed for each eligible spouse, so the maximum for this line is$500. However, the total may be further reduced by certain non-taxable income if the amount by which the expenses exceed $250each is less than the relevant nontaxable income, including nontax-able earnings from ESAs and QTPs, and excludable interest from se-ries EE savings bonds. If an amount appears here, it is reflected inthe total for line 23 and the code E is printed next to line 23 on theofficial printout of Form 1040.

Archer MSA deduction (Form 8853). (If Premium Level, supported byForm 8853.) Archer MSAs (Medical Savings Accounts) are a form ofself-insurance for the self-employed and employees of small companies.Contributions can be deducted up to a limit that is generally 65% to75% of the deductible for the plan, but you are allowed no deduction ifyour employer made any contributions to your Archer MSA during thetax year. The amount on line 7 of a Form 8853 you complete is re-ported here.

23 Archer MSA and educator expense. (auto-calc) Computed as the sum ofthe “Allowed deduction – code E” and “Archer MSA deduction.” If only theeducator expense is claimed at this line, an “E” is printed by line 23 on theofficial printout of Form 1040. If both the educator expense and Archer MSAdeductions are claimed, a “B” is printed and, if you itemized the educator line


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as instructed, a supporting statement is printed showing the breakdown be-tween the two.

24 Certain business expenses of reservists, performing artists, amd fee-basis government officials. (Road Map line, supported by Form 2106.) Theamount on this line was formerly reported as a “write-in” amount at the totalfor adjustments (line 36 on the current return), but now has its own line. Taxpayers in the cited targeted groups do not have to itemize deductions onSchedule A in order to deduct business expenses, but are allowed an adjust-ment here instead. See Form 2106 for details. (Five separate Forms 2106 areavailable, one for each employer, and can be printed as Form 2106-EZ Ifqualified.)

25 Health savings account deduction (Form 8889). (If Premium Level, sup-ported by Form 8889.) If you or someone other than your employer contrib-uted to your Health Savings Account (HSA), claim your HSA deduction here,from Form 8889, line 11.

26 Moving expenses (Form 3903). (Road Map line, supported by Form 3903.)Three Forms 3903 are accessible at this line, one for each move in the year.

27 Half of self-employment tax. (auto-calc lines) Half of the amount on Form1040, line 58 (tax from Schedule SE) appears here.

Self-employed SEP, SIMPLE, and qualified plans deduction. If self-employed,enter here any tax deductible contributions to any qualified plan (includingKeogh plans) or your own SEP if you are the employer contributing to yourown plan. The ceilings on these deductions depend on the type of plan, andcan be quite involved, but you must be self-employed to qualify for a deduc-tion here. You should therefore consult IRS Pub. 560 (Retirement Plans forthe Self-Employed) before making an entry here. CAUTION: Unless you arethe employer, contributions to your SEP payments are NOT deductible here:employer contributions to employee plans are already excluded from incomeon your W-2, and your contributions are considered as IRA contributions anddeducted at line 32, not here.

YOUR payments to self-employed SEP, etc. Enter here all contributionsmade in your behalf up to your allowed ceiling. HINT: If the plan is adefined benefit plan, you should make your entry in a supportingstatement for this line and enter "DB" in the description column, inorder to satisfy the reporting requirements of the IRS.

SPOUSE payments to self-employed SEP, etc. Enter here all contribu-tions made in spouse's behalf up to spouse's allowed ceiling. (Seethe above HINT as well.)

28 Self-employed SEP, SIMPLE, and qualified plans. (auto-calc) Computed asthe sum of the above two lines, excluding any entry for a spouse who hasNO self-employment income. CAUTION: The person claiming a deduction onthis line must be self-employed. The software assumes that a spouse is NOTself-employed and zeroes the amount for line 28 for that spouse if it findsthat the spouse's net earned income excluding wages is zero.

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Self-employed health insurance deduction. Qualified self-employed taxpayerscan now deduct up to 100% of the cost of health insurance for themselves:

Qualified self-employed health insurance. Enter here the qualifiedamount of total health insurance that was paid during the tax year.Amounts paid for any months you were eligible for your or yourspouse's employer's subsidized health plan do NOT qualify.

Amount excluded from Form 8885. (If Premium Level, supported byForm 8885.) You cannot claim a deduction here for any health in-surance payments you used to claim a credit through Form 8885(Health Coverage Credit). Accordingly, if the health insurance pay-ments reported on your copy of Form 8885 are the same paymentsas entered on the preceding line, the amount here should reflect theamount on line 4 of Form 8885 reduced by any advance paymentsshown on line 6 of the form.

Net eligible insurance paid. (auto-calc) Computed as the insurance en-tered above less the preceding exclusion, this is the amount to beconsidered for the computation at line 29.

29 Self-employed health insurance deduction. (auto-calc) The deduction iscomputed using the IRS worksheet on the assumption that you have only onesource of self-employment income. The part of the preceding total NOT de-ducted on this line is automatically included in line 1 of Schedule A. You mayhave to override the calculation for line 29 and use the procedure in IRS Pub.535 (Business Expenses) if

1) you have income from an S Corporation in which you are a morethan 2% shareholder or you have income from more than onesource of self-employment (since the deduction is limited by law toearned income from the business under which the insurance plan isestablished),

2) you file Form 2555 (Foreign Earned Income), 2555-EZ (ForeignEarned Income Exclusion), or 4563 (Exclusion of Income For BonaFide Residents of Samoa), or you exclude income from sourceswithin Puerto Rico,

3) you claim a net operating loss (NOL) deduction (see IRS Pub. 536,Net Operating Losses),

4) the insurance includes amounts for qualified long-term care insur-ance,

5) the plan was set up under an S Corporation from which you receivewages and are a more than 2% shareholder, or

6) your 2006 tax year ended on a date other than December 31, 2006(which is not allowed by Tax Preparer because it is almost never al-lowed by the IRS for individuals).

See IRS Publication 535 (Business Expenses) for details.

30 Penalty on early withdrawal of savings. (Road Map line, supported bySchedule B.) Penalties paid because of early withdrawal of certificates of de-posits should be entered on the Form 1099-INT Worksheet that supports line1 of Schedule B, and the amount will be posted here automatically.


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31 Alimony paid. If you claim a deduction for alimony paid, you must identifythe recipient as follows:

31b SSN of Recipient. Enter recipient's social security number in thestandard format (000-00-0000). If you don't provide this SSN, youmay be subject to a $50 penalty. If you paid alimony to more thanone person, list the SSN and amount for each recipient in a sup-porting statement for the BELOW amount line, not this one, and re-move any entry you already made here so that the reference to thesupport can appear in its place on the From 1040 printout.

31a Amount paid. If paid to only one person, enter here the amount youclaim as a deduction. If paid to more than one person, list the SSNand deductible amount for each recipient in a supporting statementfor this line. CAUTION: Not all alimony is tax deductible. Child sup-port payments, for example, are almost always taxable. Check IRSPublication 504 (Divorced or Separated Individuals) if in doubt.

Roth IRAs and Coverdell ESAs not deductible. The adjustment at line 32 ofthis section is relevant only to traditional IRAs. Contributions to Roth IRAsand Coverdell ESAs are NOT tax-deductible. (Note that Coverdell ESA (Educa-tion Savings Account) is the IRS name for the former Education IRA.) How-ever, distributions from these accounts are generally not taxed if you followthe IRS rules. You are allowed to convert all or part of your traditional IRA toa Roth IRA, but, because the traditional IRA was most likely tax-deductible,you are taxed on the conversion to compensate. Contributions to Roth IRAsare limited in much the same way as traditional IRAs, and the two must beconsidered together when determining the limitations. You can use our Form8606 to determine the Contributions Limit on your Roth IRAs, but only afterentering your contributions on the lines above line 32. See our details forForm 8606 for more information on contributions to and distributions fromRoth IRAs, and how conversions from traditional to Roth IRAs are taxed.

IRA CONTRIBUTIONS. (For traditional IRAs only.) Tax-deductible contribu-tions to an Individual Retirement Arrangement (IRA) are severely restricted forsome taxpayers. For 2006, the nominal limit on your contribution is $4,000,plus an additional $1,000 if age 50 or more, but no more than your taxablecompensation (called “modified earned income” and computed using a num-ber of IRS-defined adjustments). However, if you or spouse were covered bya retirement plan at work (including self-employment), the maximum contribu-tion may be reduced if your income is high enough. (“Retirement plan” in thiscontext includes qualified pension and profit-sharing plans, including 401(k)s,and self-employed coverage through Keogh, SEP, or SIMPLE plans.) Themaximum contribution for a taxpayer who is covered at work is phased outonce income exceeds specific thresholds. When income exceeds the thresh-old by $10,000 or more, NO deduction is allowed. The income used for theselimits is modified AGI, which is defined fully only in IRS Pub. 590. For taxyear 2006, the income levels above which the phaseouts begin are:

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! $50,000 if single, head of household, married filing separately and livedapart from spouse all year

! $75,000 if married filing jointly, for the spouse covered at work, or quali-fying widow(er)

! $0 if married filing separately and lived with spouse anytime in the year! $150,000 if married filing jointly, for the spouse NOT covered at workThe phaseouts are complete at incomes $10,000 higher than these levels. Alllimitations are applied automatically by the software at line 32, using theworksheets and instructions in IRS Pub. 590, which are more complete thanthose in the IRS Form 1040 instructions. Any amounts not allowed areposted to Form 8606 for consideration as nondeductible contributions to yourIRAs. Note that an employee's contribution to his or her own SEP is treatedjust like IRA payments, and no distinction between the two is made. Youmust therefore include such SEP payments in the following two lines.

2006 contributions to YOUR IRA. Enter here your TOTAL contribu-tions, unless you voluntarily choose not to deduct some of your de-ductible contributions or you were 70-1/2 or older at the end of theyear. If you elect not to claim all of your deductible contributions,you must enter only the part you choose to deduct here and enterthe remainder on your Form 8606. If you were 70-1/2 or older atthe end of the year you can neither deduct any contributions nortreat them as nondeductible contributions through Form 8606.

2006 contributions to SPOUSE IRA. As above, but for spouse.Covered? 1=You, 2=Spouse, 3=Both. If either spouse was covered by

a retirement plan during the tax year you must enter a number from1 to 3. All others should leave the entry at zero.

YOUR allowed IRA deduction. (auto-calc) Computed as the allowedIRA deduction for you using the IRS's IRA Worksheets, which arebuilt into the software and fully automatic for most taxpayers. Thededuction is automatically zero for any spouse whose age entry onour Form 1040 is 71 or older, since no deduction is allowed forthose who were 70-1/2 or older at the end of the tax year.

SPOUSE allowed IRA deduction. (auto-calc) Computed as the al-lowed IRA deduction for spouse, if married filing jointly, using thesame IRS IRA Worksheets as noted above.

32 IRA deduction. (auto-calc) Computed as the sum of the preceding twoamounts. See IRS Pub. 590 (IRAs) for subtleties in the calculations.

Additional contributions on Form 8606. When the IRA deduction allowed isless than the contributions made, Form 8606 is generated by software to de-termine the amount of disallowed contributions that are allowed as nonde-ductible contributions to your IRA. Those that are not allowed even as non-deductible contributions are subject to penalties through Form 5329.CAUTION: Even though Form 8606 is automatically generated, you may haveto access it to report the current value and past basis of your IRA accounts.Moreover, if you voluntarily choose not to deduct some deductible amounts,you must enter on the above IRA contribution lines only the amounts to be


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deducted, and enter the remainder on the Form 8606 for the appropriatespouse yourself. (Form 8606 is accessible through the Road Map at line 15bof Form 1040. Form 5329 is accessible through the Road Map at line 60 ofForm 1040, but Form 8606 must be complete before Form 5329 can givemeaningful results. Two copies of each form are built into the software: onefor you, and one for spouse.)

Student loan interest deduction. This deduction generally allows you to de-duct a limited amount of interest on a student loan if the loan is used forqualified higher education expenses. TIP: It is no longer required that you paidat least part of the interest on the loan within the first 5 years that paymentswere required.

2006 interest on qualified loan. Enter the total amount of qualified in-terest paid in 2006. See the IRS Form 1040 instructions for detailedrequirements. Up to $2,500 is deductible for tax year 2006. Notethat there is NO deduction allowed if married filing separately or ei-ther spouse is claimed as a dependent on someone else’s return.

33 Student loan interest deduction. (auto-calc) The deduction is computedusing the instructions in IRS Pub. 970, which are more complete than thosein the IRS Form 1040 instructions. The computation includes a reduction inthe maximum $2,500 deduction as modified AGI increases above certainthresholds. The result is NO deduction when modified AGI exceeds $135,000if married filing jointly, or $65,000 for all others.

34 Jury duty pay you gave to your employer. If you reported jury pay as in-come on line 21, but you were required to reimburse it to your employer be-cause the employer paid you during jury duty, you can deduct the amountyou paid here.

Domestic production and tuition and fees deductions. Because the deductionfor higher education expenses expired at the end of 2005, the IRS replacedline 34 with the jury duty deduction, which was formerly a write-in adjust-ment for line 36. However, because of the December tax bill, the IRS now in-structs you to share the domestic production line with the tuition and feesdeduction, even though the IRS form has not been changed to reflect thissharing. Our form therefore provides data entry for both deductions at thisline. (The IRS shares the tuition and fees deduction with this line instead ofthe preceding line, where it exited last year, because it is used in modifiedAGI calculations in the same way as the domestic production deduction.):

Tuition and fees deduction. Under this benefit you can deduct up to$4,000 of your expenses for higher education provided your adjustedgross income does not exceed $65,000 ($130,000 if married filingjointly). If you AGI exceeds this limit but not $80,000 ($160,000 ifmarried filing jointly), you can deduct up to $2,000. But if your AGI ex-ceeds that latter limit, you cannot deduct any expenses at all! Note thatyou cannot claim the Hope or Lifetime Learning Credit for the samestudent in the same year, so you must decide each year whether the

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new deduction or the old credit provides the greater tax benefit, a deci-sion that will vary with the tax bracket and AGI of the taxpayers.

Qualified tuition and fees. Enter the total qualified expenses. See theIRS instructions for details on what qualifies. CAUTION: To satisfyIRS reporting requirements, you must itemize this line and enter theamount in the support if also claiming a deduction for domestic pro-duction activities below.

Allowed deduction – code T. (auto-calc) The deduction is computedusing the instructions in IRS Pub. 970, which are more completethan those in the IRS Form 1040 instructions and represents an ex-panded version of the Tuition and Fees Deduction Worksheet in theIRS Instructions for Form 1040. (This deduction is not allowed forreturns with a filing status of married filing jointly.)

Domestic production deduction (Form 8903). Created by the AmericanJobs Creation Act of 2004, this line is used to claim a deduction of upto 3% of qualified income for tax year 2006, 6% for 2007 through2009, and 9% starting 2010, but limited to no more than the lesser oftaxable income or 50% of wages paid. The income must be derivedfrom an activity in the U.S., but the definition of "manufacturing" in-cludes film, computer software, and sound recordings in addition totangible property. You must support the amount you enter here with acompleted Form 8903 (not built into the software)

35 Domestic production and tuition and fees deductions. (auto-calc) Com-puted as the sum of the “Allowed deduction - code T” and “Domestic produc-tion deduction (Form 8903).” If only the tuition and fees deduction isclaimed, “T” is printed by line 35 on the official printout of Form 1040. Ifboth the tuition and fees and the domestic production deductions areclaimed, “B” is printed and, if you itemized the tuition and fees line as in-structed, a supporting statement is printed showing the breakdown betweenthe two.

Other adjustments for line 36. There are a number of valid adjustments forwhich the IRS provides no line but instructs you to include in line 36 andidentify on the dotted line for line 36. The amounts you enter here will beidentified as required:

Form 2555. (If Premium Level, supported by Form 2555.) This is theforeign housing expense that is allowed as a deduction, shown online 48 of Form 2555. Any amount here is flagged on the officialForm 1040 printout by “2555” beside line 36. This entry is used inmodified AGI for several calculations in the return.

Personal rental expense: PPR. If you made an entry for income fromthe rental of personal property at line 21, you can deduct the ex-penses related to that income here. Any entry here is flagged on theofficial Form 1040 printout by “PPR” beside line 36. This amountaffects the computation of the Earned Income Credit, which de-pends on a modified version of AGI.


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Other adjustments (itemize). For all other adjustments you must identifythe adjustment in a supporting statement for this line, using the de-scription column to enter short literal defined by the IRS, as follows:

Contributions to Sec. 501(c)(18) Pension Plans. If an amount appearsin box 12 identified as code H, this amount is the amount of elec-tive deferral to a section 501(c)(18) tax-exempt organization plan.For this kind of deferral, the amount is included as taxable income inbox 1 of your W-2, and therefore included in line 7 of Form 1040.However, you can deduct the amount here, up to the legislated limi-tation on elective deferrals (generally $15,000 for 2006). Enter"501(c)(18)D" and the allowed amount in a supporting statementfor this line. (This is the only kind of salary deferral that is deductedhere. All other deferred compensation is omitted from box 1 of W-2,and therefore already omitted from line 7 of Form 1040. See IRSPub. 575, Pension and Annuity Income, for details.)

Forestation/reforestation amortization: RFST. If you do not have tofile a Schedule C or F for the activity, you can claim a deduction forthe amortization of a forestation or reforestation here. Enter "RFST"and the allowed amount in a supporting statement for this line.

Repayment of sub-pay. If you paid back supplemental unemploymentbenefits (sub-pay) that you previously received under the Trade Actof 1974 but were not eligible for because you subsequently becameeligible for regular unemployment payments, and you reported thepreviously received payments as income on a prior tax return, youcan deduct that amount here. Enter "SUB-PAY TRA" and theamount of repayment in a supporting statement for this line.

TOTAL OTHER for line 36. (auto-calc) Computed as the sum of adjustmentsreported on the above lines. If you have more than one adjustment in this to-tal, a supporting statement cross-refernce will appear on the dotted line forline 36 rather than the IRS literals, and all details will appear in an automati-cally-generated supporting statement when the official Form 1040 is printed.

36 Add lines 23 through 35. (auto-calc) Computed as the sum of lines 23through 35 plus the above “TOTAL OTHER for line 36,” this is the Total Ad-justment to Income.

37 Subtract line 36 from line 22. (auto-calc) Computed as line 22 less line 36,this is the Adjusted Gross Income (AGI) for the return.

Press PageDown for 1040 page 2 / Press PageUp for 1040 page 1. Form1040 is now treated as two separate forms: 1040 page 1 and 1040 page 2.However, you can navigate between the two the same way you did whenthey were one form. That is, to access 1040 page 2 from the last screen1040 page 1, merely press the PgDn key. Conversely, if you entered 1040page 2 this way you can return to 1040 page 1 by pressing the PgUp keywhile viewing the first screen of 1040 page 2.

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FORM 1040 PAGE 2. Form 1040 page 2 is used to show Tax, Credits, OtherTaxes, Payments, and Refund or Amount You Owe, as follows.

TAX. Tax before credits is computed in lines 38 through 46.

38 Amount from line 37 (AGI). (auto-calc) Identical to line 37, if this result isnegative you may elect a net operating loss (NOL) carryforward or carryback.CAUTION: If you choose a carryforward, you must let the IRS know NOW inorder to use the carryforward next year. See IRS Pub. 536 (Net OperatingLosses) for details. You can satisfy this requirement through a supportingstatement for this line by accessing it with the Override Key then detachingthe override with the Detach Override Key.

39 Special filers. The following entries affect the standard deduction:39a Total age and blind claims. (auto-calc) This entry is determined

from your answers at the start of our Form 1040 for each spouse.39b Are you subject to special MFS or dual-status alien restrictions?

Answer Yes here only if EITHER you are married filing separatelyand your spouse itemizes OR you are a dual-status alien (unless, ifmarried filing jointly, your spouse is a U.S. citizen or resident andyou jointly agree to be taxed on your combined world-wide income).HINT: If you must answer Yes, your standard deduction will bezero, making it beneficial for you to itemize deductions on ScheduleA if you have ANY deductions at all.

40 Deductions. The itemized and standard deduction are compared here todetermine the largest legal deduction:

Itemized deductions (Schedule A). (Road Map line, supported bySchedule A.) Schedule A is used to support a claim for itemized de-ductions, including deductions for interest, taxes, medical expenses,contributions, employee expenses, and moving expenses. Althoughyou can change this entry and see the immediate effect on the totaltax for tax planning purposes, the amount from Schedule A willoverride your entry upon final recalculation of the return.

Schedule A used for line 40. (auto-calc) The larger of itemized deduc-tions or the standard deduction is normally used for line 40. If theitemized deductions are larger than the standard deduction, the an-swer here will automatically be Yes. CAUTION: Even when Sched-ule A is not used in line 40, it is still printed with the return if it ex-ists, so you must remove it from the printed return yourself beforefiling the return with the IRS. HINT: Some states do not allow youto itemize deductions on the state return unless you itemize deduc-tions on the federal return. You may therefore choose to itemize de-ductions on the federal return, even though the resulting deductionis lower than the standard deduction, if the tax benefit on the statereturn outweighs the lower deduction on the federal return. In thiscase, invoke the Override Key to access this line and change theanswer to Yes, and the itemized deduction will be used for line 40.


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The IRS flag "IE" will automatically appear on the printout of Form1040 whenever the itemized deductions are used even though thestandard deduction is greater.

40 ITEMIZED or STANDARD DEDUCTION. (auto-calc) If the above an-swer is Yes, the itemized deductions from Schedule A will appearhere. Otherwise the standard deduction is used based on the IRSStandard Deduction Chart and Worksheet, which are built into thesoftware and fully automatic. See Table 1-4 for the base standarddeduction amounts, which depend on the filing status, age claims,blind claims, and your dependency status.

41 Subtract line 40 from line 38. (auto-calc) Computed as indicated.

42 Exemptions. Exemptions for this line are complicated by an additional ex-emption introduced by the Katrina Emergency Tax Relief Act of 2005.

Extra exemption on Form 8914, line 6 (for Katrina victim housing).(Road Map line, supported by Form 8914.) An exemption of $500per person housed (up to a $2,000 maximum) is available for 2005and 2006 through this form, on which you identify the victims andjustify the claim. Although the IRS instructs you to compute the ex-emption for line 42 on Form 8914, it is an unecessarily complexway of handling the exemption. All that is really important to thecalculations is the amount claimed for the victims, which appears online 6 of the form. The exemption for line 42 is then the usual ex-emption, subject to phaseout, plus the entry on this line, which isnot subject to phaseout.

42 $3,300 or less times number of exemptions on line 6d. (auto-calc) Ifthere is no entry on the preceding line: this line is nominally com-puted as line 6d times $3,300 for tax year 2006. However, if AGIexceeds $112,875 in 2006, the amount may be reduced as incomeinscreases. The exact computation is based on the IRS ExemptionsWorksheet, which is built into the software and is fully automatic.For 2006, the rate of phaseout is two-thirds of its former rate, andthe phaseout stops at $1,100 per exemption instead of zero. Ac-cordingly, the phaseout occurs as AGI increases above specifiedthresholds (described below) at a rate of 1-1/3% for every $2,500increase in the excess ($1,250 for married filing separately), with afloor of $1,100 per exemption. For 2006, the specified thresholdsat which the phaseout starts are $150,500 for single, $225,750 formarried filing jointly and qualifying widow(er), $112,875 for marriedfiling separately, and $188,150 for head of household. The $3,300base amount and the threshold amounts are annually adjusted forinflation in $50 increments. If there is an entry on the precedingline: the amount on Form 8914, line 6 is added to the exemptionthat would have resulted if no Form 8914 were filed (described inthe preceding sentences), because the Katrina exemption is notsubject to phaseout. This result is the same as the result on Form8914, line 11 or 16, whichever is applicable.

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43 TAXABLE INCOME. (auto-calc) Computed as line 41 less line 42, but noless than zero and no less than line 38(c) of Schedule E. The IRS flag "Sch.Q" will appear on the printout if the Schedule E amount is the greateramount. HINT: If you file Schedule C, C-EZ, or F and contributed amounts toa capital construction fund, you will have to override this line to reduce it bythe amount of contributions to that fund, because the contributions are notdeductible directly on Schedule C, C-EZ, or F. You should perform the over-ride only after the return is fully calculated and complete, and explain youractions in a supporting statement for this line.

44 Tax. Tax calculations are now further complicated by a computation fortaxpayers with foreign earned income:

Taxable income from line 43. (auto-calc) Taken from line 43 (on thepreceding screen of Form 1040) and repeated here for reference.

Foreign Earned Income Worksheet line 6 (Form 2555). (If PremiumLevel, supported by Form 2555.) As a result of a recent change inthe law, filers who claim a foreign earned income or housing exclu-sion (via Form 2555 or 2555-EZ) must use the new Foreign EarnedIncome Tax Worksheet to figure their tax. The effect of this changeis to raise the tax for some high-income taxpayers. With the Pre-mium Level software the entry for this line is automatically com-pleted once you complete Form 2555. However, if you completeForm 2555 manually (because you use the Economy or StandardLevel software), you must complete the Foreign Earned IncomeWorksheet through line 6 and enter the amount on line 6 here. De-pending on your income, the amount you enter here may raise yourtax liability, irrespective of the method by which taxes are com-puted below. (To see the worksheet or other details, see the IRSInstructions for line 44 of Form 1040.)

Foreign Earned Income Worksheet line 7. (auto-calc) Computed asline 41 less line 42 plus the preceding amount for line 6 of theworksheet, but no less than zero, this is the same as line 7 of theworksheet. If you have no entry on the preceding line, taxable in-come from line 43 will appear here and taxes will be computedwithout regard to any change due to foreign earned income.

Taxes computed via:Tax Table. (auto-calc) The regular tax based on the IRS tax tables is

displayed here when taxable income is less than $100,000. (Youcannot choose whether to use the tax table or the tax rate sched-ule; law requires use of the tax table for incomes less than$100,000 and the tax rate schedule otherwise. If you had an entryabove from line 6 of the Foreign Earned Income Tax Worksheet, thetax may be higher than the table would imply.)

Tax Computation Worksheet. (auto-calc) The regular tax based on theIRS tax rate schedules is displayed here when taxable income is$100,000 or more. The IRS has a new Tax Computation Worksheetin place of the Tax Rate Schedules in an attempt to simplify the


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computation, but the result is identical to that from the Tax RateSchedules. (If you had an entry above from line 6 of the ForeignEarned Income Tax Worksheet, the tax may be higher than the TaxComputation Worksheet would imply.)

Qualified Dividends and Capital Gain Tax Worksheet or Schedule DTax Worksheet. (Auto-calc line, supported by the Schedule D TaxWorksheet.) If line 13 shows a gain from Schedule D and part ofthat gain stems from long-term holdings, the tax will be computedusing the computations on Schedule D Tax Worksheet. The work-sheet will also be used when there are qualified dividends on line 9bof Form 1040 or capital gain distributions on Form 1099-DIV (re-ported in the software on the 1099-DIV Worksheet for Schedule B,line 5). The result is generally a lower tax than would otherwise re-sult because of the new tax rates for capital gains. Note that evenwhen Schedule D need not be filed with the return, the calculationwill still be performed using the Schedule D Tax Worksheet by thesoftware when applicable. However, Schedule D will not be printedwith the official return if the IRS conditions for omitting it are satis-fied. See our details at line 13 of Form 1040 for more information.CAUTION: If a tax appears here, be sure to verify whether you needto make an entry in Part III of our Schedule D for lines 4e and 4g ofForm 4952 or an adjustment to the automatically calculatedamounts for unrecaptured sec. 1250 gain, because they can affectthe tax result. (If you had an entry above from line 6 of the ForeignEarned Income Tax Worksheet, the tax may be higher than theQualified Dividends and Capital Gain Tax Worksheet would imply.)

Schedule J. (Road Map line, supported by Schedule J.) Schedule pro-vides for the averaging of farm income over the prior three years oftax returns, for a potentially lower tax. The amount that appearshere is used for line 44, below, if Form 8615 is not used.

Form 8615, line 18. (Road Map line, supported by Form 8615.) Form8615 MUST be used by children under age 18 with more than$1,700 of unearned income (such as taxable interest and divi-dends). However, the form will not calculate and the "Form 8615"box will not be checked on the Form 1040 printout unless the ageyou entered as "Your age at year-end" in the Taxpayer Informationsection of our Form 1040 was less than 18.

Form 8615 tax as adjusted. (auto-calc) Computed as the above amountfrom Form 8615, line 18, less the amount on line 9 of the IRS For-eign Tax Worksheet (computed automatically based on amountsshown on screen 2 of Form 1040, page 2), but no less than zero,this is the Form 8615 tax used for line 44. (See IRS instructions forForm 8615, line 18, for details.)

* Resulting tax for line 44. (auto-calc) Normally the amount from the“Tax Table” or the “Tax Computation Worksheet,” whichever ap-

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plies, this amount is overridden by the last non-zero tax amount ap-pearing on the preceding lines.

a Tax from Form 8814. (Road Map line, supported by Form 8814.) Ifyou chose to include a child's interest and dividend income in yourown income rather than filing a return for the child, you must useForm 8814 for each such child to determine the amount of addi-tional tax you owe. The form can be prepared for any child underage 18 who had ONLY income from interest and dividends in 2006had total income of more than $850 but less than $8,500, had nei-ther estimated tax payments nor income tax withheld for 2006, andhad no overpayment of 2005 tax applied to the 2006 return. 15copies of Form 8814 are built into the software to handle up to 15children you qualify under these guidelines. HINT: This form is notmandatory, and is sometimes not advisable because it may result ina higher overall tax than would a separate return filed for the child.Because it raises AGI for the parent, it can reduce itemized deduc-tions on Schedule A, passive loss allowances on Form 8582, childcredit on Form 2441, IRA deductions, etc. Its use also results in ahigher state income tax for some states, including California, but alower tax for others, such as Alaska.

b Tax from Form 4972. If you received a lump-sum distribution from aqualified retirement plan and were born before Jan. 2, 1936, youcan generally lower your tax by using Form 4972 to figure your tax,rather than including the distribution in regular income. CompleteForm 4972 (not built into the software), and enter the result here.

Education Credit Recapture (ECR). The IRS does not provide a line forreporting nor a form for computing this recapture tax, but it must beincluded in the total for line 44. A recapture results for 2006 if youclaimed an education credit (Hope or Lifetime Learning) for a priortax year but received a refund or tax-free educational assistance in2006 for some of the expenses claimed. See IRS 2006 Instructionsfor Form 8863 for details on computing this recapture tax.

44 TAX. (auto-calc) Computed as the sum of the preceding four tax amounts.

45 Alternative minimum tax (Form 6251). (Road Map line, supported by Form6251.) Form 6251 is automatically generated when a minimum tax existsbased on your adjusted gross income, exemptions, and filing status.CAUTION: This form is required under many more circumstances than thosewhich generate it automatically, and even when it is automatically generatedyou may have to provide additional information on tax preferences.

46 Add lines 44 and 45. (auto-calc) Computed as indicated, this is the totaltax including the alternative minimum tax.

CREDITS. Personal and business tax credits are generally applied at lines 47through 56. Earned income and fuel tax credits, however, are treated like taxpayments, later, instead.


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47 Foreign tax credit (Form 1116). (If Standard or Premium Level, supportedby Form 1116.) If you paid income tax to a foreign country, you normallywould complete Form 1116 to claim any available credit for this paymenthere. However, the IRS allows you to claim the foreign tax credit withoutcompleting and filing Form 1116 under some circumstances. If all of yourforeign income was from interest or dividends, was reported to you on Form1099-INT or 1099-DIV, and the foreign taxes paid as shown on those formsdoes not exceed $300 ($600 if married filing jointly), then you may be ableto omit the complex Form 1116. We have added lines to our Form 1099-INTand 1099-DIV worksheets, which support Schedule B and Form 8814, toprovide the information necessary to compute the credit. Once you completethose worksheets and answered the additional qualification questions that wehave added to Schedule B, the allowable credit will appear here automatically

48 Credit for child and dependent care expenses (Form 2441). (Road Mapline, supported by Form 2441.) The IRS requires that you supply detailed in-formation about the care provider and the persons cared for on Form 2441,so you MUST access this form to claim the credit. You can access Form2441 here to provide the required supporting detail. The result on line 11 ofForm 2441 is posted here automatically.

49 Credit for elderly or permanently and totally disabled. (Road Map line,supported by Schedule R.) Schedule R is automatically generated and com-pleted for the elderly when it results in a credit, but you must access it your-self to claim the credit for the disabled and to report nontaxable pensions notshown on Form 1040. The result on line 24 of Schedule R is posted here.

50 Education Credits (Form 8863). (Road Map line, supported by Form 8863.)This form provides two distinct credits for expenses you paid for higher edu-cation for yourself, your spouse, or your dependents: Hope Credit and Life-time Learning Credit. You must fully complete the worksheets we provide onthat form in order to claim the credits.

51 Retirement savings contribution credit (Form 8880). (Road Map line, sup-ported by Form 8880.) This credit is designed to give a break to low-incomefilers who contribute to an IRA or other qualified plan. The credit can be ashigh as $1,000. You must complete Form 8880 to claim the credit. If youronly eligible contributions are contributions to a traditional IRA, you will nothave to access Form 8880 because it is automatically created and completedfor you based on your IRA deductions at Form 1040 line 32 and any allowedvoluntary contributions you reported on Form 8606.

NEW: Residential energy credits. Two new energy credits are available to indi-viduals who improved the energy efficiency of their home. The credits are claimedon the new Form 5695 (built into the Standard and Premium Levels) and enteredon the following two lines:

Credit on Form 5695 line 12. (If Premium Level, supported by Form5695.) Form 5695, line 12, represents the “nonbusiness energyproperty credit,” which is a limited credit for such improvements

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better insulation, exterior windows and skylights, exterior doors,and pigmented metal roofs, and such equipment as a new furnaceor hot water boiler.

Credit on Form 5695 line 29. (If Premium Level, supported by Form5695.) Form 5695, line 29, represents the “residential energy effi-cient property credit,” which is a more generous credit for suchequipment as solar electric, solar water heating, and fuel cell prop-erty.

52 Residential energy credits (Form 5695). (auto-calc) Computed as the sum ofthe preceding two credits.

53 Child tax credit. The credit is computed automatically once you identify,on our Dependents’ Worksheets for line 6c, all children who are qualified forthis credit. (The child no longer has to be your dependent to qualify you forthe Child Tax Credit, as explained for the next line, but you must still supplyall required information on our Dependent Worksheets for line 6c. The soft-ware will then decide whether to print the information on Form 8901 or line6c of Form 1040. See details for the next line for more information.) Thecredit is nominally $1,000 per child for 2006, but a number of factors maylimit this amount. The computations reflect the most of the subtleties of theworksheets in IRS Pub. 972, which are much more complete than the simpli-fied worksheet in the IRS Form 1040 Instructions and include a phaseout ofthe credit at high incomes, starting at $110,000 if married filing jointly,$55,000 if married filing separately, and $75,000 otherwise. The phaseoutamounts to a $50 reduction in credit for each $1,000 or part thereof bywhich modified AGI exceeds the threshold. The credit is also limited to tax af-ter certain other credits are deducted. If the latter limitation applies, you mayhave an additional credit at line 68 through Form 8812.

Non-dependents in above. (auto-calc) If Yes, Form 8901 is automati-cally created and completed upon the final recalculation of the re-turn, showing the required information for the qualifying nondepen-dent children. (No manual entry is required on Form 8901 and younever have to view the form, so it is only accessible from the FormsMenu and not through the Road Map.) Note that the only non-dependent children who qualify are those who are nondependentonly because either (a) they are married and file a joint return, or (b)you or spouse can be claimed as a dependent on someone else’s re-turn. See our details for the Dependents’ Worksheet at line 6c formore information.

Credit from Forms 8396, 8839, and 8859:a Credit on Form 8396. (If Premium Level, supported by Form 8396.) If

you are eligible for a Mortgage Interest Credit because you entered aqualified mortgage credit certificate program to buy, rehabilitate, ormake improvements to your home, and you were issued a mortgagecredit certificate, you are eligible for this credit. You must completeForm 8396 to claim the credit, which is shown on line 11 of theform.


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b Credit on Form 8839. (If Premium Level, supported by Form 8859.) Ifyou adopt a child you may be eligible for the Adoption Credit. Youmust complete Form 8839 to claim the credit for expenses youpaid, which is shown on line 18 of the form.

c Credit on Form 8859. (If Premium Level, supported by Form 8859.) Ifyou are a first-time homebuyer in Washington, D.C., you may beeligible for the District of Columbia First-Time Homebuyer Credit.You must complete Form 8859 to claim the credit, which is shownon line 11 of the form.

54 Credit from Forms 8396 and 8859. (auto-calc) Computed as the sum of thepreceding two amounts.

Credit subtotal (lines 47 through 54). (auto-calc) Computed as the sum of thelines 47 through 54.

55 Other credits. General business credits are consolidated on Form 3800,but you can bypass Form 3800 when only one credit is claimed:

a Credit on Form 3800. (Road Map line, supported by Form 3800.)Complete this form whenever you have a business credit listed inline 1 of Form 3800. There are now 27 credits that can be claimedon this form. CAUTION: You must now always file Form 3800when you have any credit to report on line 1 of the form. You areno longer allowed to omit the form and use line 55c when you haveonly one credit to report on the form.

b Credit on Form 8801. You may be eligible for a credit for prior-yearminimum tax if you paid an alternative minimum tax in 2005. Enterhere the result from Form 8801 (not built into the software).

c Credit from others. Because the IRS has strengthened the role ofForm 3800, there are now very few credits that you can claim onthis line. You can no longer claim here any credit listed in line 1 ofForm 3800, even when it is the only credit you have to report onForm 3800. This includes credits from Forms 3468, 5884, 6765,8586, 8826, 8846, 8861, 8874, and 8907, all of which were for-merly reportable here last year. Credits from these forms are now allreported on line 1 of Form 3800 instead, and any of these formsthat are built into the software are accessible through the Road Mapfrom the corresponding part of line 1 of Form 3800.

Credits for c from Forms 6478, 8834, 8844, 8910, 8911, and 8912. Thefirst two of these credits are supported at the Premium Level by thecorresponding form. Whether you use the Premium Level or not,any entry on any of these lines is identified on the official printoutof Form 1040 at line 55c. CAUTION: Only the personal part ofcredits on Forms 8910 and 8911 is reported here (Form 8910, line18, and Form 8911, line 19); the business part is reported on Form3800 (Form 8910, line 10, and Form 8911, line 9).

Itemize for any other. You must identify any other eligible credit in asupporting statement for this line, generally using only the formnumber of a short acronym. If there is only one item in your sup-

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porting statement and no other items, above, for line 55c, the de-scription you enter in the support will be printed in the blank spaceon Form 1040 for line 55c. Otherwise it will appear in a cross-referenced supporting statement for the line.

c Credit from others. (auto-calc) Computed as the sum of the amountson the preceding three lines.

55 Other credits. (auto-calc) Computed as the sum of credits on lines a, b,and c, above.

56 Add lines 47 through 55. TOTAL CREDITS. (auto-calc) Computed as thesum of lines 47 through 55 PLUS the above special credit.

57 Subtract line 56 from line 46. (auto-calc) Computed as line 46 less line 56,but no less than zero.

OTHER TAXES. All taxes not reported prior to line 47 are reported on lines 58through 62 plus the special line below line 62.

58 Self-employment tax. Schedule SE is automatically generated for anyspouse who is liable for the tax, based on entries elsewhere in the return.However, the automation can be blocked through your entries on the ControlForm, either directly or by claiming one of the exemptions noted below.

58 Self-employment tax. (Road Map line, supported by Schedule SE.)Two Schedules SE are available: one for each spouse. CAUTION:Even though Schedule SE is automatically generated, you may stillhave to access it to make special adjustments for church income orunreported tips or to elect one of the optional methods.

SE flag for IRS. (auto-calc) If the answers on the Control Form showthat either spouse claims that all self-employment income receivedin the year is exempt from the self-employment tax because of afiled and approved Form 4029 (for claiming conscientious objectionto social security insurance) or Form 4361 (for claiming ministerialexemption to social security insurance), the corresponding code"F4029" or “F4361” will appear here and on the official printout tothe left of line 58. In addition, no Schedule SE will be generated forthat spouse, and, if one already exists, its results will be zeroed.

Social security and Medicare tax on tip income not reported to employer. Ifyou reported all tip income to your employer, the social security tax due onthat income should already have been deducted from your wages and re-ported on your W-2 worksheets. However, if your W-2 shows an amount forallocated tips (box 8), or you have other unreported tip income, you must paysocial security tax and Medicare tax on that income.

Tax on unreported tips from Form 4137. (If Premium Level, supportedby Form 4137.) Unless you owe RRTA tax instead, you must com-plete Form 4137 and report here the tax on line 12 of that form.CAUTION: If the amount on line 3 of Form 4137 differs from theallocated tips shown in box 8 of your W-2 (which you should haveentered on line 8 of your W-2 Worksheet for line 7), you MUST en-


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ter the difference on the line “Adjust to 8 for 1040” below line 8 ofyour W-2 Worksheet because this difference is taxable income thatmust be reflected in Form 1040 line 7.

Tax on unreported tips for RRTA. If you owe RRTA tax, your employershould figure and collect the tax for you, based on information youprovide the employer. Otherwise, you must report the tax you owehere. (An entry here will be flagged on the printed return with thecode “RRTA” beside line 58.)

59 Social security and Medicare tax on tip income not reported to employer.(auto-calc) Computed as the sum of the preceding two amounts.

60 Tax on an IRA or a qualified retirement plan (Form 5329). (Road Map line,supported by Form 5329.) Two copies of Form 5329, one for each spouse,are built into the software. Although automatically created if you contributedtoo much to your IRAs this year, you will have to complete the form yourselfif you are liable for additional taxes due to premature distributions or excessaccumulations for IRAs and other retirement plans, pensions, and annuities.

61 Advance earned income credit payments from Form W-2. (auto-calc)Computed as the sum of amounts you entered for box 9 of the W-2 work-sheets for you and spouse (which support line 7 of Form 1040).

62 Household employment taxes. (Road Map line, supported by Schedule H.)The total tax from Schedule H is posted here. This schedule is designed tohelp the IRS enforce the rules for deducting and paying employment taxes,such as the social security tax, for household maids and other domestics.CAUTION: Anyone who paid $1,500 or more in 2006 to any one householdworker, who withheld any Federal income tax during 2006 on behalf of theworker, or who paid $1,000 or more in any one quarter to all workers com-bined, MUST FILE SCHEDULE H, and must have an employer identificationnumber (EIN) from the IRS. To get an EIN you must file Form SS-4 with theIRS. (You can get a Form SS-4 by downloading it from the forms section ofthe IRS web site, which can be reached through a link on our web site athowardsoft.com or by calling 1-800-TAX-FORM to have it sent to you. It isalso included on the CD-ROM for our Standard and Premium Level programs.)

Other taxes for line 63. Even though the Official Form 1040 does not providea separate line for them, you must report the following taxes here. The shortacronyms at the end of these titles are IRS-specified acronyms to be printedon Form 1040 when you report the corresponding tax:

Recapture Taxes:Date Form 8693 approved by the IRS. If you are exempt from lowin-

come housing credit recapture (LIHCR) by reason of posting a bondor pledged eligible securities, as approved by the IRS on a Form8693, enter the approval date here. See instructions for Form 8611for details.

Low-income Housing Credit Recapture: LIHCR. (If Premium Level, sup-ported by Form 8611.) If you are liable for a recapture of the low-

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income housing credit because you disposed of or reduced thequalified basis of property on which you previously claimed thecredit (through Form 8586), you must complete Form 8611 (Recap-ture of Low-Income Housing Credit). The result on line 12 of thatform is reported here.

Investment Credit Recapture: ICR. (If Premium Level, supported byForm 4255.) If you are liable for a recapture of the investmentcredit because, before the end of its useful life or recovery period,you disposed of or discontinued the business use of property onwhich you previously claimed the credit (through Form 3468), youmust complete Form 4255 (Recapture of Investment Credit). Theresult on line 13 of that form is reported here.

Federal Mortgage Subsidy Recapture: FMSR. (If Premium Level, sup-ported by Form 8828.) If you are liable for a recapture of a FederalMortgage Subsidy because you sold your home in 2006 and it wasfinanced (at least in part) by a tax-exempt qualified mortgage bond,you must complete Form 8828 (Recapture of Federal MortgageSubsidy). The result on line 23 of that form is reported here.

Qualified Electric Vehicle Credit Recapture: QEVCR. If you are liablefor a recapture of the electric vehicle credit because, within 3 yearsof the date placed in service, the vehicle was modified to no longerbe primarily electric-powered or it became nonqualified property(due to change in use or location), you must entire the prior credittaken here. See IRS Pub. 535 for details.

Indian Employment Credit Recapture: IECR. If you are liable for a re-capture of this credit because you terminated within 1 year an em-ployee who qualified you for the credit (through Form 8845), youmust enter here the amount of credit attributable to the wages forthat employee.

New Markets Credit Recapture: NMCR. If you are liable for a recaptureof this credit because the entity that qualified you for the credit(through Form 8874) ceases to qualify or was redeemed, enter thepreviously-claimed credit here.

Employer-Provided Child Care Facilities Credit Recapture: ECCFR.You are liable for a recapture of this credit if, within 10 years ofyour credit claim, the child care facility that qualified you for thecredit (via Form 8882) ceases to qualify as a child care facility orchanged ownership. If so, enter the previously claimed credit here.

Recapture taxes. (auto-calc) Computed as the sum of all precedingrecapture taxes.

Special Taxes:Tax on Accumulation Distribution of Trusts (Form 4970): ADT. (If Pre-

mium Level, supported by Form 4970.) If you are the beneficiary ofundistributed income from a trust, you may have to complete Form4970 to determine the tax on the accumulation distribution of thetrust. The result on line 28 of that form is reported here.


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Uncollected Employee Social Security and Medicare or RRTA Tax onTips: UT. Even though you reported all tips to your employer, youmay not have had enough wages for the tax to be deducted by theemployer. The amount of uncollected tax that you still have to payshould be reported to you with the code A or B in box 12 of yourW-2. Similarly, you will have to pay a tax on part of the cost of lifeinsurance arranged through a former employer if you receive a W-2with code M or N in box 12. Report here any tax identified as codeA, B, M, or N in box 12 of your W-2..

Excess Golden Parachute Payments: EPP. If you received an excessparachute payment as a key employee of a corporation changingcontrol, you are liable for a tax amounting to 20% of the excess.This amount of tax may be reported to you in box 12 of Form W-2with a code K. Alternatively the full excess may be shown in box 13of a Form 1099-MISC, identified as EPP, and the tax to be reportedis 20% of that amount.

Tax on distributions from an Archer MSA (Form 8853): MSA. (If Pre-mium Level, supported by Form 8853.) If you received any distribu-tion from your Archer MSA that was not used for qualified medicalexpenses, you may owe an additional 15% tax on it (over andabove the regular tax on the distribution). You must complete Sec-tion A of Form 8853 to compute the tax. The result on line 11b ofthat form is reported here.

Tax on distributions from a Medicare+Choice MSA (Form 8853): Med-MSA. (If Premium Level, supported by Form 8853.) If you receivedany distribution from your Medical+Choice MSA that was not usedfor qualified medical expenses, you may owe a 50% tax on it (overand above the regular tax on the distribution). You must completeSection B of Form 8853 to compute the tax. The result on line 15bof that form is reported here.

Tax on distributions from Health Savings Accounts (Form 8889): HSA.(If Premium Level, supported by Form 8853.) If you received distri-butions from HSAs that exceed the amount of unreibursed medicalexpenses, you may owe an additional 10% tax on it (over andabove the regular tax on the distribution). You must complete Part IIof Form 8889 to compute the tax. The result on line 15b of thatform is reported here.

Other special tax (itemize). You must identify any other taxes in a sup-porting statement for this line, generally using only the form numberor a short acronym in the description column. Examples include:Sec. 72 penalty (Excess Benefits Tax). If you are or were a 5%owner of a business and received premature distribution from a Ke-ogh plan, employer's qualified plan, or annuity contract, you may beliable for a 10% penalty on the distribution, as detailed in IRS Pub.560 (Retirement Plans for the Self-Employed). If so, enter the pen-alty and identify it as "Section 72(m)(5)."

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Interest on tax due on installment sale. If you sold property under aninstallment sale and qualified for the installment because youelected to pay interest on tax due on the sale, report the interesthere and identify it as "453A(c) interest."

Special taxes. (auto-calc) Computed as the sum of all preceding spe-cial taxes.

63 Add lines 57 through 62. TOTAL TAX. (auto-calc) Computed as the sum oflines 57 through 62 plus the totals for “recapture taxes” and “special taxes.”

PAYMENTS. Prior tax payments and credits not already deducted are reportedon lines 64 through 72.

Federal income tax withheld. Tax withholdings that you reported on variousW-2s and 1099s are included here automatically, but you may have to enteran adjustment for withholdings not reported elsewhere.

Federal income tax withheld on Forms W-2 and W-2G. (auto-calc) Takenfrom your entries for Federal tax withheld on the W-2 Worksheetsfor line 7 and the W-2G worksheets for line 21.

Federal income tax withheld on Forms 1099. (auto-calc) Taken fromyour entries for Federal tax withheld on the 1099-R Worksheets forlines 15a through 16b, on the 1099-INT and 1099-DIV Worksheetsfor Schedule B, on the line above Form 1040 line 19 for Federal taxwithheld on Form 1099-G, and on the line above Form 1040 line20b for Federal tax withheld on Forms SSA-1099 and RRA-1099.

Federal tax withholding not reported elsewhere. Enter here anyamounts withheld but not reflected in the preceding two lines.

64 Federal income tax withheld. (auto-calc) Computed as the sum of the pre-ceding three lines.

Press I to enter payments for line 65. (Road Map line, supported by ControlForm.) In order for an amount to appear on line 65, below, you MUST pro-vide detail on the payments for line 65 on our Control Form. The paymentseligible for line 65 include tax you chose to apply from an overpayment onthe prior-year tax return plus the quarterly estimated payments you made for2006, including the one due January 15, 2007. Enter all eligible payments inthe section on the Control From titled FEDERAL ESTIMATED TAX PAID.

65 2006 estimated tax payments and amount applied from 2005 return. (auto-calc, supported by Control Form.) This amount is taken from the ControlForm, where any estimated tax payments made for 2006 must be entered.Two lines are provided here to explain estimated tax payments for which ap-plication to your return may not be obvious:

If estimated tax payments were made with:different name, itemize detail here. If you changed your name (be-cause of marriage or divorce, for example) and made estimated taxpayments under your former name, you must explain in a supportingstatement for this line, include the payment dates and the name andSSN under which you made the payments.


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different spouse, enter former spouse’s SSN. If newly divorced in2006 and you made any estimated tax payments jointly with yourformer spouse, enter that person’s SSN (a) here if you were remar-ried to another spouse in 2006, or (b) on 1040 page 1 if you werenot remarried in 2006.

Combat pay election (see entry below line 22). You can elect to include cer-tain nontaxable combat pay in earned income, as if it were taxable income,when computing the earned income credit. The eligible combat pay is shownin box 12 of the Form W-2 you receive, and identified as code Q. Whether ornot you make this election, you must enter the nontaxable combat pay on theline “Nontaxable combat pay (see W-2)” in our special section CERTAINNONTAXABLE INCOME, which appears on the screen below line 22 of Form1040.

Use combat pay in EIC calculation? If you make this election, the com-bat pay you entered below line 22 of Form 1040 will be included inearned income when computing the earned income credit, and willbe shown on line 66b, later. This will be to your benefit only if yourincome is sufficiently low, so you should make this choice judi-ciously. You should also take into account the effect on any resultsfrom Form 8812 because if you do not make the election here, youmust include combat pay in earned income on Form 8812, whichcould result in a lower credit on that form. The software automati-cally ensures that Form 8812 uses the opposite election choice fromthe one you choose for EIC.

66a Earned income credit (Schedule EIC). (Road Map line, supported bySchedule EIC.) A credit is generally available to taxpayers with earned incomeif your investment income is no more than $2,800 and either

(A) one child lived with you and both your earned income and your ad-justed gross income are less than $32,001 ($34,001 if married fil-ing jointly), OR

(B) two children lived with you and both your earned income and youradjusted gross income are less than $36,348 ($38,348 if marriedfiling jointly), OR

(C) no child lived with you, but you (or spouse if filing jointly) are atleast age 25 but under age 65 and both your earned income andyour adjusted gross income are less than $12,120 ($14,120 if mar-ried filing jointly). CAUTION: You must enter the proper ages in theTaxpayer Information section of our Form 1040 for the credit to beproperly computed.

The maximum credit is $4,536 with two or more qualifying children, $2,747with one qualifying child, and $412 with no qualifying child (as long as youmeet the age requirements). The IRS Schedule EIC is now used by the IRSonly for providing information on a qualifying child. However, the softwareuses the schedule to hold all information relevant to the credit and to ensurethat all complexities of the calculations are performed. This schedule is virtu-ally automatic in computing the credit. However, you must supply information

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on the qualifying children on Dependents’ Worksheets at line 6c of Form1040 if you are claiming the credit based on children. Note that a couple aspecial flags may be printed on the official Form 1040 based on special cir-cumstances. For example, if you made an entry on any W-2 Worksheet atline 7 for clergy social security not in box 3 (that is, wages that are liable forthe social security tax but on which social security tax was not withheld),special rules apply which are automatically enforced by the software. If acredit results and the cited W-2 entry exists, the word CLERGY is printed onthe official printouts next to line 66a, as required by the IRS. If the credit iszero because of information not obvious on the official printout, a NO appearson the official printout next to line 66a to let the IRS know that you com-pleted Schedule EIC and zero credit resulted. Otherwise the IRS will flag thereturn for a notice to the taxpayer that there is an error in the computation.Factors that can cause a NO here include answers on our Schedule EIC thatdisqualify you, such as filing Form 2555 or being a qualifying child of some-one else, or, if childless, being in the wrong age bracket. CAUTION: If thetaxpayer’s claim for the Earned Income Credit was reduced or disallowed bythe IRS in 2004 or 2005, you must attach a completed copy of Form 8862(built into the Premium Level) in order to claim the credit for 2006.66b Nontaxable combat pay election. (auto-calc) If you answered Yes to“combat pay election” question that precedes line 66a on the screen, theamount you entered for “nontaxable combat pay” below line 22 of Form1040 appears here; otherwise zero. If an amount appears here it will be in-cluded in earned income when computing the EIC.

Due diligence requirements for paid preparers (Form 8867). Because of along history of abuse, the IRS now places special responsibilities on paid pre-parers for collecting the proper information to justify claims for the earned in-come credit. The IRS requires that paid preparers have a record of all informa-tion requested on IRS Form 8867, Paid Preparer’s Earned Income CreditChecklist. The IRS does NOT require you to use that form, but only to havethe same information in a paper or electronic record. Tax Preparer now con-tains all necessary records within the software. You can satisfy the IRS re-quirements with Quick Print copies of Schedule EIC, Form 1040, and the De-pendents’ Worksheets for line 6c of Form 1040. (Quick Prints show all re-quired information, while official printouts do not. Moreover, the line num-bering on a Quick Print of our Schedule EIC matches the line numbers on theIRS Form 8867 for easy tracking of the information.)

67 Excess social security, and tier 1 RRTA tax withheld. (auto-calc) The ex-cess withheld is computed based on the amount of properly-withheld socialsecurity tax and the social security-equivalent RRTA Tier 1 tax shown on theW-2 Worksheets you completed at line 7 of Form 1040. The excess withheldis the amount by which the amounts for you and spouse separately exceedthe legislated $5,840.40 maximum for 2006. (No excess should exist unlessyou or spouse had more than one employer and total wages over $94,200.See the instructions for our W-2 Worksheet for details.) See IRS Pub. 505


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(Tax Withholding and Estimated Tax) for more details. CAUTION: This linecan no longer be used to claim excess withholding from a Tier 2 RRTA tax.Instead, you must now use Form 843, which is a generic form for claimingoverpayments from the IRS.

68 Additional child tax credit. (Road Map line, supported by Form 8812.) Thisform for an additional child tax credit is built into the software and fullyautomatic. It is automatically generated and completed when it applies andpotentially provides an additional credit when the regular child tax credit atline 53 is limited due to a low net tax after deducting certain credits.

69 Amount paid with request for extension to file. You should report herepayments made with any of three forms of extension request:

Amount paid with Form 2350. (If Premium Level, supported by Form2350.) This extension request applies to you only if you need extratime in order to meet residency tests for the foreign earned incomeexclusion. If approved, an extension is granted to a date 30 days af-ter you expect to meet the residency tests. The amount you paidwith the form, shown on line 5 of Form 2350, is reported here.

Amount paid with Form 4868. (Road Map line, supported by Form4868.) If you want to apply for an automatic 6-month extension oftime to file, you should complete Form 4868. You must file thatform along with any tax you expect to owe by the regular filingdeadline for the return. Once you have completed the form, theamount you paid with the form appears here.

69 Amount paid with extensions request. (auto-calc) Computed as the sum ofthe preceding two lines.

70 Other payments. Two other special amounts are reported here.a Credit from Form 2439. Use Form 2439 (not built into the software)_

to claim the regulated investment company credit, and enter thecredit here.

b Credit from Form 4136. (If Premium Level, supported by Form 4136.)Use Form 4136 to claim credit for federal excise tax paid on fuelsused for certain nontaxable purposes like farming and fishing. Thetotal on line 10 of that form is reported here.

c Credit from Form 8885. (If Premium Level, supported by Form 8885.)Use Form 8885 to claim credit for health insurance payments forcertain state insurance plans, COBRA continuation, and plans con-tinued after separation from a job. The credit on line 7 of that formis reported here.

70 Other payments. (auto-calc) Computed as the sum of lines 70a, b, and c.Tax paid to Virgin Islands (Form 8689). If you have income from the VirginIslands but were not a bona fide resident of the Virgin Islands, you are re-quired to file Form 8689 with your Form 1040 return and file the return withboth the U.S. and the Virgin Islands. A portion of the tax you figure on Form1040 is allocated to the Virgin Islands through Form 8689, and any amountdue to or refund available from the Virgin Islands is figured on that form as

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well. In order to prevent double taxation, you must enter here the amounts onlines 40 and 44 of Form 8689, which are all the taxes you paid to the VirginIslands for the year (including tax withheld by the Virgin Islands, estimatedtax payments you made to the Virgin Islands, and the amount you paid withthe return you sent to the Virgin Islands). See IRS Pub. 570 for details. Theamount you enter here is reflected in the total at line 72 and is printed to theright of line 70 with the flag “8689.” (The IRS instructs you on Form 8689 toenter the flag and amount on line 72, but there is no room on the officialform to do this. Furthermore, IRS e-file specifications associate the amountwith line 70.) CAUTION: If you are a bona fide resident of the Virgin Islands,you should not use Form 8689 but must instead file your Form 1040 returnwith the Virgin Islands only, and pay all tax figured on Form 1040 to the Vir-gin Islands.

Credit for federal telephone excise tax paid. Federal excise tax collected onlong distance or bundled service after February 28, 2003 was recently ruledas improper, so the federal government is required to refund the tax to tax-payers for the period in which it was collected: March 1, 2003 through July31, 2006. As long as you have not received and will not request a refundfrom your service provider, you can claim a tax credit here. You have two op-tions:

Credit on Form 8913. If you have records to prove the amount of taxyou paid (which is 3% of the long-distance or bundled servicecharges), you can claim it by completing the new Form 8913 (notbuilt into the software) and entering the resulting tax credit here.

Use standard amount instead? A standard amount is available withoutany records. If you answer Yes here, the amount is computed basedsolely on the number of exemptions claimed on the return: $0, $30,$40, $50, or $60, for 0, 1, 2, 3, or 4 or more exemptions, respec-tively. (TIP: If you file your return claiming the standard amount andlater find that the amount you actually paid is more, you can file anamended return to claim the higher amount using Form 8913.)

71 Credit for federal telephone excise tax paid. (auto-calc) Computed as thestandard amount if you answered Yes, above, or the amount you enteredfrom Form 8913 if you answered No.Other special payments (itemize). You may be able to claim a tax credit forother payments you made. For example, if you repaid more than $3,000 ofincome you reported as taxable income in a prior year, such as excess unem-ployment compensation or advance commissions not earned, you may havethe option of claiming a credit here rather than deducting the amount fromincome elsewhere. The credit amounts to the tax you would have saved hadyou not been taxed on the income in the prior year. To claim the credit, enter“IRC 1341” and the amount of credit in a supporting statement for this line.See Repayments in IRS Pub. 525 (Taxable and Nontaxable Income) for de-tails.72 Add lines 64 through 71. TOTAL PAYMENTS. (auto-calc) Computed as indi-cated, this is the total of payments already made or credited.


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REFUND. If line 72 exceeds line 63, a refund may be available.73 Amount you OVERPAID. (auto-calc) Line 72 less 63, but no less than zero.2007 estimated tax (Form 1040-ES). (Road Map line, supported by Form 1040-ES.) Your total estimated tax for the next tax year is figured on Form 1040-ES using the tax rates and other regulations for the next tax year. If you wantto apply any of the excess payment on line 73 to estimated taxes, use thepercentage entry below to control the maximum amount to be applied. If youcomplete no Form 1040-ES but you want to apply some of the refund to nextyear's estimated tax, enter 100% below and the dollar amount to apply here.% of above estimated tax to prepay. This entry controls the amount of anyoverpayment appearing on line 73 that will be applied to 2007 estimatedtaxes via line 75, below. If you complete a Form 1040-ES, you will typicallyenter 25% here so that the first quarter's estimated tax payment is automati-cally made. Or, if you prefer, you could pay up to the amount of estimatedtaxes for the entire year by entering 100% here. If you complete no Form1040-ES but you want to apply some of the refund to next year's estimatedtax, enter 100% here and the dollar amount to apply above.74a Amount of line 73 you want REFUNDED TO YOU. (auto-calc) Computedas line 73 less any penalty from Form 2210 on line 77 and less line 75.Use Form 1310 to claim a refund for deceased person. (If Premium Level,supported by Form 1310.) If the return is for a deceased taxpayer and youare claiming the refund on line 74a for the decedent’s estate, you must fileForm 1310 with the return to make the claim. No monetary amounts appearon the form. It is merely an affidavit of your right to the claim, and access tothe form is provided here for the Premium Level for convenience.To apply for e-file RAL or QIK for a refund, itemize. If you will e-file the returnand have purchased Bank Products with your software, you can offer RefundAuthorization Loans or QIK checks to your clients. The bank application canbe completed either through Tax Preparer by itemizing the following line, orthrough your EFI2006 transmission software by navigating through itsmenus.

Type: 0=None, 1=RAL, 2=QIK. (Road Map line, supported by the RALor QIK Bank Application.) Once you itemize this line and completethis form, the bank information that appears on that form is used inthe next section, so you must enter all bank information on the sup-porting form.

Direct Deposit Information. Complete the following lines to direct the IRS todeposit any refund directly in your bank account. CAUTION: If you applied fora RAL or QIK refund through the preceding line, lines 74b through 74d arecompleted for you and should not be changed because they represent thebank account that will repay any advance payment you receive.

Do you want refund deposited into more than one account? If Yes, youshould skip lines 74b through 74d, below, and instead complete and

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attach Form 8888 to supply the required information for the multiplebank accounts. (This option is not available for an e-filed return.)

74b Routing number. This 9-digit number identifies the bank to whichany refund will be sent. If a checking account, the number is thefirst set of numbers printed at the bottom of your checks.

74c Type: 1=Checking, 2=Savings. Enter 1 or 2 to identify the type ofbank account. This entry is forced to zero if a 9-digit routing num-ber is not entered above, and is forced to 1 if e-file RAL or QIKfunds was applied for on our RAL or QIK Bank Application.

74d Account number. Enter full account number, including the bank'sbranch number. If a checking account, the number is the second setof numbers printed at the bottom of your checks. (Be sure not toinclude the last set of numbers, which is your check number.)

75 Amount of line 73 to be APPLIED TO YOUR 2007 ESTIMATED TAX. (auto-calc) Computed as the lesser of line 73 less line 77 or the portion of esti-mated tax you choose to prepay.

AMOUNT YOU OWE. If line 63 plus 77 exceeds line 72, you owe more tax.76 AMOUNT YOU OWE. (auto-calc) Computed as line 63 plus penalty on line77, below, less line 72, but no less than zero.Are you paying the full amount due? The IRS now requests that you enclosea Form 1040-V voucher along with any payment. However, you may chooseto pay less than the full amount due, and penalties will apply only to the bal-ance not paid. If you are paying the full amount on line 76, answer Yes hereand the full amount will be printed on a Form 1040-V voucher for the return.Amount to be paid. If you answered Yes above, the amount from line 76 ap-pears here. But if you answered No, you must enter the amount you will payand that amount will appear on the printed Form 1040-V.77 Estimated tax penalty. (Road Map line, supported by Form 2210.) If line76 is $1,000 or more, or you did not pay enough estimated tax on every oneof the quarterly payment due dates, you may be liable for a penalty. Form2210 is automatically generated upon the final recalculation of the return,and made a permanent part of the return if a penalty exists. You will have toaccess Form 2210 if you want to report annualized income installments (for alesser penalty when most of your income is received in the second half of theyear) or to provide additional information to qualify you for the more favorableForm 2210-F. After Form 2210 or 2210-F is completed, the penalty is postedto this line, and lines 74a, 75, and 76 are readjusted accordingly.

THIRD PARTY DESIGNEE. Information you supply below will appear at thebottom of page 2 of the official printout of Form 1040, designating anotherperson to be allowed to discuss your return with the IRS.

Do you want the PAID PREPARER to be the designee? Answer Yes ifyou want the paid preparer identified in the signature block of Form1040, page 2, to be the person to discuss your return with the IRS.If you answer Yes, the word “PREPARER” is automatically entered


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for the designee and all other lines are made blank, in accordancewith IRS instructions.

If No, identify below who you want to allow to discuss the return with the IRS:Designee’s name. Enter the name in 15 characters or less. Your desig-

nee can be anyone you choose to allow to communicate with theIRS for you, including a friend or relative. The person you designatehere is allowed to give the IRS any missing information from the re-turn, to call the IRS for information about the processing or statusof the return, and respond to IRS notices concerning errors in thepreparation of the return, but does not otherwise represent you be-fore the IRS. However, if you want the paid preparer who signs thereturn to be the designee, just answer Yes to the preceding questionand the word “Preparer” will appear here and the next two lines willbe made blank, in accordance with IRS instructions.

Designee’s phone number. Enter the phone number complete with areacode in 12 characters or less.

Designee’s personal identification number (PIN). The PIN is selected bythe designee and can be any 5 digits of his or her choosing. Enterthe 5-digit PIN in the allowed 10-character space by adding a spaceafter each digit.

Itemize to access Form 8453. (For Standard and Premium Levels, Road Mapline to Form 8453.) In order to e-file a return you must complete a Form8453 for the return, irrespective of whether you are required to send a paperForm 8453 to the IRS. This form is used to collect a broad range of informa-tion that the IRS requires, including your Electronic Filing Identification Num-ber (EFIN). This line is provided solely for easy access to Form 8453.

SPECIAL IDENTIFICATION. These entries are used to identify the personsigning a decedent return:

Filing as surviving spouse? If married filing jointly and the other spousedied during the tax year you must answer Yes here for the return tobe accepted for e-file. For e-file, a Yes is required here if a joint re-turn and one of the spouses died during the year.

Personal representative? If not married filing jointly and the taxpayerdied during the tax year you must answer Yes here for the return tobe accepted for e-file. For e-file, a Yes is required here if a joint re-turn and both spouses died during the year, or other than joint andthe taxpayer died during the year.

The phrase to which you answer Yes will be printed in the signature block atthe bottom of Form 1040 page 2 for a paper return.

Extra line for personal memos. The supporting statement you create for thisline will not be printed as a part of the official return. This line is providedonly to allow you to make private notes or reminders.

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Schedule A / Itemized DeductionsPurpose. Schedule A is used to itemize deductions when your actual deducti-ble expenses exceed the standard deduction. It supports claims for such de-ductions as medical expenses, taxes, interest, contributions, and employeeexpenses. Since the software automatically gives you the maximum deduc-tion, it is usually worthwhile to complete Schedule A even when you thinkthat the total itemized deduction will be less than the standard deduction(shown in Table 1-4 in Chapter 1.) This schedule is accessible through theRoad Map at the line following line 39b on Form 1040. It is automaticallycreated when the total of amounts for Schedule A from other forms andschedules exceed the standard deduction. Amounts considered in decidingwhether to auto-create this schedule include: state estimated tax on the Con-trol Form, state withholding on the W-2 and 1099-R Worksheets for Form1040, investment expense or deductible foreign tax from Schedule B, de-ductible amounts from REMICs shown on line 37(e) of Schedule E, and de-ductible amounts from Forms 2106, 4684 and 4797. Even though automati-cally created under a broad set of circumstances, you will generally want toaccess this schedule to provide details in itemized lists for specific lines.

Beware of the impact of tax year and AGI. Several automatically computedlimitations depend on the tax year and adjusted gross income (AGI). Thenumbers you see on the screen may therefore not be the final numbers forthe schedule if you subsequently change either tax year or AGI.

MEDICAL AND DENTAL EXPENSES. Medical and dental expenses are de-ducted here, subject to a floor of 7.5% of AGI. You can deduct medical anddental expenses for you, your spouse, all dependents, a child not claimed asyour dependent only because of the rules for separated parents, or a personnot claimed as your dependent only because that person’s income was$3,300 or more or that person filed a joint return.

Insurance:Self-employed insurance not on Form 1040, line 29. (auto-calc) If Form

1040 line 29 is less than the amount on the line above it labeled“Net eligible insurance paid,” the difference appears here.

Other insurance. Include here all other amounts for medical and den-tal insurance premiums.

Deductible INSURANCE. (auto-calc) Computed as the sum of the pre-ceding two amounts.

Long-term Care Contracts:YOUR long-term care premiums. Enter here the total premium paid for

the principal taxpayer.Amount excluded from Form 8885. (If Premium Level, supported by

Form 8885.) You cannot claim a deduction here for any health in-surance payments you used to claim a credit through Form 8885(Health Coverage Credit). Accordingly, if the health insurance pay-ments reported on your copy of Form 8885 are the same payments


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as entered on the preceding line, the amount here should reflect theamount on line 4 of Form 8885 reduced by any advance paymentsshown on line 6 of the form.

Deductible for YOU. (auto-calc) You can deduct long-term care pre-miums only up to amounts defined by the IRS for various agegroups. The limitation is applied here based on your age entered onForm 1040. The limit ranges from $280 per year for taxpayers un-der 41 to $3,530 for taxpayers over 70.

SPOUSE long-term care premiums. Enter here the total premium paidfor the spouse.

Amount excluded from Form 8885. (If Premium Level, supported byForm 8885.) The same limitations as applied for you apply for yourspouse as well, so if the health insurance payments reported on thespouse’s copy of Form 8885 are the same payments as entered onthe preceding line, the amount here should reflect line 4 of Form8885 reduced by any advance payments on line 6 of the form.

Deductible for SPOUSE. (auto-calc) The same limitations as appliedfor you are applied here for your spouse.

OTHER long-term care premiums. You are allowed to deduct premiumsyou paid for others as well, including all your dependents. We pro-vide an extra entry for one such person.

Age of OTHER at year-end. Enter the age at the end of the tax year ofthe person whose premiums you paid.

Deductible for OTHER. (auto-calc) The limitation is applied as beforefor one other person. You will have to override the amount if youpaid premiums for more than one other person.

Car Expenses (to get care):Car (owned) expense - actual. You can deduct the actual gas and oil

costs of using your own car to get medical care, or an amountbased on a standard mileage rate, whichever is greater. Enter theactual costs here. The software will use this amount only if it isgreater than the standard mileage amount computed below.

Miles traveled to get care. Enter total round-trip miles traveled in yourown car to get medical care in 2006.

Maximum allowed (actual or standard). (auto-calc) Computed as thegreater of the actual expenses entered or the standard mileageamount (computed at the 2006 rate of 18 cents per mile).

Parking fees and tolls. Whichever method of car expense deductionyou use, you can also deduct these parking fees and tolls here.

TOTAL deductible car expenses. (auto-calc) Computed as the sum ofthe preceding two lines.

MEDICAL AND DENTAL EXPENSES (summary):Insurance. (auto-calc) Taken as the previously computed “Deductible

INSURANCE.”Long-term care contracts. (auto-calc) Computed as the sum deducti-

ble amounts computed previously for YOU, SPOUSE, and OTHER.

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Car expenses. (auto-calc) Taken as the previously computed “TOTALdeductible car exepenses.”

Other medical and dental expenses. Enter here amounts for prescrip-tion medicines and drugs, insulin, doctors, dentists, nurses, hospi-tals, etc. See Table 2-6. Be sure to include travel costs to get medi-cal care (except for costs for your own car entered previously), in-cluding lodging expenses for hospital-related medical care up to $50per night. Do NOT include health insurance premiums entered previ-ously. (You cannot deduct off-the-shelf medication except for insu-lin, nor life insurance nor income protection payments.)

1 Medical and dental expenses. (auto-calc) Computed as the sum of the pre-ceding four amounts.

2 Amount on Form 1040, line 38. (auto-calc) Taken from Form 1040 as indi-cated.

3 Multiply line 2 by 7.5%. (auto-calc) Computed as indicated.

4 Subtract line 3 from line 1. (auto-calc) Computed as indicated but no lessthan zero, this is the net deductible medical and dental expense.

Table 2-6. Deductible Medical and Dental Expenses Ambulance service Capital expense, medically required, reduced by any associated increase in property value Contact lenses - and replacement insurance Dental services - including cleaning of teeth Dentures Eyeglasses Guide dog Hearing aids Lodging expenses (except meals) for hospital or medical care (up to $50 per night per person) Medical care not reported on Form 2441 Medical expenses to stop smoking Medical insurance premiums - including the voluntary premiums paid for Medicare B Nursing home medical care Orthopedic shoes Prescriptions, medicines, drugs, vitamins if prescribed Professional services - physicians, dentists, chiropractors, nurses, optometrists, etc. Prosthesis Psychiatric care Special schooling for a physically, mentally, or emotionally handicapped child or dependent Telephone adaptation for hearing impaired Therapy for medical treatment Transportation - either actual expenses, or at the standard mileage rate, plus parking fees and tolls

Note: All deductions subject to prescribed limits. See Pub. 502 for deductions for handicapped persons.


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TIP: State and local sales tax still deductible in lieu of state and local in-come tax. Even though the IRS Schedule A for 2006 doesn’t show it, thesales tax deduction reintroduced by the American Jobs Creation Act of 2004is still available as an itemized deduction. The deduction expired at the end of2005, but was retroactively reinstated for 2006 by the December tax bill.Like last year, you can take a deduction for either state and local sales tax orstate and local income tax, but not both. (Before 1986, sales tax was de-ductible in addition to income tax, but no sales tax was deductible for 1986through 2003.) The main beneficiaries of the reinstated law are residents ofAlaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, allof which have no state income tax, as well as New Hampshire and Tennes-see, both of which tax only dividend income. Because the new law passedlong after the IRS had printed Schedule A and its instructions for 2006, thehandling of the sales tax deduction for 2006 appears only in a new IRS Pub.600. (You can get the latest IRS Pub. 600 from the web by clicking “Checkfor Updates” on the Tax Preparer Control Panel and going to the MANUALSpage. The publication is accessible in the section entitled “IRS Resources for2007 Filing Season.”)

Remember local sales tax. If you plan to take advantage of this law by usingthe IRS Sales Tax Tables in Pub. 600 rather than your actual expenses, it isimportant to realize that the IRS tables reflect only the state portion of thesales tax. We therefore provide a Sales Tax Worksheet to help you maximizeyour deduction by increasing the amounts in the IRS Sales Tax Tables to re-flect your local sales tax. For details, see our instructions for line 5 of Sched-ule A.

TAXES YOU PAID. Only a few taxes to state and local governments are stilldeductible here, such as state, local, or foreign income taxes, state, local, orforeign real estate taxes, and the portions of automobile license fees that aread valorem taxes. Most other taxes are no longer deductible, but sales taxesare deductible in lieu of income taxes.

INCOME TAX Option for line 5:Itemize to access Control Form. (Road Map line, supported by Control

Form.) You MUST use our Control Form to report any estimated taxpayments for tax year 2006 that are deductible here. The amountsdeductible for tax year 2006 will appear on the next line. (Note thatany part of the estimated tax payment for the final quarter of 2006made after December 31, 2006 cannot be deducted here, but willbe deductible on the return for tax year 2007.)

State estimated tax on Control Form. (auto-calc) State estimated taxpayments you entered on the Control Form as being paid in 2006appear here.

State and local withholding on W-2, W-2G, and 1099-R. (auto-calc)State and local tax withholding you entered on the W-2 Worksheets

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that support line 7 of Form 1040, the W-2G Worksheets that sup-port line 21 of Form 1040, and the 1099-R Worksheets that sup-port lines 15a through 16b of Form 1040 appear here.

Other non-federal income tax paid. Enter here any state and local in-come tax payments made in 2006 but not included above. Also usethis line for negative adjustments. For example, enter as a negativenumber any tax included above that is tax on income not subject tofederal tax. Also enter as a negative amount any excess tax col-lected that you will claim on your state return, such as state disabil-ity insurance collected by more than one employer.

a Income taxes. (auto-calc) Computed as the sum of the above threelines.

SALES TAX Option for line 5:Actual Expense Method. You can generally deduct sales taxes based onthe state and local sales tax you actually paid for 2006. However, youmust keep your actual receipts to back your claim if you use thismethod.

Actual sales taxes paid. Enter the amount of sales tax actually paidbased on your receipts. However, if any amount is based on a rateother than the general sales tax rate, see IRS Pub. 600 for instruc-tions on determining the amount to enter. CAUTION: Only sales taxon personal purchases qualify. Sales tax on purchases for yourtrade or business are deducted on the form or schedule you use toreport income for that business, such as Schedule C or Schedule F.

Optional Table Method. Alternatively, you can deduct sales taxes basedon your income and exemptions using the IRS’s Optional Sales Tax Ta-bles in IRS Pub. 600. However, the income to use is not always yourAGI, and the tables reflect only the state portion of sales taxes. Wetherefore provide here additional calculations and a worksheet to helpyou maximize your deduction.

AGI on Form 1040, line 38. (auto-calc) Taken from Form 1040 as in-dicated, this is the starting point for determining the income to usewhen using the IRS tables.

Nontaxable income on Form 1040. (auto-calc) Computed as the sumof tax-exempt income on line 8a of Form 1040, nontaxable part ofIRA distributions on line 15a of Form 1040, nontaxable part of pen-sions and annuities on line 16a of Form 1040, nontaxable part ofsocial security benefits on line 20a of Form 1040, and the amountof nontaxable combat pay you entered below line 22 of Form 1040.

Other nontaxable income. Enter eligible nontaxable income notshown above, including worker’s compensation and public assis-tance payments you received.

Income for Sales Tax Tables. (auto-calc) Computed as the sum of theabove three lines. You must use this income together with the num-ber of exemptions you claim on line 6d of Form 1040 in order to de-termine allowable state sales tax from the IRS tables.


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State tax from IRS tables. (Supported by the Sales Tax Worksheet,Figure 2-6.) You can enter an amount here rather than using thesupporting worksheets if you lived in the same state for the entireyear and the IRS tables include all of your local sales tax, if any.Otherwise, you should use the supporting worksheets to ensure thatyour deduction is properly prorated among different states or locali-ties and increased to reflect your actual local tax rates. When youreturn from the worksheets, the total that appears here is the sumof prorated portions of line 1 from all worksheets combined. (Clarifi-cation: Although this line is labeled as “state tax,” the IRS tablesnow include local sales tax for states that have a uniform local salestax. Nevertheless, some localities may have additional local salestaxes that you can deduct. The set of worksheets you access byitemizing here is the same set of worksheets you access by itemiz-ing the next line.)

Local tax from worksheet. (Supported by the Sales Tax Worksheet,Figure 2-6.) The IRS allows you to deduct, in addition to the amountin the tables, a prorated amount for local tax not reflected in the ta-bles. The IRS complicates the determination because some of theamounts in the state tables already reflect local sales taxes whileothers do not. We therefore provide a more straightforward work-sheet that deviates from the IRS worksheets by basing its calcula-tions on the full rate you actually paid (including both state and localsales tax). When you return from the worksheets, the total that ap-pears here is the sum of prorated portions of line 2d from all work-sheets combined. TIP: If you choose to use the IRS worksheet inPub. 600 instead of ours, you can enter the result on line 6 of theIRS worksheet here rather than itemizing to use our worksheet. (Theset of worksheets you access by itemizing here is the same set ofworksheets you access by itemizing the preceding line.)

Tax on specific items. In addition to the table amounts, you are al-lowed a deduction for sales tax paid on certain big-ticket items youpurchased during the tax year. Qualifying purchases include thepurchase of a motor vehicle, aircraft, boat, home, and home build-ing materials, but there are restrictions on the amount you can de-duct. See the IRS Pub. 600 for details. CAUTION: Only sales tax onpersonal purchases qualify. Sales tax on purchases for your trade orbusiness are deducted on the form or schedule you use to report in-come for that business, such as Schedule C or Schedule F.

TOTAL for Optional Method. (auto-calc) Computed as the sum of theabove three lines.

Result for best method:b General sales taxes. (auto-calc) Computed as the greater of “Ac-tual sales taxes paid” for the Actual Expense Method or “TOTAL forOptional Method” for the Optional Table Method.

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W/S ERROR-Total days over 1 year. (auto-calc) If an amount appearshere, it means that you have an error in at least one of your entriesfor “Days in 2006 resident here” on the Sales Tax Worksheet. Thetotal number of days for all worksheets combined should not exceedthe total number of days in the year (365 for 2006) or else the pro-rationing of table amounts among residences will be incorrect. Formore information, see the details for the worksheet, which follow.

Why a Sales Tax Worksheet? Our worksheet provides a simple way of deter-mining the additional local tax you can deduct over and above the amount inthe IRS table. The IRS table reflects the local sales tax for some states butnot others, and does not include the local rate for any localities that chargemore than the uniform rate for the state. Therefore, our worksheet has thetax rate assumed by the IRS built into its calculations, so when you enter thefull sales tax rate you actually paid, the software can determine the properprorated amount of additional tax you are allowed to deduct. Our worksheetcan therefore help you maximize your deduction by increasing the amounts inthe IRS Sales Tax Tables to reflect your actual local sales tax rate. (The IRSprovides an unecessarily complex worksheet and numerous supplemental in-structions to determine the additional deduction, so our approach deviatessignificantly from the IRS instructions while producing the same results.)

CAUTION for CA, ID, NV, NJ, NY, NC, and OH. Releases prior to 2007.01g as-sume rates for the listed states that differ from those in the latest version ofIRS Pub. 600, because of changes in the state rates or the inclusion of localrates. Some rates increased and some rates decreased. Therefore, if you useour worksheet to determining the additional local tax you can deduct in oneof these states, you should update to our latest release to ensure that yourprorated deduction is accurate.

Sales Tax Worksheet, Figure 2-6. Use a separate worksheet for each separatelocality in which you resided during the tax year. The sales tax carried backto Schedule A when you exit will be an amount prorated in accordance withthe number of days you resided in each locality. (This worksheet is patternedafter the IRS State and Local General Sales Tax Deduction Worksheet, but in-cludes only lines 1 through 2d so that the proper prorationing among multipleworksheets can be performed.) TIP: The purpose of this workheet is only todetermine a prorated additional local tax deduction to which you may be enti-tled. If your locality has no local sales tax, or the IRS “2006 Optioonal Stateand Certain Local Sales Tax Tables” already reflect your local sales tax, youshould not use this worksheet, but enter the amount from the IRS tables onour Schedule A line labeled “State tax from IRS tables” instead.


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State for THISworksheet.You must en-ter here the 2-character statecode whereyou residedduring the por-tion of the taxyear repre-sented by thisworksheet.This entry iscritical to thecalculations.The calcula-tions dependon the ratesassumed bythe IRS in their “2006 Optioonal State and Certain Local Sales TaxTables,” which are automatic on this worksheet once you properlyenter the state. Codes for all 50 states plus Washington, D.C. arerecognized.

Locality for THIS worksheet. This entry is provided in order to distin-guish the separate worksheets you complete, but is not used in thecalculations. You must enter the sales tax rate you pay in your lo-cality above line 2a.

Days in 2006 resident here. Enter the number of days you resided inthe above locality during the tax year. You must enter the numberof days here or no deduction will be computed! This entry is usedfor prorating sales taxes among different worksheets. Therefore, ifyou use just one worksheet, enter 365 here. CAUTION: Take carethat the sum of entries for all worksheets combined does not ex-ceed the total number of days in the year (365 for 2006). Other-wise the deduction you compute will be more than is allowed by theIRS. (We flag this error by showing the amount by which your totalexceeds a full year at the bottom of screen 2 of Schedule A, in theresult for “W/S ERROR-Tot. days over 1 yr.”)

Use the following information in the IRS tables (in IRS Pub. 600 for2006) in order to determine the proper entry for line 1:

Income for IRS tables. (auto-calc) Taken from the line “Income forSales Tax Tables” computed on Schedule A, this is the income youmust use when reading the IRS tables.

SALES TAX WORKSHEETSALES TAX WORKSHEETSALES TAX WORKSHEETSALES TAX WORKSHEET State for THIS worksheet.. State for THIS worksheet.. State for THIS worksheet.. State for THIS worksheet.. Locality for THIS worksht. Locality for THIS worksht. Locality for THIS worksht. Locality for THIS worksht. Days in 2006 resident here Days in 2006 resident here Days in 2006 resident here Days in 2006 resident here (365 days is max for 2006) (365 days is max for 2006) (365 days is max for 2006) (365 days is max for 2006)Use following two numbersUse following two numbersUse following two numbersUse following two numbersIn IRS tables to determineIn IRS tables to determineIn IRS tables to determineIn IRS tables to determineproper entry for line 1.proper entry for line 1.proper entry for line 1.proper entry for line 1. Income for IRS tables..... Income for IRS tables..... Income for IRS tables..... Income for IRS tables.....▒ 0▒ 0▒ 0▒ 0 Exemptions on 1040 line 6d Exemptions on 1040 line 6d Exemptions on 1040 line 6d Exemptions on 1040 line 6d▒ 0▒ 0▒ 0▒ 0 1 State sales tax from tables 0 1 State sales tax from tables 0 1 State sales tax from tables 0 1 State sales tax from tables 0Supply following for add�lSupply following for add�lSupply following for add�lSupply following for add�lDeduction for local tax.Deduction for local tax.Deduction for local tax.Deduction for local tax. State rate assumed by IRS. State rate assumed by IRS. State rate assumed by IRS. State rate assumed by IRS.▒ 0▒ 0▒ 0▒ 0 Full rate you actually pd. 0 Full rate you actually pd. 0 Full rate you actually pd. 0 Full rate you actually pd. 0 2a Local gen sales tax rate(%) 2a Local gen sales tax rate(%) 2a Local gen sales tax rate(%) 2a Local gen sales tax rate(%)▒ 0▒ 0▒ 0▒ 0 2b State gen sales tax rate(%) 2b State gen sales tax rate(%) 2b State gen sales tax rate(%) 2b State gen sales tax rate(%)▒ 0▒ 0▒ 0▒ 0 2c Line 2a divided by 2b in %. 2c Line 2a divided by 2b in %. 2c Line 2a divided by 2b in %. 2c Line 2a divided by 2b in %.▒ 0▒ 0▒ 0▒ 0 2d Local general sales taxes.. 2d Local general sales taxes.. 2d Local general sales taxes.. 2d Local general sales taxes..▒ 0▒ 0▒ 0▒ 0 -> LINE 1 PRORATED FOR SCH. A. -> LINE 1 PRORATED FOR SCH. A. -> LINE 1 PRORATED FOR SCH. A. -> LINE 1 PRORATED FOR SCH. A.▒ 0▒ 0▒ 0▒ 0 -> LINE 2d PRORATED FOR SCH. A -> LINE 2d PRORATED FOR SCH. A -> LINE 2d PRORATED FOR SCH. A -> LINE 2d PRORATED FOR SCH. A▒ 0▒ 0▒ 0▒ 0

Figure 2-6. Sales Tax Worksheet

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Exemptions on Form 1040, line 6d. (auto-calc) Taken from Form 1040as indicated, this is the number of exemptions you must use whenreading the IRS tables.

1 State sales tax from tables. Enter the amount for the above incomeand exemptions for your state from the IRS “2006 Optioonal Stateand Certain Local Sales Tax Tables” in the latest version of IRS Pub.600. The IRS released this publication for 2006 long after the IRSforms were printed, in response to the December tax bill, and hasrevised it since its first release. You can get the latest IRS Pub. 600from the web by clicking “Check for Updates” on the Tax PreparerControl Panel and going to the MANUALS page. The publication isaccessible in the section entitled “IRS Resources for 2007 FilingSeason.” If you lived in Alaska, there is no state sales tax but cer-tain boroughs and cities have a local tax. IRS Pub. 600 provides in-structions for this situation, which is unique to Alaska. Even thoughthis line is labeled as a state line, you must enter here the amountyou determine from Pub. 600, and make no entry on the line “Fullrate you actually paid.”

Supply the following information for an additional deduction for local tax:State rate assumed by the IRS. (auto-calc) This is the rate assumedby the IRS, for the state you entered above, in the IRS’s “2006 Op-tioonal State and Certain Local Sales Tax Tables,” which may al-ready reflect some or all of your local sales tax. It is the basis fordetermine how much additional tax you may be able to deduct, ifany, for local sales tax. (Even though it is shown on the screen as apercentage to only 2 place, it is accurate to 3 places in the calcula-tions.) CAUTION: If you claim sales tax in California, Idaho, Nevada,New Jersey, New York, North Carolina, or Ohio, be sure to updateto the latest release of Tax Preparer before using this worksheet.The rates we compute here for these states were revised in release2007.01g to reflect changes in the IRS tables.

Full rate you actually paid. Enter the full rate here, including both lo-cal and state parts, as a percentage. This is the only rate most tax-payers know – the full sales tax rate they pay in their locality forstate and local tax combined. We therefore compute the local partof this rate not reflected in the IRS tables for line 2a based on yourentry here and our knowledge of the state part of your entry.

2a Local general sales tax rate (%). (auto-calc) Computed as the “Fullrate you actually paid” less “State rate assumed by the IRS.” (Eventhough it is shown on the screen as a percentage to only 2 place, itis accurate to 3 places in the calculations.)

2b State general sales tax rate (%). (auto-calc) Taken from “State rateassumed by the IRS,” above.


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2c Line 2a divided by line 2b in %. (auto-calc) Computed as indicatedand expressed as a percentage to 2 places, but carried to full accu-racy in the calculations.

2d Local general sales taxes. (auto-calc) Computed as line 1 times line2c, but using the precise percentage underlying the display for line2c. This is the amount by which the table amount in line 1 can beincreased for local taxes.

# LINE 1 PRORATED FOR SCHEDULE A. (auto-calc) Computed as line1 times the ratio of “Days in 2006 resident here” divided by thenumber of days in the year (365 for 2006), this is the amount thatTHIS worksheet can contribute to the total state sales tax you de-duct on Schedule A.

# LINE 2d PRORATED FOR SCHEDULE A. (auto-calc) Computed as line2d times the ratio of “Days in 2006 resident here” divided by thenumber of days in the year (365 for 2006), this is the amount thatTHIS worksheet can contribute to the total local sales tax you de-duct on Schedule A.

Summary for line 5:a Amount for income tax option. (auto-calc) Taken as the amount onthe previous line labeled “a Income taxes.”

b Amount for sales tax option. (auto-calc) Taken as the amount onthe previous line labeled “b General sales taxes.”Option b used for line 5? (auto-calc) Answered Yes if line b, above,is greater than line a, above; otherwise, No.

5 State and local income taxes. (auto-calc) Taken as line b if the pre-ceding answer is Yes, and line a otherwise. This is the only amountshown on the official printed Schedule A because the IRS form wasprinted before the sales tax deduction was reinstated. As a result,the IRS now instructs you to print a code “ST” next to line 5 on theofficial Schedule A when the sales tax deduction is used for thisline, which Tax Preparer does for you automatically.

6 Real estate taxes. Enter here ONLY property tax on nonbusiness re-alty. (Taxes on business-owned property are deducted throughSchedule C or F, and taxes on rental property are deducted throughSchedule E.)

7 Personal property taxes. Include here any property taxes not includedin line 6, such as the portion of your automobile license fee that isbased on the value of your car (ad valorem taxes).

8 Other taxes. Type and amount. Other taxes qualified for deduction onthe federal return are entered on the following three lines.REMINDER: State and local sales taxes are NOT deductible here,but may be deductible at line 5.

Other federal and state qualified taxes. Enter in a supporting state-ment for this line ONLY taxes not included in line 5, 6, or 7 that aredeductible on BOTH the federal and state tax returns.

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Form 1099 foreign tax elected. (auto-calc line, supported by ScheduleB) This is the amount of foreign tax withheld on Forms 1099-INTand 1099-DIV that you elected (on our Schedule B) to be deductedon Schedule A rather than claimed as a foreign tax credit on line 47of Form 1040. See our details between Parts II and III of ScheduleB for more information.

Other foreign income taxes. Include here any income taxes paid to aforeign country. This tax is NOT deductible on some state returns,such as California's.

Other federal-deductible taxes. Enter in a supporting statement forthis line any other taxes deductible on the federal return but not thestate return.

8 Total other taxes. (auto-calc) The sum of the above four lines.9 Add lines 5 through 8. (auto-calc) Computed as indicated, this is the

total deductible taxes.

Table 2-7. Deductible Interest Expenses

INTEREST YOU PAID. Most personal interest, with the exception of mortgageinterest, is no longer deductible, as summarized in Table 2-7. Mortgage inter-est is fully deductible if you satisfy any of the following EXCEPTIONS:

1 All mortgages on your main home were taken before Oct. 14, 1987.2 A mortgage was taken out on your main home after October 13,

1987, but was used to buy or improve your home and the amountof all mortgages on your home (including those taken out before Oc-tober 14, 1987) does not exceed $1 million ($500,000 if marriedfiling separately).

3 A mortgage was taken out on your main home after October 13,1987, was not used to buy or improve your home, but the amountof the mortgage was no more than $100,000 throughout 2006($50,000 if married filing separately).

Lines 10 and 11 are used to report both the entire amounts and the deducti-ble amounts for mortgage interest. CAUTION: If you file Form 8829 for de-ducting expenses for the business use of your home, you can deduct hereONLY the amounts NOT deducted on Form 8829.

Bank loans for investments

Margin accounts with a broker

Mortgage loans

Notes: 1. You cannot deduct interest on debts incurred to purchase or carry tax-exempt securities. 2. The deduction for interest on investment debt is limited to investment income. 3. Mortgage debt is subject to additional restrictions when incurred after Oct. 13, 1987. See IRS Pub. 936 (Home Mortgage Interest Deduction).


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Home mortgage interest and points paid to financial institutions andshown on Form 1098. Enter the entire amount shown on the Forms1098 from the institutions here, not just the deductible amount.You must also explain in a supporting statement for this line anydiscrepancy between your entry for this line and the amount re-ported to you on Form 1098. For example, if claiming the MortgageInterest Credit (through Form 8396, which is reported on line 54a ofForm 1040), you must reduce your entry here by line 3 of Form8396. CAUTION: If you paid any amounts to institutions that didNOT report the amount to you on a Form 1098, enter the amountbelow line 10, not here.

Amount exceeding limit. If you don’t qualify for one of the above ex-ceptions, use IRS Pub. 936 (Home Mortgage Interest Deduction) todetermine the part of the above interest that is classified as personalinterest and therefore NOT deductible.

Exclusion on Form 8396, line 3. (If Premium Level, supported by Form8396.) If you claim a Mortgage Interest Credit, a portion of the in-terest you paid is not deductible. The nondeductible amount isshown on line 3 of Form 8396 and reported here.

10 Home mortgage interest and points reported on Form 1098. (auto-calc) Computed as the total entered less the above excess.Other home mortgage interest (NOT on a Form 1098). (Supported bythe Mortgage Interest Worksheet, Figure 2-7.) Enter all home mort-gage interest for which you did NOT receive a Form 1098 here. En-ter the entire amount, not just the deductible amount, but do NOTinclude points. (Points not reported to you on a Form 1098 are re-ported at line 12, not here.) CAUTION: If any interest for this linewas paid to the person(s) from whom you bought the home, youMUST complete the Mortgage Interest Worksheet that supports thisline, showing the name, address, and taxpayer identification numberof the lender.

If you did not receive a Form 1098, but someone else did, ITEMIZE. Ifyou paid the interest with someone else and received no Form 1098because it was sent to the other person, you must report that per-son’s name and address in a supporting statement for THIS line.

Amount exceeding limit. If you do not qualify for one of the excep-tions, use IRS Pub. 936 (Home Mortgage Interest Deduction) to de-termine the part of the above interest that is classified as personalinterest and therefore NOT deductible.

11 Home mortgage interest not reported on Form 1098. (auto-calc)Computed as the total other interest less the above amount that ex-ceeds the limit.

12 Points not reported on Form 1098. Enter only FULLY DEDUCTIBLEpoints here, but be sure to include the points excluded from line 11.Deductions for points must usually be spread over the life of theloan, unless they were paid in the current year to buy or improve

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your home and the loan was secured by your main home. See IRSPub. 936 (Home Mortgage Interest Deduction) for details.

13 Investment interest (Form 4952). (If Standard or Premium Level, sup-ported by Form 4952.) Interest on loans used to purchase or main-tain an investment in 2006 are deductible only to the extent of in-vestment income. You must generally use Form 4952 to determinethe deductible amount. Investment interest that is subject to thepassive loss rules is NOT reported here, but rather included withother expense when reporting the net income or loss for the activ-ity. All or part of the result on line 8 of the form is reported here.

14 Add lines 10 through 13. (auto-calc) Computed as indicated, this isthe total interest.

Mortgage Interest Worksheet, Figure 2-7. If ANY interest you want to reporton line 11 is interest on a seller-financed mortgage, you must report ALL in-terest for the line on these worksheets, whether seller-financed or not, al-though you are only obligated to supply the name, address, and ID numberfor the seller.

Name. Enter here thename of the indi-vidual (the lender)in 25 charactersor less.

Address. Enter herethe address of theindividual if themortgage is a seller-financed mortgage. You can enter as many as35 characters total, 25 on the first line and 10 on the continuationline.

ID No. Enter the social security number (SSN) or employer identificationnumber (EIN) for the individual if the mortgage is a seller-financedmortgage.

$ amount. Enter the total amount paid during the tax year.The dollar totals are carried to the line from which the worksheet is accessed.

GIFTS TO CHARITY. Charitable contributions are subject to strict reportingrequirements, so you must explain all claims in a supporting statement foreach line.

Cash and check contributions. Enter all contributions paid by cash orcheck here, including out-of-pocket expenses except for those forthe use of your own car (which are entered later). Although the IRSno longer requires supporting statements as a part of the return, de-tails should be kept in a supporting statement for this line; the De-tach Key can be used to detach the support so that it is not printedwith the return, as described in Chapter 7 of the separate User’sGuide. Note that you can deduct gifts of $250 or more only if youhave a statement from the donee showing the amount of money

MORTGAGE INTEREST WRKSHEETMORTGAGE INTEREST WRKSHEETMORTGAGE INTEREST WRKSHEETMORTGAGE INTEREST WRKSHEET Name.............. Name.............. Name.............. Name.............. Address........... Address........... Address........... Address........... Address conti Address conti Address conti Address continnnnued...........ued...........ued...........ued........... ID No. ..................... ID No. ..................... ID No. ..................... ID No. ..................... $ amount.................. 0 $ amount.................. 0 $ amount.................. 0 $ amount.................. 0

Figure 2-7. Mortgage Interest Worksheet


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contributed and a description of property contributed, plus a state-ment on whether or not the donor received any services because ofthe donation. (See Table 2-8 for categories of contributions limitedto specified percentages of AGI.)

Actual expense for your own car. You can deduct the actual gas andoil costs of using your car for volunteer work, or an amount basedon standard mileage rates, whichever is greater. Enter the actualcosts here and the mileage in the next line(s), and the software willuse the more favorable deduction of the two.

Miles traveled with your own car. Enter total round-trip miles traveledduring volunteer work.

Katrina-related part of the above. Enter mileage included in the pre-ceding line that is attributable to providing relief related to HurricaneKatrina. This mileage is eligible for a 32 cents per mile deductionrather than the standard 14 cents per mile deduction.

Car expenses allowed. (auto-calc) Computed as the greater of (a)the Katrina mileage times 32 cents per mile plus the remaining mile-age (total miles less Katrina miles) times 14 cents per mile, or (b)the actual expense entered above. (The rate for regular charity-related mileage remains at 14 cents per mile because the IRS doesnot have the authority to raise this rate, and Congress has notraised it for non-Katrina activities.)

Parking fees and tolls. Whichever method of car expense deductionyou use, you can additionally deduct these parking fees and tollshere.

15 Gifts by cash or check. (auto-calc) Computed as the sum of “Cashand check contributions,” “Car expenses allowed,” and “Parkingfees and tolls.”

16 Other than by cash or check. Enter non-cash contributions here, butsee the next two lines if this amount exceeds $500.

Itemize here for Form 8283. (Road Map line, supported by Form8283.) This line provides easy access to Form 8283, which is an in-formational form used to justify noncash gifts of more than $500.

You MUST attach Form 8283. (auto-calc) This line is automaticallyYes whenever line 16 exceeds $500, to alert you that you need tocomplete Form 8283, which is accessible through the Road Map atthe preceding line.

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Table 2-8. Deductible Contributions

17 Carryover from prior year. Enter amounts not deducted in prioryears because of the annual limitations on deductibility.

Legal limit (half of AGI). (auto-calc) Computed as 50% of AGI (line38 of Form 1040). This result is used to impose the annual limita-tion on deductions for contributions to one-half of adjusted grossincome. However, additional limitations apply to some kinds of con-tributions. CAUTION: If any of the above contributions are subjectto the more strict rules of 20% or 30% of AGI detailed in Table 2-8,you may have to override this line with a lesser amount. See IRSPub. 526 (Charitable Contributions) for more details.

18 Add lines 15 through 17. (auto-calc) Computed as indicated subjectto the above limitation. This is total contributions. If you have notyet completed Form 1040, and AGI is still zero as a result, theamount computed at line 18 may be zero now, but the amount willbe updated when the final recalculation of the return is complete.

CONTRIBUTIONS LIMITED TO 50% OF AGI:

Contributions carried over from prior year(s)

Charitable nonprofit hospitals and medical research

organizations

Churches, synagogues, other religious organizations

Community chests, corporations, trusts, funds, or foundations

organized and operated for charitable, religious,

educational, scientific, or literary purposes, for the

prevention of cruelty to children or animals, or to foster

national or international sports competition

Government entities (federal, state, local) if the

contribution is made for public purposes only

Tax-exempt educational organizations

Volunteer's mileage at 14 cents per mile

(32 cents per mile if Katrina-related)


Capital gain property donated to the above organizations

Expenses for a student living with you who is placed by

a qualifying organization

Gifts other than capital gain property to other than the

above organizations


Capital gain property donated to other than the above

organizations

For more details consult IRS Pubs. 526 (Charitable Contribu-

tions) and 561 (Determining the Value of Donated Property).


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CASUALTY AND THEFT LOSSES. Losses in excess of $100 are deductedhere. You must use Form 4684 to determine the deductible amount, whereeach loss is reduced by $100 and the remaining total is reduced by 10% ofAGI.

19 Casualty or theft losses (Form 4684). (Road Map line, supported byForm 4684.) Losses from the casualty or theft of personal useproperty are posted here from Form 4684. Losses for business andincome-producing property are posted to Form 4797 or Schedule Aline 22. One Form 4684 is built into the software for reporting thedetails of one casualty or theft, and a summary of totals from allcasualties and thefts for the year. (See the details for Form 4684 ifyou have more than one occurrence of casualty or theft to report.)

JOB EXPENSES AND MOST OTHER MISCELLANEOUS DEDUCTIONS. Thedeductions entered in this section are subject to a floor based on 2% of AGI:

20 Unreimbursed employee expenses. Out-of-pocket expenses requiredby your job but not reimbursed by your employer are reported onone of the following two lines.

Amount from Form 2106 or 2106-EZ. (Road Map line, supported byForm 2106.) Five copies of Form 2106 are available, one for eachemployer. You MUST use Form 2106 to claim travel, transportation,meal, or entertainment expenses, and to report ANY reimburse-ments from the employer. Most expenses are deducted here, butexpenses for certain special cases are posted to other lines instead:(1) The net expense on line 10 of Form 2106 for a qualified per-forming artist is included as a fully deductible adjustment in line 36of Form 1040. (2) The net expense on line 10 of Form 2106 forcertain handicapped employees is not subject to the usual 2% AGIfloor, and is therefore included in line 27 of Schedule A, below.

Other amounts itemized. If you are not required to use Form 2106,you can list unreimbursed employee expenses in a supportingstatement for this line instead. Examples of eligible expenses includeunion dues, professional dues, small tools, uniforms, etc. See Table2-9 for more examples. If you have ANY travel, transportation,meal, or entertainment expenses, you MUST use Form 2106 forthese and ALL other job expenses, NOT this line.

20 Total employee expenses. (auto-calc) The sum of the above twolines.

21 Tax preparation fees. Enter the cost of preparing your income taxreturns. Don't forget the cost of this software if you are preparingyour own return.

22 Other expenses. Most other deductible expenses are reported here,many of which are automatically posted from other forms.

Other itemized. Enter deductions not reported elsewhere in a sup-porting statement for this line. See Table 2-9 for examples.

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Depreciation (Form 4562). (Road Map line, supported by Form 4562.)The result on Part IV of the copy of Form 4562 that is reserved forSchedule A is automatically posted to this line.

Amortization (Form 4562). (Road Map line, supported by Form 4562.)The result on Part VI of the copy of Form 4562 that is reserved forSchedule A is automatically posted to this line.

Form 4684, lines 35 and 41b. (auto-calc line, supported by Form4684.) Deductible losses due to casualties and thefts for employeeproperty are posted here from Form 4684.

Form 4797, line 18a. (auto-calc line, supported by Form 4797.) Thecasualty and theft losses included on Form 4797 are posted here forthe employee property part of line 18a.

Investment expense from Schedule B. (auto-calc line, supported bySchedule B.) Taken from the 1099-INT and 1099-DIV worksheetsthat you complete in support of Schedule B.

Amount from Schedule E, line 37(e). (auto-calc line, supported bySchedule E.) This expense for a REMIC, which you report as incomeon Schedule E, is deductible here.

22 Total other expenses. (auto-calc) The sum of the above lines.23 Add lines 20 through 22. (auto-calc) Computed as indicated.24 Amount from Form 1040, line 38. (auto-calc) Taken from Form 1040

as indicated.25 Multiply line 24 by 2%. (auto-calc) Computed as indicated.26 Subtract line 25 from line 23. (auto-calc) Computed as indicated, but

no less than zero.

OTHER MISCELLANEOUS DEDUCTIONS. Some miscellaneous deductions arestill NOT subject to the 2% AGI floor:

27 Other. List type and amount. The software separates the remainingallowed deductions into three categories, as follows.

Disabled's expense (Form 2106). (Road Map line, supported by Form2106.) An entry appears here only for certain handicapped employ-ees, in accordance with a special exception. See IRS Pub. 907 (TaxHighlights for Persons with Disabilities) and Form 2106 for details.

Gross gambling losses. Enter all gambling losses here. They will belimited to gambling income, as required by law, in the followinglines.Gambling income on Form W-2G. (auto-calc) Taken from your en-tries for gambling winnings on the W-2G Worksheets that supportline 21 of Form 1040.Other gambling income. Enter gambling income not including in thepreceding line.

Gambling losses. (auto-calc) Computed as gross gambling losses butno more than the sum of the preceding to amounts for gambling in-come.


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Form 4684, lines 35 and 41b. (auto-calc line, supported by Form4684.) Deductible losses due to casualties and thefts for income-producing property are posted here from Form 4684.

Form 4797, line 18a. (auto-calc line, supported by Form 4797.) Thecasualty and theft losses included on Form 4797 are posted here forthe income-producing property part of line 18a.

Other not subject to the 2% floor. Enter other allowable deductions ina supporting statement for this line, including federal estate taxesattributable to income in respect of a decedent. See the list in Table2-9 for line 27, as well as IRS Pub. 525 (Taxable and NontaxableIncome) and IRS Pub. 529 (Miscellaneous Deductions), for other ex-amples of deductions not subject to the 2% floor. Do NOT deductamortizable bond premiums on bonds acquired after December 31,1987 here; instead, enter the amounts on the 1099-INT Worksheetwhere it will be used to reduce the amount of interest you report onSchedule B.

27 Total other not limited. (auto-calc) The sum of the above three lines.

TOTAL ITEMIZED DEDUCTIONS. The deductions that can be claimed are fur-ther limited when income is high enough.

28 Is 1040 line 38 over $150,500 ($75,250 if MFS)? (auto-calc) Answeredautomatically based on the amount on line 38 of Form 1040. A Yesanswer here means that the total itemized deductions may be re-duced due to limitations on high-income taxpayers.

Total before limitation. (auto-calc) Computed as the sum of lines 4,9, 14, 18, 19, 26, and 27.

Amount disallowed. (auto-calc) This amount is computed automati-cally based on the IRS's Itemized Deductions Worksheet, which ap-plies to taxpayers with adjusted gross income above $150,500($75,250 if married filing separately) for 2006. For most amountson Schedule A, the worksheet results in a reduction of the allowablededuction amounting to 3% of the amount by which AGI exceedsthe stated thresholds, but only 80% of the deduction is subject tothis reduction. However, amounts on lines 4, 13, and 19, and thegambling and Form 4684 losses in line 27, are excepted from thelimitation.

28 Allowed itemized deductions. (auto-calc) Computed as the total be-fore limitation less the amount disallowed. This result is posted toForm 1040 below line 39b, to be used for line 40 in place of thestandard deduction when it is the greater of the two.

Extra line for personal memos. The supporting statement you create forthis line will not be printed as a part of the official return. This line isprovided only to allow you to make private notes or reminders.

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Table 2-9. Miscellaneous Deductions

FOR LINE 20 OF SCHEDULE A: Business use of part of your home (if that part used exclusively and continuously in your work and for convenience of your employer). See IRS Pub. 587. If self-employed, use Form 8829 and Schedule C. Dues to professional societies & business associations Educational expenses for maintaining or improving skills required in your present position, or if required by your employer, by law or regulations to keep your present job or salary Employment agency fees Employment-seeking expenses Physical exams required by the employer Professional journals and dues Safety equipment, small tools and supplies Travel expenses incurred in finding a new job Uniforms, work clothes, protective clothing (including cleaning) if not adaptable for general wear Union dues

FOR LINE 21 OF SCHEDULE A: Tax return preparation costs (including this software)

FOR LINE 22 OF SCHEDULE A: Investment expenses (deductible if they are related to earning taxable investment income): Accounting fees Office supplies Custodian fees Phone & mail costs Fees for collecting Proxy fight expenses investment income Safe-deposit box Financial publications for securities Investment and tax Statistical services counseling fees Wages or salaries Legal costs for clerical help Losses on certain deposits not federally insured due to insolvency/bankruptcy of a financial institution (limited to $20,000, or $10,000 if filing separate) Repayment under a claim of right if $3,000 or less Your share of investment expenses of a regulated investment company

FOR LINE 27 OF SCHEDULE A: Amortizable bond premium on bonds acquired before before October 23, 1986 Federal estate tax attributable to ordinary income in respect of a decedent Gambling losses (but no more than gambling winnings reported on line 21 of Form 1040) Impairment-related work expenses of the handicapped Repayment of amounts under a claim of right if over $3,000 Unrecovered investment in a pension (see IRS Pub. 575)


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Schedule B / Interest and Dividend IncomeWho must use Schedule B? The IRS requires you to file Schedule B when thetotal of either interest received or dividends received exceeds $1,500, or youare claiming the exclusion of interest from Series EE U. S. Savings Bonds is-sued after 1989, or you had a foreign account. If not required you can enterinterest and dividends on lines 8a through 9b of Form 1040 yourself. How-ever, we strongly recommend that you complete Schedule B and its work-sheets even when the IRS doesn’t require it because completing the 1099-INT and 1099-DIV Worksheets for Schedule B ensures accurate data entry,provides permanent record-keeping, and simplifies reporting of amounts forother forms. In fact, we use Schedule B as a holding point for amounts onForms 1099-INT and 1099-DIV that are used on Schedule D, Form 6251, andForm 1040 (other than lines 8a through 9b)n, such as capital gain distribu-tions and foreign taxes paid (withheld). Schedule B is accessible through theRoad Map at lines 8a, 8b, 9a, and 9b of Form 1040.

PART I, INTEREST INCOME. All interest income is reported here, includingexempt-interest dividends from mutual funds, which are treated as interest bythe IRS. You should list in the worksheets noted below all interest received,whether taxable or not, and whether or not the payer reported it on Form1099-INT, including any interest reported to you on a Schedule K-1.

Seller-financed mortgage. (Supported by the Seller-Financed Work-sheet, Figure 2-8.) If you sold your home and receive interest fromthe buyer as a condition of the sale, you must report that interestand certain identifying information about the buyer on the Seller-Financed Worksheet that supports this line. Do NOT report this in-terest on the 1099-INT Worksheets described below.

Other interest (itemize). (Supported by the 1099-INT Worksheet,Figure 2-9.) You should report all other interest on the 1099-INTWorksheets that support this line, described below. When you re-turn from the worksheets, the gross interest appears here.

1 Interest subtotal. (auto-calc) The sum of the above two amounts.Nominee distribution. (auto-calc) The total for this category from allworksheets appears here, to be printed on Schedule B as requiredby the IRS. See the details for the worksheet for more information.

Accrued interest. (auto-calc) As above for accrued interest.Tax-exempt interest. (auto-calc) As above for tax-exempt interest.

Other tax-exempt interest for Form 1040, line 8b. Enter here only non-taxable interest that you did not report on a 1099-INT Worksheetbut which you must include in line 8b of Form 1040. This may in-clude interest from municipal bonds or exempt-interest dividendsfrom a mutual fund or other regulated investment company. Thisamount plus the tax-exempt interest on the worksheets is posted toline 8b of Form 1040.

OID adjustment. (auto-calc) As above for OID (Original Issue Dis-count) adjustments.

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ABP adjustment. (auto-calc) As above, for ABP (Amortizable BondPremium) adjustments.

2 Add the amounts on line 1. (auto-calc) Computed as line 1 less theabove adjustments.

U S savings bonds, etc. (auto-calc) Taken from the entries for box 3of the 1099-INT Worksheets, this total is used to check your entryfor the next line.

3 Excludable savings bond interest from Form 8815. (If Premium Level,supported by Form 8815.) Form 8815 is used to claim an exclusionof interest for Series EE U. S. Savings Bonds issued after 1989 thatyou cashed during the tax year to pay for the qualified higher educa-tion of you, your spouse, or your dependents. The bond must be inyour or spouse's name and the owner must have been age 24 orolder at the time of bond's issue. This exclusion is not available ifmarried filing separately. The allowed exclusion is shown on line 14of Form 8815 and reported here. CAUTION: The interest to whichForm 8815 applies MUST be included in line 3 of the 1099-INTWorksheet for line 1 of Schedule B. If the amount shown here is re-duced by the software from the amount on Form 8815, it meansthat you did not properly enter the interest from the bond on the1099-INT Worksheet because the software limits the amount forline 3 to be no more than the amount reported on line 3 of the theworksheets.

4 Subtract line 3 from line 2. (auto-calc) Computed as indicated, this isthe fully taxable interest posted to line 8a of Form 1040.

The remaining lines in this section are automatically calculated from the1099-INT Worksheet totals, and are used elsewhere in the return:

Taxable ONLY by state. (auto-calc) Used by the state return, not thisfederal return.

Investment expense on Form 1099-INT. (auto-calc) Posted to Sched-ule A as one of the components of line 22 of Schedule A.

Penalty on early withdrawal of savings. (auto-calc) This result isposted to line 30 of Form 1040.

Federal withholding on Form 1099-INT. (auto-calc) Posted to Form1040 as one of the components of line 64 of Form 1040.

Foreign tax paid on Form 1099-INT. (auto-calc) This amount is usedin computing foreign tax credit, either through Form 1116 or, whenqualified, directly on line 47 of Form 1040. See the details on for-eign tax later in this section.

AMT preference for Form 6251, line 11. (auto-calc) Posted to Form6251 as indicated along with any analogous amounts from Forms8814.


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Seller-Financed Work-sheet, Figure 2-8. Thisworksheet is used toidentify the individualfrom whom you receiveinterest as a conditionof sale of your property:If you do not supply

here the name, address and SSN of the buyer from whom you receive inter-est, you are subject to a $50 penalty, whether or not you properly report theamount received as income.

Buyer's name. Enter here the name of the individual (the borrower) in25 characters or less.

Address. Enter here the address of the individual. You can enter asmany as 35 characters total, 25 on the first line and 10 on the con-tinuation line.

ID number. Enter the buyer's social security number (SSN). You mustalso give your social security number to the buyer, for his or her useon Schedule A, and are subject to a $50 penalty if you do not.

$ amount. Enter the total amount paid during the tax year.The dollar totals are carried to the line from which the worksheet is accessed.

1099-INT Worksheet,Figure 2-9. Report all in-terest received here,whether or not a Form1099-INT was actuallyreceived for theamounts. CAUTION: Ifyou received any interestfrom a loan you financedto help sell your prop-erty, you must list thatinterest in the Seller-Financed Worksheetsthat support the earlierline labeled "Seller-financed mortgage," nothere. See Figure 2-8.

Name of payer. Enter payer's name in 25 characters or less.Account identification. Enter account number or other note that further

identifies the source of income in 25 characters or less.1 Interest income not in 3. Enter all interest other than U. S. savings

bonds, whether reported to you on a Form 1099 or not, and whethertaxable or not. The excludable portions of this total are entered onsubsequent lines on this worksheet. If the interest is reported to youon a 1099-OID, enter the sum of boxes 1 and 2 of that form here. Be

SELLER-FINANCED WORKSHEETSELLER-FINANCED WORKSHEETSELLER-FINANCED WORKSHEETSELLER-FINANCED WORKSHEET Buyer's name Buyer's name Buyer's name Buyer's name Address......... Address......... Address......... Address......... (address co (address co (address co (address connnntinued):tinued):tinued):tinued): ID nu ID nu ID nu ID nummmmber.................ber.................ber.................ber................. $ amount.................. 0 $ amount.................. 0 $ amount.................. 0 $ amount.................. 0

Figure 2-8. Seller-Financed Worksheet

FORM 1099-INT:FORM 1099-INT:FORM 1099-INT:FORM 1099-INT: Name of Payer Name of Payer Name of Payer Name of Payer Account I.D. Account I.D. Account I.D. Account I.D. 1 Interest income not in 3.. 0 1 Interest income not in 3.. 0 1 Interest income not in 3.. 0 1 Interest income not in 3.. 0 2 Early withdrawal penalty.. 0 2 Early withdrawal penalty.. 0 2 Early withdrawal penalty.. 0 2 Early withdrawal penalty.. 0 3 US Svgs Bonds & Treasuries 0 3 US Svgs Bonds & Treasuries 0 3 US Svgs Bonds & Treasuries 0 3 US Svgs Bonds & Treasuries 0 Total (gross) Total (gross) Total (gross) Total (gross)▒ 0▒ 0▒ 0▒ 0 Nominee distribn in above. 0 Nominee distribn in above. 0 Nominee distribn in above. 0 Nominee distribn in above. 0 Accrued interest in above. 0 Accrued interest in above. 0 Accrued interest in above. 0 Accrued interest in above. 0 Fed tax-exempt int in abve 0 Fed tax-exempt int in abve 0 Fed tax-exempt int in abve 0 Fed tax-exempt int in abve 0 Part taxable by state 0 Part taxable by state 0 Part taxable by state 0 Part taxable by state 0 AMT pref for 6251,ln11 0 AMT pref for 6251,ln11 0 AMT pref for 6251,ln11 0 AMT pref for 6251,ln11 0 O.I.D. adjustment to above 0 O.I.D. adjustment to above 0 O.I.D. adjustment to above 0 O.I.D. adjustment to above 0 A.B.P. adjustment to above 0 A.B.P. adjustment to above 0 A.B.P. adjustment to above 0 A.B.P. adjustment to above 0 NET TAXABLE INTEREST.. NET TAXABLE INTEREST.. NET TAXABLE INTEREST.. NET TAXABLE INTEREST..▒ 0▒ 0▒ 0▒ 0 4 Fed income tax withheld... 0 4 Fed income tax withheld... 0 4 Fed income tax withheld... 0 4 Fed income tax withheld... 0 5 Investmnt expenses........ 0 5 Investmnt expenses........ 0 5 Investmnt expenses........ 0 5 Investmnt expenses........ 0 6 Foreign tax paid.......... 0 6 Foreign tax paid.......... 0 6 Foreign tax paid.......... 0 6 Foreign tax paid.......... 0

Figure 2-9. 1099-INT Worksheet

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sure to include line 4a of any Schedule K-1 you receive from a part-nership, corporation, etc., and any exempt-interest dividends from atax-exempt mutual fund. See IRS Pub. 564 (Mutual Fund Distribu-tions) for details. (All line numbers on this worksheet correspond tothe box numbers on the IRS Form 1099-INT.)

2 Early withdrawal penalty. Enter penalties paid because of early with-drawal of certificates of deposits here. This amount will be postedto line 30 of Form 1040.

3 U S Savings Bonds and Treasuries. Enter interest on U. S. savingsbonds and treasury obligations, which should be shown in box 3 ofForm 1099-INT.

Total (gross). (auto-calc) The sum of the above three amounts, this to-tal is posted to the interest subtotal line of Schedule B.

Nominee distributions in above. Enter the interest included in the abovegross amount that was received as a nominee for another here, andreport the amount to the actual owner on a Form 1099-INT. (Youmust also file with the IRS a Form 1096 along with a copy of the1099-DIV sent to the nominee.) This amount will be excluded onSchedule B. If you make an entry here, you must proportionately re-duce the applicable remaining entries, below.

Accrued interest in above. Enter here accrued interest included in theabove gross amount that you paid when buying a bond, which willbe excluded on Schedule B.

Federal tax-exempt in above. Enter tax-exempt interest included in theabove gross amount, such as interest on municipal bonds and divi-dends from a tax-exempt mutual fund. It will be excluded onSchedule B, and posted to line 8b of Form 1040. Include here anyamount in box 8 of Form 1099-INT, and include this amount in line1 of this worksheet whether or not included by the payer in box 1.

Part taxable by state. Enter interest included in box 1 that is taxable byyour state even though it is not taxable on the federal return, suchas the interest on municipal bonds from other states. This entry isneeded for the proper completion of state returns.

AMT preference for Form 6251, line 11. If the federal tax-exempt amountincludes tax-exempt interest from private activity bonds issued before8/7/86, you must enter the amount here. It will then flow to line 11of Form 6251 as a tax preference for the alternative minimum tax. In-clude any amount reported to you in box 9 of Form 1099-INT.

O.I.D. adjustment to above. If you are reporting interest reported to you inbox 1 or 6 of a Form 1099-OID, you may have to enter an adjustmenthere if you did not buy the obligation at its original discount or did nothold it for the entire year. See IRS Pub. 1212 (List of Original IssueDiscount Instruments) for details on how to determine the proper ad-justment. Make a positive entry here to reduce the taxable interestand a negative entry to increase the taxable interest.


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A.B.P. adjustment to above. Enter the amount of Amortizable BondPremium included in the above gross amount that you are deductingfor bonds acquired on or after October 23, 1986. (Amortizable bondpremiums for bonds acquired before that date are deducted on line27 of Schedule A, not here.)

NET TAXABLE INTEREST. (auto-calc) The above gross amount less allabove exclusions.

4 Federal tax withheld. Enter any backup withholding here. It will beautomatically reflected in line 64 of Form 1040.

5 Investment expenses. Enter the part of box 1 that is identified to youas investment expense, such as your share of investment expensesin a single class REMIC. You will be taxed on the full amount in box1, but your entry here will be posted to line 22 of Schedule A as amiscellaneous deduction.

6 Foreign tax paid. Enter any foreign tax withheld here. It will be usedto determine the foreign tax credit when Form 1116 is not needed.

If there is an entry in box 8 or box 9 of Form 1099-INT, see our instructionson the previous page for “Foreign tax-exempt in above” and “AMT preferencefor Form 6251, line 11.”

PART II, DIVIDEND INCOME. All dividend income is reported here, except ex-empt-interest dividends from mutual funds, which are treated as interest bythe IRS. Form 1099-DIV underwent a major redesign for 1998, eliminatingthe need to subtract capital gain and nontaxable amounts from the total inbox 1. As a result, Schedule B was simplified by the elimination of those ad-justing amounts. However, the amounts are still shown on Form 1099-DIV,and they are still needed throughout the return. As a result, we use ScheduleB as a holding place for a myriad of information on Form 1099-DIV that nolonger appears on the IRS form. This information is then automatically distrib-uted to the proper places elsewhere in the return.

Dividends on Form 8814, line 9. (Road Map line, supported by Form8814.) If Schedule B is required for other reasons, you must nowshow on Schedule B a portion of your children’s qualified dividendsif you elect (through Form 8814) to report your children’s incomeon your return. (Other dividends of the children are included withother income in line 12 of Form 8814, and are therefore reflected inthe amount posted to line 21 of Form 1040.) The amount of quali-fied dividends to report is posted here from line 9 of Form 8814.

Other dividends (itemize). (Supported by the 1099-DIV Worksheet,Figure 2-10.) You must list in the worksheets described later ALLdividends received, whether taxable or not, and whether or not thepayer reported it on Form 1099-DIV, including any interest reportedto you on a Schedule K-1. When you return from the worksheets,the total for ordinary dividends (box 1a of Form 1099-DIV) appearshere.

5 Dividend subtotal. (uato-calc) Computed as the sum of the precedingtwo lines.

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Nominee distributions. (auto-calc) Posted here from all 1099-DIVWorksheets, this is the part of line 5 taxable to a nominee, not you.

6 Add the amounts on line 5. (auto-calc) Computed as line 5 less theabove adjustment, this is the taxable balance, posted to line 9a ofForm 1040.

Qualified dividends on worksheets. (auto-calc) Posted here from all1099-DIV Worksheets, this is the amount from box 1b of all Forms1099-DIV reduced by the pro rata share of any nominee distribu-tions reported for line 5.

Capital gain distributions. (auto-calc) Posted here from line 2a of all1099-DIV Worksheets, this total is posted to Schedule D where allcapital gain distributions are collected.Nominee distributions in CGD. (auto-calc) Posted here from all1099-DIV Worksheets, this is the part of capital gain distributions(CGD) that is a nominee distribution, and therefore not taxable toyou.Net taxable CGD. (auto-calc) Computed as capital gain distributionsless the above nominee part, this is the taxable amount posted toSchedule D.Unrecaptured sec. 1250 gain in CGD. (auto-calc) Posted here fromline 2b of all 1099-DIV Worksheets, and posted to Schedule D.Sec. 1202 gain in CGD. (auto-calc) Posted here from line 2c of all1099-DIV Worksheets, and posted to Schedule D.

Collectibles (28%) gain. (auto-calc) Posted here from line 2d of all1099-DIV Worksheets, this is the 28% rate gain posted to ScheduleD.

Nontaxable distributions. (auto-calc) Posted here from line 3 of all1099-DIV Worksheets.

Federal withholding on Form 1099-DIV. (auto-calc) Posted here fromline 4 of all 1099-DIV Worksheets and reflected in line 64 of Form1040.

Investment expense on Form 1099-DIV. (auto-calc) Posted here fromline 5 of all 1099-DIV Worksheets and reflected in line 22 ofSchedule A.

Foreign tax paid on Form 1099-DIV. (auto-calc) Posted here from line6 of all 1099-DIV Worksheets, this amount is used in computingforeign tax credit, either through Form 1116 or, when qualified, di-rectly on line 47 of Form 1040. See the details on foreign tax laterin this section.

Qualified dividends for Form 1040, line 9b. (auto-calc) Computed as thesum of “Dividends on Form 8814, line 9” and “Qualified dividendson worksheets,” this is the total of dividends that qualify for thecapital gains tax rate and is posted to both line 9b of Form 1040and Part IV of Schedule D (for use in its tax computations).


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1099-DIV Worksheet,Figure 2-10. Report alldividends received here,whether or not a Form1099-DIV was actuallyreceived for theamounts. The line num-bers on this worksheetcorrespond to the boxnumbers in the IRS Form1099-DIV.

Name of payer.Enter payer'sname in 25characters orless.

Account identifi-cation. Enter

account number or other note that further identifies the source ofincome in 25 characters or less.

1a Ordinary dividends. Enter ordinary dividends received here, whetheryou received a Form 1099-DIV for them or not. If you received aForm 1099-DIV, this amount appears in box 1a. Include line 4b(2)of any Schedule K-1 you receive from a partnership, corporation,etc.

Nominee distributions in 1a. Enter dividends received as a nomineehere, and report this amount to the actual owner on a Form 1099-DIV. (You must also file with the IRS a Form 1096 along with acopy of the 1099-DIV sent to the nominee.)

Taxable balance. (auto-calc) Computed as ordinary dividends on line1a less the above nominee amount, this is the part taxable on yourreturn.

1b Qualified dividends. Enter qualified dividends received here, whichcould be reported to you in box 1b of a Form 1099-DIV or line 4b(1)of a Schedule K-1. This is the part of dividends in line 1a that qual-ify for taxation at a capital gains tax rate. (Most dividends qualify.)

Nominee distributions in 1b. (auto-calc) Computed as the pro ratashare of 1b that is attributable to the nominee, based on your entryfor nominee distributions in 1a.

Taxable balance. (auto-calc) Computed as qualified dividends on line1b less the above nominee amount, this is the part taxable on yourreturn.

2a Total capital gain distribution. These distributions are eligible formore favorable tax treatment than ordinary dividends, and are taxedat the more favorable rates through the tax computations onSchedule D. Specific parts of the amounts in this total are identified

FORM 1099-DIV:FORM 1099-DIV:FORM 1099-DIV:FORM 1099-DIV: Name of Payer Name of Payer Name of Payer Name of Payer Account I.D. Account I.D. Account I.D. Account I.D. 1a Ordinary dividends........ 0 1a Ordinary dividends........ 0 1a Ordinary dividends........ 0 1a Ordinary dividends........ 0 Nominee distribs in 1a 0 Nominee distribs in 1a 0 Nominee distribs in 1a 0 Nominee distribs in 1a 0 Taxable balance....... Taxable balance....... Taxable balance....... Taxable balance.......▒ 0▒ 0▒ 0▒ 0 1b Qualified dividends....... 0 1b Qualified dividends....... 0 1b Qualified dividends....... 0 1b Qualified dividends....... 0 Nominee distribs in 1b Nominee distribs in 1b Nominee distribs in 1b Nominee distribs in 1b▒ 0▒ 0▒ 0▒ 0 Taxable balance....... Taxable balance....... Taxable balance....... Taxable balance.......▒ 0▒ 0▒ 0▒ 0 2a Total capital gain distr. 0 2a Total capital gain distr. 0 2a Total capital gain distr. 0 2a Total capital gain distr. 0 Nominee distrbns in 2a 0 Nominee distrbns in 2a 0 Nominee distrbns in 2a 0 Nominee distrbns in 2a 0 Bal. for 2b and 2c.... Bal. for 2b and 2c.... Bal. for 2b and 2c.... Bal. for 2b and 2c....▒ 0▒ 0▒ 0▒ 0 2b Unrecap. sec. 1250 gain... 0 2b Unrecap. sec. 1250 gain... 0 2b Unrecap. sec. 1250 gain... 0 2b Unrecap. sec. 1250 gain... 0 2c Section 1202 gain......... 0 2c Section 1202 gain......... 0 2c Section 1202 gain......... 0 2c Section 1202 gain......... 0 2d Colletibles (28%) gain.... 0 2d Colletibles (28%) gain.... 0 2d Colletibles (28%) gain.... 0 2d Colletibles (28%) gain.... 0 3 Nontaxable distributions.. 0 3 Nontaxable distributions.. 0 3 Nontaxable distributions.. 0 3 Nontaxable distributions.. 0 4 Fed income tax withheld... 0 4 Fed income tax withheld... 0 4 Fed income tax withheld... 0 4 Fed income tax withheld... 0 5 Investmt expenses......... 0 5 Investmt expenses......... 0 5 Investmt expenses......... 0 5 Investmt expenses......... 0 6 Foreign tax paid.......... 0 6 Foreign tax paid.......... 0 6 Foreign tax paid.......... 0 6 Foreign tax paid.......... 0

Figure 2-10. 1099-DIV Worksheet

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in the next few lines because of their special tax consequences.(Note that short-term capital gains will be reported in box 1a insteadof box 2a because ordinary tax applies to them.)

Nominee distributions in 2a. Enter the part of box 2a that you re-ceived as a nominee here and report the amount to the actual owneron a Form 1099-DIV. (You must also file with the IRS a Form 1096along with a copy of the 1099-DIV sent to the nominee.) CAUTION:If you make an entry here, you must proportionately reduce your en-tries for lines 2b through 2d, below.

Balance for 2b through 2e. (auto-calc) Computed as box 2a less theabove nominee amount, this is the part that taxable on your return.

2b Unrecaptured section 1250 gain. This is the part of line 2a that mustbe taxed at the less favorable 25% rate for real estate property.

2c Section 1202 gain. This is the part of line 2a that is eligible for a spe-cial exclusion. See our details for Schedule D for more information.

2d Collectibles (28%) gain. This is the part of line 2a that must betaxed at the highest capital gains tax rate.

3 Nontaxable distributions. The amount reported to you in box 3 isusually a return of capital that reduces the basis of your stock whenyou sell it, but is not taxable now. CAUTION: Once the total of allyour nontaxable distributions from the stock equals your originalcost or basis for the stock, you must report remaining amounts ascapital gains distributions, above, rather than here. By contrast, ex-empt-interest dividends must be reported on 1099-INT Worksheetssupporting line 1, not here, as tax-exempt interest, and they will beposted to line 8b of Form 1040.

4 Federal income tax withheld. Enter any backup withholding here. Itwill be automatically reflected in line 64 of Form 1040.

5 Investment expenses. This is the part of box 1 that you did not actu-ally receive but was used by the payer to cover investment ex-penses. You must pay tax on the full amount in box 1. The invest-ment expense is deducted only as an itemized expense in line 22 ofSchedule A, which the software ensures automatically.

6 Foreign tax paid. Enter any foreign tax withheld here. It will be usedto determine the foreign tax credit when Form 1116 is not needed.

If there is an entry in box 8 or box 9 of Form 1099-DIV, you may have acapital gain or loss to report on Schedule D (for the proceeds from a liquida-tion of a corporation). These amounts are not reported on our 1099-DIVWorksheets.

FOREIGN TAX SHOWN ON 1099s. This is not a part of the IRS Schedule Bbut is a section we provide so that you can potentially report the amounts forforeign tax paid directly on Form 1040 without filing Form 1116. You gener-ally qualify to omit Form 1116 if all of the following are true:! all your foreign income was from interest and dividends,! all your foreign income and foreign tax paid are shown on Form 1099-

INT or 1099-DIV, and


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! your creditable foreign tax totals no more than $300 ($600 if marriedfiling jointly).

The above tests ensure qualification to omit Form 1116, but they are not al-ways necessary. See IRS Instructions for Form 1116 for more information.

Foreign tax shown on 1099s. (auto-calc) The foreign tax paid from the1099-INT and 1099-DIV Worksheets you completed is shown here.

Foreign tax shown on Form 8814. (Road Map line, supported by Form8814.) Any foreign tax paid shown on your children’s 1099-INT and1099-DIV Worksheets appears here from their Forms 8814.

Tax on excluded income. If any of the above tax is for income ex-cluded from taxation, you must enter the corresponding tax here.No credit is allowed for it because you are not taxed on the relatedincome. See the instructions for line 12 of Form 1116 for details.

Creditable foreign tax. (auto-calc) Computed as the foreign tax paid onForms 1099-INT, 1099-DIV, and 8814, this is the maximumamount potentially eligible for a tax credit.

Eligible to omit Form 1116 so far. (auto-calc) Answered Yes if the cred-itable foreign tax is no more than $300 ($600 if married filingjointly).

Elect and meet other requirements? See IRS 1040 Instructions forline 47 of Form 1040 for the general requirements for omitting Form1116 from the return, or see Form 1116 and IRS Pub. 514, ForeignTax Credit for Individuals, for more complete requirements. Youshould answer No if you prefer to deduct the taxes on Schedule Aso that you can make that election later in this section.

Credit for Form 1040 line 47. (auto-calc) Equal to the creditable foreigntax if the preceding two answers are Yes, and zero otherwise.

Available for Form 1116 or Schedule A. (auto-calc) Equal to the credit-able foreign tax if the preceding amount is zero.

Amount to deduct on Schedule A. You can elect to deduct foreigntaxes paid on Schedule A instead of claiming them as a tax credit.Any amount you enter here will appear on line 8 of Schedule A, butyou should complete Form 1116 first to determine the eligibleamount.

Balance available for Form 1116. (auto-calc) Computed as the totalavailable less the amount you elect for Schedule A. You should con-sider filing Form 1116 if an amount appears here. (Form 1116 isbuilt into Standard and Premium Level software in support of line 47of Form 1040.)

PART III, FOREIGN ACCOUNTS AND TRUSTS. You MUST complete Part III ofSchedule B if you had any type of involvement with a foreign account:

7a At any time during 2006, did you have an interest in or a signatureor other authority over a financial account in a foreign country,such as a bank account, securities account, or other financial ac-count? If Yes, you may have to file Form TD F 90-22.1, separatelyfrom your return, by June 30, 2006.

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Answer for child from Form 8814. (auto-calc, supported by Form8814) If have a Form 8814 for a child who would answer Yes tothe above question, a Yes appears here for printing on your Sched-ule B. The flag “Form 8814” will appear on the printout to let theIRS know that the answer comes from your child, not you.

b If "Yes," name of the foreign country. Enter the name in 25 charactersor less if you answered Yes to line 7a.

8 During 2006, did you receive a distribution from, or were you thegrantor of, or transferor to, a foreign trust? If Yes, you may have tofile Form 3520.

Answer for child from Form 8814. (auto-calc, supported by Form8814) If have a Form 8814 for a child who would answer Yes tothe above question, a Yes appears here for printing on your Sched-ule B. The flag “Form 8814” will appear on the printout to let theIRS know that the answer comes from your child, not you.

You may need to file Form 3520. (auto-calc) Automatically Yes if the an-swer to line 8 is Yes, to alert you of the possible need to provideadditional information.


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Schedule C & C-EZ / Profit or Loss from BusinessWho must use Schedule C or C-EZ? Schedule C (or C-EZ) is used to report in-come as the sole proprietor of a nonfarm business or profession, and certain"statutory" employees (defined below). (Schedule F is used for farm busi-nesses.) You can report only one business on any one Schedule C, so fiveseparate copies of Schedule C are built into the software. Schedule C-EZ isbuilt into each Schedule C for your optional use, but note that a spouse withmore than one business is not allowed to use Schedule C-EZ, as detailedlater. Schedule C can also be used by employees whose Form W-2 has the"Statutory employee" box checked, including full-time life insurance sales-people, certain agent or commission drivers and traveling salespeople, andcertain homeworkers. This special provision allows these employees to de-duct expenses from income without being subjected to the limitations im-posed by Schedule A on itemized deductions. (CAUTION: You must NOT usethe same copy of Schedule C to report both statutory and non-statutory in-come and expenses. You must use a separate copy of Schedule C for each.)Schedule C (or C-EZ) is accessible through the Road Map at line 12 of Form1040.

And who must not? Schedule C (or C-EZ) can be used ONLY for sole proprie-torships, and NOT for partnerships, joint ventures, or corporations. A husbandand wife who jointly own a business are considered to have formed a part-nership for purposes of the Federal income tax. They must therefore not useSchedule C (or C-EZ), but rather file a Partnership Return (Form 1065) andenter the amounts from the Schedules K-1 of that return on Schedule E, PartII, of this return. (See IRS Pub. 541, Partnerships, and IRS instructions forSchedule SE concerning how community income.)

GENERAL INFORMATION. Your answers to some of the following questionsare critical to the proper automation of the software. You must answer allquestions whether you file Schedule C or Schedule C-EZ, because the an-swers help determine whether you qualify for Schedule C-EZ.

Copy number (1 through 5). (auto-calc) The number for the copy youselected from the menu appears here automatically.

Spouse owns (not you)? Each of the five available copies of Schedule Ccan be designated for either spouse. You must identify the properspouse for each copy so that computations that depend on aspouse’s individual self-employment income, such as the self-em-ployment tax, are properly computed.

A Principal business or profession. Enter here the activity (such as Re-tailing, Manufacturing) and the specific product or service (such asComputers, Clothing) in 25 characters or less.

B Enter code. Enter here the IRS 6-digit code that fits the principal busi-ness you are reporting on this copy of Schedule C. The codes arebased on a standard from the North American Industry ClassificationSystem (NAICS), which was developed in a joint effect between

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Canada, Mexico, and the United States. If you are unable to classifyyour business with one of the codes in the table, enter 999999 asthe code and explain the business in a supporting statement for thisline.

C Business name. Enter name in 35 characters or less.D Employer Identification Number (EIN). An entry here is required only

if you have a Keogh Plan or you were required to file employment,excise, alcohol, tobacco, or firearms tax returns. Enter the numberin the standard 10-character format (00-0000000). CAUTION: DoNOT enter a social security number here.

E Business address and city, state, and ZIP code. Enter street addresson the first line and city, state, and ZIP code on the second line, in35 characters or less each.

F Accounting method (1=Cash, 2=Accrual, 3=Other). Enter the codefor the accounting method from 1 to 3.If other, specify. If you entered 3 above, you MUST describe themethod here in 15 characters or less, or in a supporting statementfor this line.

G Did you "materially participate" in the operation of this businessduring 2006? If you can answer Yes, you are not subject to thepassive loss limitations, and no gain or loss from this schedule willbe used in Form 8582. You can generally answer Yes if you partici-pated in the operation of the activity for more than 500 hours dur-ing the year, or materially participated for any 5 of the prior 10years. See our instructions for Form 8582 for details.Were you a "significant participant" in the operation of this busi-ness? You are tentatively considered to be a significant participantif you participated in this business for more than 100 hours but nomore than 500 hours during the tax year. If the net of ALL signifi-cant participation activities throughout the return taken together is again, no amounts will be used in Form 8582, so the benefit of off-setting passive gains against passive losses from other activities isnot available. If the net is a loss, all amounts will be used in Form8582, so the limitations on passive losses apply. However, if theaggregate number of hours of participation for ALL significant par-ticipation activities on the return COMBINED is more than 500hours, then the participation will be considered as material participa-tion for ALL such activities rather than significant participation. Seeour instructions for Form 8582 for more details. If you do not sat-isfy the requirements for material participation, but can be classifiedas a significant participant, you MUST answer Yes here.

H Is this the first Schedule C filed for this business? If so, you mustanswer Yes here for IRS audit purposes.

SCHEDULE C-EZ QUALIFICATIONS. Schedule C-EZ is a simplified version ofSchedule C comprised of just three monetary entries: gross receipts, total ex-penses, and net profit. You need not supply any more detail than that if you


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qualify, but qualifications are rather narrow, as explained below. The follow-ing qualifications are preliminary only:

Elect NOT to use Schedule C-EZ if eligible. You can block the auto-matic printout of Schedule C-EZ by answering Yes here.

Had only 1 sole proprietorship. You and spouse are treated separately,so one spouse can use a Schedule C-EZ even if the other spousecan't. But any spouse who has more than one business cannot useSchedule C-EZ.

Are NOT required to file Form 4562. If claiming, for this business, de-preciation (or a section 179 expense deduction) on property placedin service in the tax year, or listed property of any date, you MUSTanswer No here and complete a Form 4562 for this business.

Use cash method of accounting. (auto-calc) Answered Yes only if youentered 1 (Cash) as the method at line F.

QUALIFIED FOR C-EZ so far. (auto-calc) Answered Yes only if the pre-ceding three answers are all Yes, and the first answer is No.

The final determination for qualification is made only after Schedule C iscomplete. If you qualify, the software will print Schedule C-EZ in place ofSchedule C when the official return is printed, omitting supporting details.You qualify only if the above answer is Yes and total expenses are no morethan $5,000, the business does not operate at a loss, there is no inventory,no requirement to file Form 4562, no passive loss carryovers, no home ex-penses deducted, and no employees. HINT: If you already know you willqualify for Schedule C-EZ, you can omit entering monetary details in all of thebelow lines and instead just enter the gross receipts in line 1 and the totalexpenses in the "other expenses" line above line 48. But note that you stillmay need to make entries in Part IV if you claim car expenses.

PART I, INCOME. All taxable income is reported here:1 Gross receipts or sales. Enter gross receivables here, including

amounts eventually refunded or not collected. (Those who are surethey qualify for Schedule C-EZ can enter ALL income here and leavelines 2 and 6 blank.)

Statutory Employee on Form W-2? You can answer Yes here only ifthe income reported on this copy of Schedule C was reported toyou on a Form W-2 with the "statutory employee" box checked,and social security tax was deducted for you, as shown on Form W-2. If you answer Yes, you must use this copy of Schedule C to re-port the income and expenses as a statutory employee alone. Anyother self-employment income or expenses must be reported on aseparate copy of Schedule C. The Yes answer to this question onSchedule C ensures that the social security tax is not applied to theincome reported here twice. You must also complete a W-2 Work-sheet for this income (at line 7a or 7b of Form 1040) in order to re-port the amount of social security tax collected, and answer Yes tothe statutory employee question on the W-2 Worksheet. The Yesanswer on the W-2 Worksheet ensures that the regular tax is not

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applied to the income reported here twice. (Statutory employees in-clude full-time life insurance salespeople, certain agent or commis-sion drivers and traveling salespeople, and certain homeworkers.This special provision allows these employees to deduct expensesfrom income without being subjected to the limitations imposed bySchedule A on itemized deductions.) CAUTION: If social security taxwas NOT withheld for you, as should be evident from your W-2,you must answer NO here on Schedule C, even if the "statutory"box on W-2 is checked, so that the social security tax will be auto-matically computed for you on a Schedule SE.

2 Returns and allowances. Enter returns, refunds, etc. here.3 Subtract line 2 from line 1. (auto-calc) Computed as indicated.4 Cost of goods sold (from line 42). (auto-calc) Taken automatically from

line 42 in Part III of this schedule, and therefore not correct untilyou complete Part III.

5 Gross profit. (auto-calc) Computed as line 3 less line 4.6 Other income. Report all other income here, including

• interest received,• bad debts recovered,• credit or refund of fuel tax,• recapture on Form 4797, line 35 (secs. 179 and 280F(b)(2)) for

deductions previously taken for this business,• bad debts recovered,• reimbursements for overpayments or cancellations, such as in-

surance reimbursements,• recapture of deductions for clean-fuel vehicles or clean-fuel vehi-

cle refueling property.7 Gross income. (auto-calc) The sum of lines 5 and 6.

This gross income is used for the optional method on Schedule SE as well asfor the computation of net profit at line 31.

PART II, EXPENSES. General business expenses are reported here; expensesassociated only with goods sold (for businesses with inventories) are reportedin Part III. Pre-defined IRS categories are provided by line 8 through 26. Ex-penses not fitting those categories are posted to line 27 from your entries atline 48. (If you are certain to qualify for Schedule C-EZ, you can enter the to-tal of all expenses at line 48 and leave lines 8 through 26 blank.)

8 Advertising. Enter all marketing, sales, and advertising expenses here.

Car and truck expenses. The rules for deducting vehicle expenses are similarto those detailed for employees on Form 2106. You can generally use eitherthe standard mileage rate method or the actual expenses method (further de-scribed in our details for Form 2106). However, in spite of the IRS label forline 9, the reporting of car expenses on Schedule C involves more than oneline of the form. Lines 9, 13, and 20a are all relevant parts of the formula.We therefore provide the following entries to help guide you into the properreporting of the expenses. CAUTION: You MUST provide information on your


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vehicle if you make an entry at line 9, as follows: If you have to use Form4562 for any other depreciation, complete columns a through c of Section Aand all of Sections B and C of Part V of Form 4562 (accessed at line 13, be-low). Otherwise, use Part IV of Schedule C.

Used more than five vehicles at the same time? Answer Yes only if youused five or more vehicles in the business at the same time, such asin a fleet operation. You do not have to answer Yes if you alter-nated use among several vehicles but never used more than four atany one time.

Actual expense REQUIRED for ALL. (auto-calc) Automatically Yes if youanswered Yes above. If you used more than four vehicles at thesame time you are not allowed to use the Standard Mileage Ratemethod for any of the cars. A Yes answer here therefore preventsyou from using the following section for the Standard Mileage Rate.You must instead report actual expenses in the section that followsthe next one.

for cars and trucks using Standard Mileage Rate Method: You can use this method only if you owned the vehicle and always

used this method for it, or leased the vehicle and used the methodfor the entire lease period, and did not use the vehicle for hire.

Total 2006 business miles. Enter the total business mileage driven in2006 for cars and trucks that you choose to report under the Stan-dard Mileage Rate method.

Deduction for line 9. (auto-calc) Computed as the mileage driventimes 44.5 cents per mile for 2006. This is the total deduction al-lowed for those cars and trucks that you choose to report under theStandard Mileage Rate method.

for cars and trucks using Actual Expense Method: You cannot use this method if you leased the vehicle and ever used

the Standard Mileage Rate method for the vehicle.Rent or lease payments. Enter total rent or lease payments for carsand trucks. These payments are deducted at line 20a, not line 9,subject to the following limitation.

Inclusion amount from IRS Pub. 463. The IRS publishes an extensivetable of inclusion amounts for “luxury vehicles.” The amount oflease expenses you can deduct as a business expense is reduced bythis inclusion amount. The reduction generally applies only to leasesbeginning after 1986 for vehicles with an initial market value in ex-cess of $12,800 if begun before 1991, $13,400 if begun in 1991,$13,700 if begun in 1992, $14,300 if begun in 1993, $14,600 ifbegun in 1994, $15,500 if begun in 1995 or 1996, $15,800 ifbegun in 1997 or 1998, $15,500 if begun in 1999 through 2002,$18,000 if begun in 2003, $17,500 if begun in 2004, and$15,200 if begun in 2005 or 2006. See IRS Pub. 463 (Travel, En-tertainment, Gift, and Car Expenses) for details.

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Deduction for line 20a. (auto-calc) Computed as the rent or leasepayment less the preceding inclusion amount, this total is used atline 20a of Schedule C, not here.

Depreciation – report on Form 4562 for line 13, NOT here. When youuse the Actual Expenses method, depreciation is an allowable partof the actual expense you can deduct. However, the IRS requiresyou to report that depreciation on the copy of Form 4562 for thisbusiness, not here. This depreciation will then flow from Form 4562to line 13 of Schedule C. (The proper copy of Form 4562 is ac-cessed when you itemize line 13 of Schedule C. The proper deduc-tion is then returned to Schedule C when you return from Form4562. Note that you must also complete the information on vehiclesin Part V of Form 4562, irrespective of which expense method youuse.)

Other actual expense. All other actual expenses are deducted at line9. Enter here all expenses not deducted at line 13 or 20a for carsthat you choose to report under the Actual Expenses method. In-clude expenses for gasoline, oil, repairs, insurance, tires, licenseplates, etc. Exception: You can also enter here your parking fees ortolls, irrespective of the expense method you use. (Parking fees andtolls are the only actual expenses allowed for cars and trucks re-ported under the Standard Mileage Rate method.)

9 Car and truck expenses. (auto-calc) Computed as the sum of the de-duction for line 9 from the Standard Mileage Rate method plus yourentry above for other actual expenses.

Other expenses. Other expenses are deducted through lines 10 through 27:10 Commissions and fees. Enter sales commissions and other fees.11 Contract labor. (NEW line) Enter the cost of contract labor. Do NOT

include any contract labor included in Part III (line 37). Also, do notinclude any wages, which should be included in line 26.

12 Depletion. Enter depletion here, and attach IRS Form T if it applies totimber.

13 Depreciation and section 179 expense deduction. (Road Map line,supported by Form 4562.) A separate Form 4562 is available foreach separate copy of Schedule C. You cannot prepare more thanone copy of Form 4562 for each Schedule C, but you can depreci-ate as many items as you want on one copy. When you accessForm 4562 through the Road Map by pressing the Itemize Key atline 13 of Schedule C, the proper copy of Form 4562 is automati-cally accessed. After you complete the form, the total depreciationand section 179 expense is posted here from Part IV of Form 4562.

14 Employee benefit programs. Enter contributions to employee benefitprograms that are not included in line 19, below, such as accident,health, and life insurance programs, and dependent care assistanceprograms. You must exclude the sole proprietor of the business


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from this entry, but you may be able to deduct some of the soleproprietor's health insurance at line 29 of Form 1040.

15 Insurance (other than health). Enter business insurance, includingproperty and liability insurance, here.

16 Interest. You can deduct in the following two lines only interest forloans in which the proceeds have been used in the business in thecurrent or prior years, not future years.

a Mortgage paid to banks, etc. You must reconcile, in a supportingstatement for this line, any differences between the amount you re-port here and the amount reported to you on a Form 1098 formortgage interest you paid.

b Other interest. Enter all other allowable interest here.17 Legal and professional services. Enter legal and professional fees

from attorneys, accountants, and other independent contractors.18 Office expense. Enter miscellaneous office expenses here.19 Pension and profit-sharing plans. Enter here only contributions to

employee pension, profit-sharing, or annuity plans for which youhave filed a Form 5500 with the IRS. You must exclude the soleproprietor of the business from this entry, but you may be able todeduct the contributions made on behalf of the sole proprietor atline 29 of Form 1040.

20 Rent or lease. Deductions must be separated into those for equip-ment and those for other property.

Vehicles (entered above line 9). (auto-calc) This is the amount com-puted above line 9 for rent and lease payments on cars and trucks,reduced by the IRS inclusion amounts for luxury vehicles. See thedetails above line 9 of this schedule.

Machinery and equipment. Enter equipment rentals here. a Vehicles, machinery, and equipment – 20a. (auto-calc) Computed as

the sum of the preceding two amounts. b Other business property – 20b. Enter all other rent and lease pay-

ments here, including the rental of office space.21 Repairs and maintenance. Include labor (except for the sole proprie-

tor's labor), supplies, etc., but only if they do not add to the valueof the property. Expenses that add to the value of the property mustbe capitalized (depreciated or amortized) instead.

22 Supplies, not in Part III. Enter only supplies not reported elsewhere.Do not include supplies associated with goods sold or held in inven-tory, which must be deducted in Part III instead.

23 Taxes and licenses. Enter business taxes not reported elsewhere, in-cluding sales taxes (if included in line 1), property taxes, and socialsecurity and Medicare taxes paid in behalf of employees (if not in-cluded in line 27). Also include business licenses.

24 Travel, meals, and entertainment. The meal and entertainment partof these expenses are limited, as detailed below.

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a Travel..24a. Enter only travel expenses here, including transportationand lodging, but not meals and entertainment. For days that you donot claim meal expenses you can use an optional method for com-puting incidental expenses at the rate of $3 a day for 2006.

Meals and entertainment. Report the full amount of qualified mealsand entertainment on this line. See IRS Instructions for detailed limi-tations on qualification for an entry here. You can use a standardmeal allowances instead of actual expenses, which ranges from $39a day for small localities to $69 a day for major cities. For detailedinformation on standard meal allowances, see

www.policyworks.gov/perdiemfor domestic travel and

www.state.gov/m/a/als/prdmfor international travel. (Generally only 50% of meals and enter-tainment are deductible, and the software automatically enforcesthis limitation below. If you provide day-care in your home, see IRSPub. 587 for details on how to deduct cost of meals to day-care re-cipients.)

Part NOT subject to limitation. Enter here the amounts included inthe preceding entry that are NOT subject to the 50% rule (or 75%for DOT, below), such as meals reimbursed to an employee buttreated as wages subject to withholding.

Part subject to DOT limitation. The allowance for meal expenses is75% of the actual expense (instead of 50%) for employees subjectto Department of Transportation (DOT) hours of service limits. Thisincludes certain air transportation employees (pilots, crew, etc.), in-terstate bus and truck drivers, certain railroad employees (engineers,conductors, crew, etc.), and certain merchant marines. Enter theeligible amount here.

Remainder limited to 50%. (auto-calc) Computed as the total formeals and entertainment less the amount NOT subject to limitationand less the amount subject to the DOT limit. This balance is limitedto 50% of the actual expense.

Nondeductible part of meals and entertainment. (auto-calc) Com-puted as 50% of the preceding line plus 25% of the DOT line.

b Deductible meals and entertainment..24b. (auto-calc) Computed asthe full amount entered for “Meals and entertainment” less theabove “Nondeductible part of meals and entertainment,” this is theonly amount included in the total deductions for Schedule C.

25 Utilities. Note that if you use a home phone for business, you cannotdeduct the base rate of the FIRST phone line into the house.

Wages. Enter the full amount of wages not deducted elsewhere, ex-cluding the sole proprietor.

Employment credit. Enter here any employment credits, such asWork Opportunity Credit (Form 5884), Welfare-to-Work Credit(Form 8861), Empowerment Zone Employment Credit (Form 8844),


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Indian Employment Credit (Form 8845), and Credits for EmployersAffected by Hurricane Katrina, Rita, or Wilma (Form 5884-A).CAUTION: Even though some of these forms are built into the Pre-mium Level, no amounts are posted here automatically since it isnot evident on those forms where the corresponding wages are re-ported.

26 Wages (less Employment Credit). (auto-calc) Computed as abovewages less the above employment credits.

27 Other expenses (line 48). (auto-calc) Allowable expenses that do notfit into the above categories, and are not a part of goods sold or in-ventory, are detailed in Part V and posted here from line 48.

28 TOTAL EXPENSES. (auto-calc) Computed as the sum of lines 8 through 27.

SUMMARY. Net profit or loss, reflecting any passive activity limitations, iscomputed here.

29 Tentative profit or loss. (auto-calc) Computed as line 7 less line 28 (butzero for a spouse’s copy if the filing status is not married filing jointly.)

30 Expenses for business use of your home (Form 8829). (Road Map line, sup-ported by Form 8829.) You must report all expenses related to the businessuse of your home on this form because such expenses are limited by law.One copy of Form 8829 is available for each copy of Schedule C.

Tentative net with home expenses deducted. (auto-calc) Computed as line 29less line 30.

$ amount of loss NOT at risk (Form 6198). If tentative net income reflects anet loss for the business, you must enter the part of the loss that is NOT atrisk here. Your losses are limited to the amount that you have at risk, whichis the amount that you personally stand to lose from the activity. It generallyincludes cash and the adjusted basis of any property you contributed to theactivity plus any amount borrowed for use in the activity for which you arepersonally liable. To determine how much you have at risk, you must com-plete Form 6198 (which is built into the Premium Level software) and file itwith the return.

Passive loss limitations. If you answered No to Question I, the tentative netincome reduced by the amount of loss not at risk may be used in Form 8582.HINT: Form 8582 is automatically generated and completed when needed, soyou should not normally have to access the form.

Prior unallowed passive loss. This is the loss carryover from the prior-year return stemming from passive loss limitations on this activity.This carryover is automatically transferred by the software from theprior-year return when you use the translate feature on a return thathas 2005 as the entry for tax year.

Part allowed in significant participation net. (auto-calc) If the tentativenet income calculated above is a loss, no amount will appear here.But if it is a gain, and you identified this business as a significant

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participation activity below line I, the part of the above carryoverthat does not exceed the tentative net income appears here.

Significant participation net. (auto-calc) This line is calculated as thetentative net income less the above part of carryover allowed, pro-vided you identified this business as a significant participation activ-ity, and is posted to Form 8582. However, it will not actually beused in Form 8582 unless the net of ALL significant participationactivities throughout the return is a loss (as indicated by the answerto the next question).

Net gain from ALL significant participation activities? (Road Map line,supported by Form 8582.) The answer to this question comesautomatically from Form 8582, but can only be determined uponthe final recalculation of the return. You can access Form 8582 withthe Itemize Key at this line, but there is no need to do so becausethe form is automatically generated and completed upon the finalrecalculation of the return.

Passive loss unallowed in 2006. (auto-calc) Any loss unallowed herebecause of the passive loss rules is posted here automatically, but itmay not be accurate until the final recalculation of the return. It isthe proper pro-rated portion of the amount shown on Form 8582 forloss unallowed for all Schedules C together. If line 31, below, re-flects a disallowance from Form 8582 or reflects an additional lossdue to a carryover, the IRS flag "PAL" will appear beside the line inthe final printout.

Note that the handling of the carryovers, significant participation amounts,and pro-rating among different Schedule C's for different businesses is allfully automatic without requiring you to complete any passive activity work-sheets yourself. However, you should read our instructions for Form 8582 tosee if you need to enter any special adjustment to Form 8582, if you havesignificant participation amounts.

31 NET PROFIT OR LOSS. (auto-calc) Computed as tentative net income withlosses not at risk and passive losses unallowed removed. This line plus line31 from all other copies of Schedule C is posted to line 12 of Form 1040.

32 If you have a loss, check. One of the following questions will automaticallybe answered Yes if the tentative net income is a loss.

32a All investment is at risk. (auto-calc) Yes only if there is NOT an en-try for "$ loss NOT at risk (6198)."

32b Some investment is not at risk. (auto-calc) Yes only if there IS anentry for "$ loss NOT at risk (6198)."

If line 32b is “Yes,” you must file Form 6198! Form 6198 is built intothe Premium Level software.

AMOUNTS FOR SCHEDULE C-EZ. If you are eligible for use of the shortSchedule C-EZ, based on your previous answers to the qualification questionsand the software's determination of eligibility, a summary of the amounts ap-pears here.


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Schedule C-EZ will be used. (auto-calc) Answered Yes only if the an-swer to "QUALIFIED FOR C-EZ so far" preceding Part I is Yes (itselfbased on only four of the qualifications for Schedule C-EZ) and ex-penses on line 28 is $5,000 or less, tentative net profit below line30 shows no loss, there was no inventory during the year (andhence no entries on lines 35 nor 41 in Part III), there were no em-ployees (and hence no entries on line 14, 19, 26, nor 37 of Sched-ule C), you do not deduct expenses for business use of your home(and hence line 30 is zero), and you do not have a prior-year unal-lowed passive loss for this business (and hence your entry for "PriorPAL unallowed loss" below line 30 is zero).

For the official printout for the IRS, Schedule C-EZ will be printed (withoutsupporting statements) in place of Schedule C (with supporting statements)only if the answer to above question is Yes. If so, the following lines willshow amounts as well:

1 Gross receipts. (auto-calc) Taken from line 7 of Schedule C.2 Total expenses. (auto-calc) Taken from line 28 of Schedule C.3 Net profit. (auto-calc) Taken from line 29 of Schedule C.

You must also complete Part IV if line 2 includes car or truck expenses.

PART III, COST OF GOODS SOLD AND/OR OPERATIONS. All expenses tiedto the product or services actually sold are reported here. (Expenses associ-ated with products not yet sold are generally not deductible until the productis sold.) You do not need to complete Part III if you have no inventory.

33 Method(s) used to value closing inventory (1=Cost, 2=Lower of costor market, 3=Other:itemize). Enter the code for the valuationmethod from 1 to 3. When you enter method 3 you MUST describethe method in a supporting statement for this line. See IRS instruc-tions for details.

34 Was there any change in determining quantities, costs, or valua-tions between opening and closing inventory? If you must answerYes, you MUST explain the change in a supporting statement, be-cause changes are not normally allowed.

35 Inventory at beginning of year. This entry should generally be identi-cal to the end of year inventory reported in Part III of the prioryear's Schedule C (line 41 of the prior-year Schedule C).

36 Purchases (excluding items withdrawn for personal use). Enter allpurchases of finished goods here.

37 Cost of labor (excluding yourself). Enter wages, excluding those forthe sole proprietor of the business.

38 Materials and supplies. Enter purchases of raw materials here.39 Other costs. Enter here all other costs associated with products,

whether they were sold or not.40 Add lines 35 through 39. (auto-calc) Computed as indicated.41 Inventory at end of year. Enter as indicated.42 Cost of goods sold and/or operations. (auto-calc) Computed as line

40 less line 41.

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The result on line 42 is transferred to line 4 of Part I of this Schedule.

PART IV, INFORMATION ON YOUR VEHICLE. If you claim car or truck ex-penses and do not have to file Form 4562 for any other reason, you MUSTcomplete this part of Schedule C. (This section is printed for both Schedule Cand Schedule C-EZ.)

43 When did you place your vehicle in service for business use. Enterdate in the mm/dd/yy format.

44 Total miles you drove your vehicle during 2006. Enter total miles.Of the total number of miles you drove your vehicle during 2006: En-ter the number of miles you used your vehicle for:

a Business. Enter business part of total miles entered for line 44. b Commuting. Enter commuting part of total miles entered for line 44. c Other. (auto-calc) Computed as line 44 less lines a and b.45 Do you (or spouse) have another vehicle available for personal use?46 Was your vehicle available during off-duty hours?47a Do you have evidence to support your deduction?47b If Yes, is the evidence written?

PART V, OTHER EXPENSES. You must detail in this section all expenses youare claiming for Schedule C that do not fall into the IRS categories of line 8through 26 and are not associated with cost of goods. If you know you qual-ify for Schedule C-EZ, you can merely enter the total expenses for the busi-ness on “Other expense” line, below, without supporting the entry in a sup-porting statement.

Amortization (Form 4562). (Road Map line, supported by Form 4562.)See line 13, above, for information on how Form 4562 supportsSchedule C. After you complete the appropriate copy of Form 4562,the total amortization in Part VI of Form 4562 is posted here.

Other expense itemized. List any other expenses in a supporting state-ment for this line. You should try to classify all remaining expensesinto no more than nine categories so that they can fit on the officialprinted Schedule C without a separate supporting statement. Besure to include any allowance for bad debts from sales or servicesthat were previously included in income and are known to be un-collectible. (If you later collect any of the amount deducted here,you must report it as other income on line 6 in the year collected.)

48 TOTAL OTHER EXPENSES. (auto-calc) The sum of the above twolines. This result is posted to line 27 in Part II of this schedule.



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Schedule D / Capital Gains and LossesWho is it for? Schedule D is used mainly to report the sale or exchange ofcapital assets, including most properties you own and use for personal pur-poses, pleasure, or investment. This includes the sale of inherited property,closing or expiration of options, and exchange of like-kind property. The saleof some capital assets (such as cars, furniture, residences not held for theproduction of income) are reported here only if they resulted in a gain, be-cause they do not qualify for loss deductions. Schedule D is accessiblethrough the Road Map at line 13 of Form 1040.

Most sales reported on Schedule D are “portfolio” transactions, and NOTSUBJECT TO PASSIVE LOSS LIMITATIONS. Sales of investment holdings arenot normally subject to the passive loss rules. However, you must identifysuch sales by answering Yes to the "Portfolio?" question on the worksheetsdescribed below. Otherwise the passive loss rules are automatically imple-mented and the transactions are posted to Form 8582.

Different treatment for different types of capital gain. As a result of variouslegislation in the past several years there are now four different capital gainstax rates: 5%, 15%, 25%, and 28% -- three less than last year, but stillcomplex. Which rate applies for any particular sale or distribution depends ona number of factors, including the tax bracket of the taxpayer. Furthermore,the IRS has done little to help you keep track of the different categories.However, the tax capital gain tax computations require that you separatelystate 28% rate gain (which now generally applies only to collectibles), unre-captured section 1250 gain, and qualified dividends. As a result it is criticallyimportant that you use our worksheets whenever they are available to sup-port a line because they automatically categorize many of the these differenttypes, including:• 1099-DIV worksheets on Schedule B and Form 8814,• Gain/Loss Worksheets for line 8 of Schedule D,• Schedule K-1 Worksheets for line 12 of Schedule D, .• Personal Casualty and Theft Worksheets for Sec. A of Form 4684,• Business Casualty and Theft Worksheets for Sec. B of Form 4684,• Gain/Loss Worksheets for line 2 of Form 4797,• Schedule K-1 Worksheets for line 2 of Form 4797,• Gain/Recapture Worksheets for Part III of Form 4797,• Form 6252 for current or past installment sales, and• Entries from other forms above line 11 of Schedule D.With the aid of these worksheets the tracking of the different categories in-volves minimal additional effort on the part of users of Tax Preparer, in spiteof the oversimplified IRS designs for the forms.

Sale of Your Home. Under current law, most taxpayers have no taxable gainon the sale of their home because the new law allows an exclusion of up to$250,000 of gain ($500,000 if married filing jointly and meet the qualifying

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tests). As a result, the IRS eliminated Form 2119 (which was formerly usedto compute the gain and apply allowed exclusions), and eliminated the needto report the sale if you have no taxable gain after applying the new exclu-sions. The exclusion can be less than the stated maximums if you did not oc-cupy and own the home for at least 2 out of the 5 years ending on the dateof sale, unless you qualify for an exception because you were affected by theSeptember 11, 2001 terrorist attacks. Moreover, you cannot use the exclu-sion more than once every two years. You may therefore still have a taxablegain after all. You can determine the proper exclusion by completing the1997 Form 2119 that is built into the 1998 Edition of Tax Preparer, or byconsulting IRS Pub. 523. If you still have a taxable gain after deducting yourexclusion, you must report the sale on Schedule D using a pair of successiveworksheets for line 8 (line 1 if held one year or less before its sale), as de-tailed in the later boxed section titled “How to Report Excludable Gains.”

Short-term vs. long-term capital transactions. Short-term and long-termholdings are reported separately because long-term gains are generally taxedmore favorably than short-term gains. The separate sections are nearly identi-cal to each other, but you must enter the proper transactions in the propersections: Part I for assets held one year or less, Part II for assets held morethan one year.

IRS moves prior-year Capital Loss Carryover Worksheet to current year.Prior to last year the carryover to the next year appeared in the IRS instruc-tions for the prior year. Last year, however ,the IRS omitted from theirSchedule D instructions the Capital Loss Carryover Worksheet, instructingyou to wait until next year to determine the carryover. This shift has nowtaken place, so the Capital Loss Carryover Worksheet that appears in the cur-rent instructions is used to compute the amount to enter on the currentSchedule D rather than the one to be filed next year. The first screen of ourSchedule D therefore shows the worksheet that determines the entries forlines 6 and 14 of the current Schedule D.

CAPITAL LOSS CARRYOVER WORKSHEET. This worksheet is not a part ofthe printed Schedule D but is an important part of the IRS Instructions forSchedule D. It shows the computations that determine the amounts for lines6 and 14 of Schedule D (carryovers from 2005). No manual entry is requiredas long as the return is translated from a prior-year return with the tax yearretained at 2005. Otherwise, you must supply the information for the fourdata entry lines yourself based on the prior-year return.

PART I, SHORT-TERM SALES. This section is usually reserved for capital gainsand losses on assets held one year or less. However, hedges and personal(nonbusiness) bad debts are reported here regardless of the holding period.

Short-term sales reported on Schedule D alone. You should report most ofyour own short-term transactions here, except for installment sales. (You willreport transactions by partnerships, S corporations, and fiduciaries in which


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you have an interest at line 5.) You MUST supply all information on theGain/Loss Worksheets provided by the software at line 1 in order to satisfyIRS reporting requirements and to properly automate the passive loss rules.Use these lines ONLY for SHORT-TERM sales. Sales are usually reported toyou and the IRS on Forms 1099-B or 1099-S. Using one worksheet for eachtransaction, any number of transactions may be entered, within your diskspace limitations.

1 Short-term (d) sales price. (auto-calc) Computed as the total of allsales on the worksheets that support the next line.

1 Short-term (f) Gain/Loss. (Supported by the Short-term Gain/LossWorksheet, Figure 2-11a.) Using one worksheet for each transac-tion, you can report as many transactions as your disk space allows.The net gain or loss from the sum of all worksheets is posted here.

Statement for line 1 (itemize). Since the space for description on theIRS form and the worksheet is now very limited, we provide a sepa-rate line to explain any special circumstances to the IRS in a sup-porting statement, which will be cross-referenced on the officialprintout.

2 Totals from Schedule D-1, line 2(d), (f), and (g). (auto-calc lines, al-ways zero) These lines are provided by the IRS for totals from amanually-prepared form that has the same format as line 1. Butsince the software provides an unlimited number of worksheets tosupport line 1, and prints a cross-referenced supporting statement inthe same format when they don’t fit on the form, there is no needto use Schedule D-1 with the software.

3 TOTAL SHORT-TERM SALES PRICE AMOUNTS. (auto-calc) Computedas the sum of gross sales on lines 1(d) and 2(d).

The total appearing at line 3 must be reconciled with box 2 of the 1099-Band 1099-S forms you receive for short-term sales.

Gain/Loss Worksheet,Short-term or Long-term, Figures 2-11aand 2-11b. (Supportsline 1 for Short-termand line 8 for Long-term capital gains andlosses.) This worksheetfollows the format ofthe columns on the IRSSchedule D, with sev-eral additions thatmake possible theautomation of Form8582:

a. Description of property. Describe the asset sold in 15 characters orless.

SHORT-TERM GAIN/LOSSSHORT-TERM GAIN/LOSSSHORT-TERM GAIN/LOSSSHORT-TERM GAIN/LOSS a. Description of pro a. Description of pro a. Description of pro a. Description of proppppertyertyertyerty Portfolio or no Portfolio or no Portfolio or no Portfolio or nonnnnpassve? Nopassve? Nopassve? Nopassve? No Significant pa Significant pa Significant pa Significant parrrrticipnt? Noticipnt? Noticipnt? Noticipnt? No Entire interest sold..? No Entire interest sold..? No Entire interest sold..? No Entire interest sold..? No Bypass date checking..? No Bypass date checking..? No Bypass date checking..? No Bypass date checking..? No b. Date acquird (mm/dd/yy) b. Date acquird (mm/dd/yy) b. Date acquird (mm/dd/yy) b. Date acquird (mm/dd/yy) c. Date sold (mm/dd/yy) c. Date sold (mm/dd/yy) c. Date sold (mm/dd/yy) c. Date sold (mm/dd/yy) d. Sales price ........ 0 d. Sales price ........ 0 d. Sales price ........ 0 d. Sales price ........ 0 e. Cost or other b e. Cost or other b e. Cost or other b e. Cost or other baaaasis... 0sis... 0sis... 0sis... 0 NET (your entry if d=0 & e=0) 0 NET (your entry if d=0 & e=0) 0 NET (your entry if d=0 & e=0) 0 NET (your entry if d=0 & e=0) 0 Sig par net for Form 8582 Sig par net for Form 8582 Sig par net for Form 8582 Sig par net for Form 8582▒ 0▒ 0▒ 0▒ 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582▒ 0▒ 0▒ 0▒ 0 f. GAIN/LOSS f. GAIN/LOSS f. GAIN/LOSS f. GAIN/LOSS ▒ 0▒ 0▒ 0▒ 0

Figure 2-11a. Short-term Gain/Loss Worksheet

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Qualified smallbusiness stock(sec. 1202)?(appears ONLYon long-termworksheets forline 8, Figure2-11b) EnterYes only if thisworksheet re-lates to a salefor which youare claiming anexclusion un-der sec. 1202.CAUTION: Youmust have heldthe stock for more than 5 years to qualify for the exclusion. The IRSrequires special reporting procedures for this exclusion. For sec.1202 stock sales you must use two successive worksheets, report-ing the sale on the first worksheet (which we call worksheet type 1)and reporting the exclusion on the next worksheet (which we callworksheet type 2). For capital gain distributions (CGD) you must re-port the CGD before exclusion on line 13 first, then the exclusion it-self here (which we’ll call worksheet type 3 to distinguish it fromthe preceding two).

If so, 1=w/s1, 2=w/s2, 3=CGD. (appears ONLY on long-term workeetsfor line 8) If you answered Yes above, you must identify one of the3 worksheets as worksheet type 1, worksheet type 2, or worksheettype 3 (CGD), described above. If you answer 1, the exclusion youenter later appears as a 28% rate gain because that part of the re-maining gain is taxed under the 28% rate rules. (The exclusion itselfis not claimed on worksheet 1). If you answer 2, the exclusion youenter appears as a loss at line f, line a becomes “SEC 1202EXCLN,” and all other entries are ignored. If you answer 3, the ex-clusion you enter appears as a gain or loss at line f.

Is property a collectible? (appears ONLY on long-term worksheets forline 8) Answer Yes if the item qualifies as a collectible, such as awork of art, antique, precious metal, gem, stamps, coins, etc. Long-term gains on collectibles are not eligible for the lowest rates ofcapital gains tax, and are taxed under the 28% rate rules instead.

Portfolio transaction or other nonpassive activity? You MUST answerYes here if the property sold is NOT an interest in a passive activity.Otherwise the information reported here may be used on Form8582. REMINDER: You must normally answer Yes here for sales of

LONG-TERM GAIN/LOSSLONG-TERM GAIN/LOSSLONG-TERM GAIN/LOSSLONG-TERM GAIN/LOSS a. Description of pro a. Description of pro a. Description of pro a. Description of proppppertyertyertyerty Qlfd small bus stk (1202)? No Qlfd small bus stk (1202)? No Qlfd small bus stk (1202)? No Qlfd small bus stk (1202)? No If so,1=ws1,2=ws2,3=CGD. 0 If so,1=ws1,2=ws2,3=CGD. 0 If so,1=ws1,2=ws2,3=CGD. 0 If so,1=ws1,2=ws2,3=CGD. 0 Is property a co Is property a co Is property a co Is property a colllllectible? Nolectible? Nolectible? Nolectible? No Portfolio or nonpa Portfolio or nonpa Portfolio or nonpa Portfolio or nonpasssssive..? Nosive..? Nosive..? Nosive..? No Significant partic Significant partic Significant partic Significant particiiiipant..? Nopant..? Nopant..? Nopant..? No Entire interest sold.....? No Entire interest sold.....? No Entire interest sold.....? No Entire interest sold.....? No Bypass date chec Bypass date chec Bypass date chec Bypass date checkkkking.....? Noing.....? Noing.....? Noing.....? No b. Date acquird (mm/dd/yy) b. Date acquird (mm/dd/yy) b. Date acquird (mm/dd/yy) b. Date acquird (mm/dd/yy) c. Date sold (mm/dd/yy) c. Date sold (mm/dd/yy) c. Date sold (mm/dd/yy) c. Date sold (mm/dd/yy) d. Sales price ........ 0 d. Sales price ........ 0 d. Sales price ........ 0 d. Sales price ........ 0 e. Cost or other b e. Cost or other b e. Cost or other b e. Cost or other baaaasis... 0sis... 0sis... 0sis... 0 NET (your entry if d=0 & e=0) 0 NET (your entry if d=0 & e=0) 0 NET (your entry if d=0 & e=0) 0 NET (your entry if d=0 & e=0) 0 1202 exclusion ele 1202 exclusion ele 1202 exclusion ele 1202 exclusion elecccction.. 0tion.. 0tion.. 0tion.. 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582▒ 0▒ 0▒ 0▒ 0 f. GAIN/LOSS f. GAIN/LOSS f. GAIN/LOSS f. GAIN/LOSS ▒ 0▒ 0▒ 0▒ 0

Figure 2-11b. Long-term Gain/Loss Worksheet


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stocks and bonds because such sales are usually considered to beportfolio transactions.

Significant participant? If you answered No above, you should answerYes here if you do not satisfy the requirements for material partici-pation, but you can be classified as a significant participant. You aretentatively considered to be a significant participant if you partici-pated in the activity for more than 100 hours but no more than 500hours during the tax year, but there is an important escape clause inthe law. See our instructions for Form 8582 for details.

Entire interest sold? If you answered No to the portfolio question, youranswer here controls the posting to Form 8582. If you answer Yes,only the gains are posted to Form 8582. If you answer No, bothgains and losses are posted to Form 8582.

Bypass date checking? Answer Yes to defeat the built-in protectionsagainst erroneous date entries. Automatic checks are built into thesoftware to protect you against entering a sale in the wrong sectionof Schedule D, or entering a sale not made during the return's taxyear. If the dates are not appropriate to the line itemized, anINVALID message appears at the date sold entry, and lines f and gare automatically zeroed. However, there are several valid reasonsfor answering Yes to “Bypass date checking?” including:

SHORT SALES. You typically report short sales as short-termtransactions. You must use a worksheet that supports line 1 re-gardless of the dates involved.

INHERITED PROPERTY. Inherited property is always treated aslong-term property regardless of the dates involved. You must usea worksheet that supports line 9 or 10 and enter INHERIT in placeof the date at line b.

OPTIONS. Report expired options (unless a section 1256 con-tract, which is reported on Form 6781) as follows:

(1) If a purchase option expired, enter EXPIRED at line b andthe expiration date at line c.

(2) If an option granted expired, enter the expiration date atline b and EXPIRED at line c.

VARIOUS. If you sell a block of stock at one time, but eachstock was purchased on a different date and all the stock qualifiesfor the same treatment (that is, all short-term or all long-term), youcan enter VARIOUS in place of the date at line b, but you must thentake care to use a worksheet that supports the proper holding pe-riod (short-term vs. long-term).

b. Date acquired. Enter date acquired in the mm/dd/yy format (such as11/13/90). If you answered No to the portfolio question, your entryhere affects the posting to Form 8582, since passive activities ac-quired after October 22, 1986 are treated differently from those ac-quired before that date. (INHERIT, EXPIRED, and VARIOUS are alsovalid entries in some cases, as noted above.)

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c. Date sold. Enter date sold in the mm/dd/yy format (such as03/17/06). The holding period must be consistent with the lineitemized (short-term for line 1 vs. long-term for line 8) and the cur-rent tax year or else INVALID will appear here in place of your entry(unless you entered Yes for "Bypass date checking?").

d. Sales price. Enter either gross or net proceeds of the sale here. Ifyou received a Form 1099-B for the sale, use that amount. If theamount you enter here is a net figure, be sure not to include thecosts of the sale (such as commissions and option premiums) in linee, below. (If a purchased option has expired, make no entry here.) Ifyou sold publicly traded securities after August 9, 1993, you maybe able to postpone all or part of the gain if you also bought stock(or a partnership interest) in a Specialized Small Business InvestmentCompany; see the paragraph later in these instructions titled "Howto Report Excludable Gains" for details on how to report the salehere.

e. Cost or other basis. Enter the net purchase price and any costs ofthe sale not already reflected in line d, above. HINT: If the assetsold is a capital asset held for personal use, and the sale results in aloss, enter here an amount equal to line d so that no loss results(because personal losses are not deductible), and enter PERSONALLOSS at line a. You must report such a sale even though it is notdeductible in order to reconcile your Forms 1099-B and 1099-Swith the IRS. (If a granted option has expired, make no entry here.)If this is a fund with reinvestment rights, see IRS Pub 564 (MutualFund Distributions) for details. If you disposed of bonds between in-terest dates, see IRS Pub 550 (Investment Income and Expenses).

NET (your entry if d=0 or e=0). This line will normally be computed asline d less line e. However, if both lines d and e are zero, you mayenter any net here yourself (positive for gain, negative for loss). Thiscapability is provided for some special types of transactions thatcannot be reported using sales prices and costs, such as:

Nonbusiness BAD DEBT. For a worksheet supporting line 1,enter the unrecoverable personal debt here as a loss (a negativenumber), and enter BAD DEBT on line a. Then, in a supporting ste-ment for the line below line 1 (“Itemize to explain line 1”), detail thecircumstances of the case in accordance with IRS Pub. 550 (In-vestment Income and Expenses).

Sec. 1202 exclusion election. (appears ONLY for long-term worksheetsfor line 8) If you answered Yes to the sec. 1202 question, identifiedthis worksheet as worksheet type 1, and held the stock for morethan 5 years, enter the amount of sec. 1202 gain that you elect toexclude from taxation. This entry should normally be no more thanhalf the total sec. 1202 gain. However, for qualified empowermentzone business stock you can exclude up to 60% of the gain pro-


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vided the stock was acquired after December 21, 2000. See IRS in-structions for Schedule D for details.

PRIOR-year unallowed passive loss. Enter the short-term unallowedpassive loss last year for this activity. Although the total prior pas-sive unallowed losses shown on Schedule D are determined auto-matically during the translation of the prior-year return, you mustallocate that total among all activities in these worksheets, guidedby the disallowances shown on the previous year's worksheets.

Net elsewhere for the same activity. If other transactions for the samepassive activity appear elsewhere on the return, you must enter thenet gain or loss from all such other transactions here in order for theallocation of unallowed losses among the various worksheets to beperformed in strict conformance with the IRS rules. If the sum ofthe net on this line plus the net shown above for this particulartransaction less the prior-year unallowed loss is an overall gain, alllosses for this worksheet are allowed in full (and more of the totaldisallowance on Form 8582 is allocated to other passive activities).

Unallowed THIS year on Form 8582. (auto-calc lines) Computed usingthe math on the IRS worksheets without requiring you to completethem yourself, this result is assured of full accuracy ONLY whenyou view the worksheet after the final recalculation of the return.

f. GAIN (or LOSS). (auto-calc) Computed as the NET (line d less line e)modified by the prior-year unallowed passive loss (which reducesthe net) and the loss unallowed THIS year (which increases the net).

Several amounts from this worksheet are summed with all other worksheetsfor the same line and posted to Schedule D itself, including amounts for errorchecking to let you know whether you need to view the worksheets anew toalter your entries for prior unallowed passive losses or to allow the current-year disallowances to be reallocated among the worksheets.

4 Short-term gains and losses from other forms. Short-term capital gains andlosses throughout the return are consolidated here:

Installment sale gain on Form 6252. (Road Map line, supported by Form6252.) Any short-term result on Form 6252 that is appropriate forSchedule D is posted here automatically. Five copies of Form 6252are available for five separate installment sales.

Short-term net in Form 4684 line 15. (Road Map line, supported by Form4684.) Any short-term gain or loss resulting from casualties andthefts of personal property is posted here from Form 4684.

Section 1256 (Form 6781) gain or loss. (If Premium Level, supported byForm 6781.) Any short-term gains and losses from section 1256contracts and straddles is reported here, shown on line 8(b) of Form6781, which you must file.

Like-kind exchange (Form 8824) gain or loss. (If Premium Level, sup-ported by Form 8824.) If you claim the deferral of any gain underthe rules for like-kind exchanges, you must complete Form 8824.

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The short-term gain or loss resulting on that form is reported here ifit applies to Schedule D instead of Form 4797 or Form 6252.

4 Short-term from other forms. (auto-calc) The net gain or loss from thepreceding total lines appears here.

5 Net short-term gain or loss from Schedule(s) K-1, (f) and (g). (Supported bythe Schedule K-1 Short-term Gain/Loss Worksheet, similar to Figure 2-12.)Access the worksheet with the Itemize Key from line 5(f) or 5(g) to reportshort-term capital gains and losses reported to you on a Schedule K-1 frompartnerships, S corporations, and fiduciaries. The amounts destined for Form8582 are automatically reflected in the totals that follow line 6.

Sch. K-1 Gain/LossWorksheet, Short-termor Long-term, Figure2-12. (Supports line 5for short-term and line12 for long-term capi-tal gains and losses.)Note that the 28%rate lines in Figure 2-12 are not relevant toshort-term holdings,so they are hiddenfrom view when youaccess them from line5 of Schedule D, asnoted below. These

worksheets are used mainly to report capital gain information that appears onthe Schedules K-1 that you receive:

a. Description. Identify the entity from which you received the Sched-ule K-1 in 25 characters or less.

Portfolio transaction or other nonpassive activity? You MUST an-swer Yes here if the property sold is NOT an interest in a passiveactivity. Otherwise the information reported here may be used onForm 8582. The Schedule K-1 from the payer should identifywhether or not the transaction qualifies as a portfolio transaction.

Significant participant? If you answered No above, you should an-swer Yes here if you do not satisfy the requirements for materialparticipation, below, but you can be classified as a significant par-ticipant. You are tentatively considered to be a significant partici-pant if you participated in the activity for more than 100 hours butno more than 500 hours during the tax year, but there is an impor-tant escape clause in the law. See our instructions for Form 8582for details.

Entire interest sold? If you answered No to the portfolio question,your answer here controls the posting to Form 8582. If you answer

SCH K-1 LONG-TM GAIN/LOSSSCH K-1 LONG-TM GAIN/LOSSSCH K-1 LONG-TM GAIN/LOSSSCH K-1 LONG-TM GAIN/LOSS a. Description a. Description a. Description a. Description Portfolio or no Portfolio or no Portfolio or no Portfolio or nonnnnpassve? Nopassve? Nopassve? Nopassve? No Significant pa Significant pa Significant pa Significant parrrrticipnt? Noticipnt? Noticipnt? Noticipnt? No Entire interest sold..? No Entire interest sold..? No Entire interest sold..? No Entire interest sold..? No THIS w/s for 28% rate G/L? No THIS w/s for 28% rate G/L? No THIS w/s for 28% rate G/L? No THIS w/s for 28% rate G/L? No Net income or loss.... 0 Net income or loss.... 0 Net income or loss.... 0 Net income or loss.... 0 Sig par net for Form 8582 Sig par net for Form 8582 Sig par net for Form 8582 Sig par net for Form 8582▒ 0▒ 0▒ 0▒ 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582▒ 0▒ 0▒ 0▒ 0 f. GAIN or LOSS f. GAIN or LOSS f. GAIN or LOSS f. GAIN or LOSS ▒ 0▒ 0▒ 0▒ 0 28% rate gain or loss.... 28% rate gain or loss.... 28% rate gain or loss.... 28% rate gain or loss....▒ 0▒ 0▒ 0▒ 0Estates and trusts ONLY:Estates and trusts ONLY:Estates and trusts ONLY:Estates and trusts ONLY: Unrecaptured sec 1250 gain 0 Unrecaptured sec 1250 gain 0 Unrecaptured sec 1250 gain 0 Unrecaptured sec 1250 gain 0

Figure 2-12. Schedule K-1 Gain/Loss Worksheet(Long-term version shown)


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Yes, only the gains are posted to Form 8582. If you answer No,both gains and losses are posted to Form 8582.

THIS worksheet is for 28% rate Gain or Loss? (appears ONLY on long-term worksheets for line 12) The entity that issued you the Sched-ule K-1 should identify for you which amounts are 28% rate gain orloss. The 28% rate rules now apply only to collectibles and sec.1202 exclusions.

Net income or loss. Enter the amount reported on Schedule K-1. En-ter a gain as a positive number and a loss as a negative number.

Significant participation net for Form 8582. (auto-calc) The precedingnet will appear here if you answered Yes to "Significant participant"above.

PRIOR-year unallowed passive loss. Enter the short-term unallowedpassive loss last year for this activity. (Although the total of all priorunallowed losses is determined automatically during the translationof the prior-year return, you must allocate that total among all ac-tivities in these worksheets, because the worksheets are intention-ally not translated.).

Net elsewhere for the same activity. If other transactions for the samepassive activity appear elsewhere on the return, you must enter thenet gain or loss from all such other transactions here in order for theallocation of unallowed passive losses among the various work-sheets to be performed in strict conformance with the IRS rules. Ifthe sum of the net on this line plus the net shown above for thisparticular transaction is an overall gain, all losses for this worksheetare allowed in full (and more of the total disallowance on Form8582 is allocated to other passive activities).

Unallowed THIS year on Form 8582. (auto-calc lines) Computed usingthe math on the IRS worksheets without requiring you to completethem yourself, this result is assured of full accuracy ONLY whenyou view the worksheet after the final recalculation of the return.

f. GAIN or LOSS. (auto-calc) Computed as your entry for “Net income orloss” modified by prior-year unallowed passive loss (which reducesthe net) and loss unallowed THIS year (which increases the net).

28% rate gain or loss. (auto-calc line, which appears ONLY for long-term worksheets accessed at line 12) Computed as line f if the an-swer to the 28% question is Yes, and zero otherwise.

Estates and trusts ONLY. (appears ONLY on long-term worksheets forline 12) The following entry is information from estates and truststhat must be used in computing the capital gains tax on Schedule D.

Unrecaptured sec 1250 gain. The entity that issued you the ScheduleK-1 should identify for you amounts that are unrecaptured sec 1250gain. Those amounts are subject to a higher tax rate than otherlong-term capital gains. This amount is used in the tax computa-tions on Schedule D.

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Several amounts from this worksheet are summed with all other worksheetsfor the same line and posted to Schedule D itself, including amounts for errorchecking to let you know whether you need to view the worksheets anew toalter your entries for prior unallowed passive losses or to allow the current-year disallowances to be reallocated among the worksheets.

6 Short-term capital loss carryover from the Capital Loss Carryover Work-sheet. (auto-calc) Taken from line 8 of the Capital Loss Carryover Worksheetshown on screen 1 of the current Schedule D, this is the short-term loss car-ried over from tax year 2005.

Passive Loss Limitations. The next set of lines summarize the interactionwith Form 8582 for automatic handling of the passive loss rules for short-term (ST) gains and losses on Schedule D. (The gains and losses destined forForm 8582 will include amounts from significant participation activities if thelast time you viewed the worksheets there was NOT a net gain for the aggre-gate of all significant participation activities throughout the return. You maytherefore have to reaccess the worksheets if the answer to "Net gain for ALLsignificant participation activities" on Form 8582 changes after you last viewthe worksheets.)

Total ST gain to Form 8582 line 3a. (auto-calc) The sum of gains fromthe preceding worksheets for passive activities.

Total ST loss to Form 8582 line 3b. (auto-calc) The sum of losses fromthe preceding worksheets for passive activities.

Prior ST passive unallowed loss. This is the loss carryover from theprior year stemming from passive loss limitations on sales shown onscreen 2 of the Schedule D for 2005. This carryover is automati-cally posted here by the software from the prior-year return whenyou use the translate feature on a return that has 2005 as the entryfor tax year on Form 1040 (as long as you answered Yes to "Trans-fer all prior $ amounts" for the translation). Nevertheless, you mustappropriately distribute this total among the worksheets for lines 1or 5 yourself so that the unallowed amounts calculated on theworksheets reflect the proper prorationing among the worksheets.An amount on the line “W/S ERROR in prior unallowed losses,” de-scribed on the nect page, will alert you of the need to do so.

Passive ST unallowed loss in 2006. (Road Map line, supported by Form8582.) This disallowance comes automatically from Form 8582, butcan only be determined upon the final recalculation of the return.You can access Form 8582 with the Itemize Key at this line, butthere is no need to do so because the form is automatically gener-ated and completed upon the final recalculation of the return. Oncethe return is complete, you may have to view each worksheet forlines 1 and 5 so that the unallowed losses are reallocated basedupon the final return. An amount on the line “W/S ERROR in currentunallowed losses,” described on the next page, will alert you of theneed to do so.


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Significant participation part of prior unallowed losses. When reportingcarryovers for activities that are significant participation activities in2006, the IRS requires that you include those carryovers in the sig-nificant participation net to the extent that they are offset by gainsfor the same activity. This rule materially affects whether significantparticipation activities will be classified as passive activities. Youmust enter here the part of the 2005 carryover that is offset by sig-nificant participation gains which you have entered on the work-sheets for lines 1 or 5. (See our instructions for Form 8582 formore details on significant participation activities.)

W/S ERROR in prior unallowed losses. (auto-calc) Computed as thesum of prior unallowed losses you entered on all the worksheets forlines 1 and 5, less the total prior unallowed losses shown above(which you entered or "translate" posted). If this result is nonzero, itmeans that you have not properly allocated the total prior unallowedlosses among all the worksheets you have completed. You must re-turn to the worksheets and revise the entries. Your record of unal-lowed loss for each item for the previous year should guide your en-tries on the worksheets.

W/S ERROR in current unallowed losses. (auto-calc) Computed as thesum of unallowed losses computed the last time you viewed theworksheets for lines 1 and 5, less the total losses unallowed shownabove for 2006 (which comes automatically from Form 8582). Ifthis result is nonzero, allocation of unallowed losses on your work-sheets is not up to date, so you must view each worksheet so thatthe unallowed losses can be reallocated.

Note that the handling of the carryovers, significant participation amounts,and pro-rating among different schedules does not require you to completeany IRS passive activity worksheets yourself. However, you must generallyview all Gain/Loss Worksheets for lines 1 and 5 after the final recalculation ofthe return to ensure that all disallowances are properly reallocated among alltransactions based on the final results on Form 8582.

7 NET SHORT-TERM CAPITAL GAIN OR LOSS. (auto-calc) This line is ostensi-bly the sum of all gains and losses in lines 1 through 6. However, the resultsare modified by a complex interaction with Form 8582, and this line is auto-matically updated as Form 8582 changes due to recalculations throughoutthe return. If the worksheets are not up-to-date with this result, an amountwill appear on one of the above W/S ERROR lines to alert you that you shouldview each worksheet to force its calculation to match the latest calculationwhich appears here.

Additional step for sec. 1042 elections and SSBIC rollovers. See the IRS In-structions for Schedule D for the statements you must attach to support thesec. 1042 election or SSBIC rollover. You should enter the required informa-tion in a supporting statement for the line “Itemize to explain line 1” or“Itemize to explain line 8,” whichever line applies, and it will be cross-refenced on the printout for the IRS.

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How to Report Excludable Gains. The IRS has devised special reporting pro-cedures for sales that are eligible for an exclusion that reduces or eliminatesthe current-year taxable gain from the sale. This includes the sale of yourhome, sales of stock to ESOPs or certain cooperatives, and SSBIC rollovers.(Sec. 1202 exclusions follow similar procedures, but they are described sepa-rately because of the automation for them that is built into the Gain/LossWorksheets.) For all such sales you must use two successive Gain/LossWorksheets (supporting line 8 for long-term sales or line 1 for short-termsales), as follows:! Report the full gain on the first worksheet. Complete the first Gain/Loss

Worksheet like you would any other sale of property, but be sure to de-scribe the property in line a, and answer Yes for “Portfolio or nonpas-sive.” The gain that would be taxable if it were not for the exclusion willappear on line f.

! Report the exclusion on the second worksheet. On the very next work-sheet, make entries only on the following lines:

a. Description of property. Enter the IRS-defined label for the exclusion: “Sec 121 excls’n” for exclusion on sale of your main home . “Sec1042 elect’n” for an election to postpone all or part of the gain on

your sale of qualified stock to an ESOP or cooperative. “SSBIC rollover” for an election to postpone the gain on the sale of stock

used to buy an interest in an SSBIC. Portfolio or nonpassive. Answer Yes. Bypass date checking. Answer Yes. You will not enter dates. NET (your entry if d=0 & e=0). Enter the allowed exclusion as a negative

number (such as, -250,000).The exclusion will then appear on line f as a negative number. When Sched-ule D is computed, the exclusion is automatically subtracted from the gain,and you are taxed only on the remaining balance (at the favorable capital gainrates if you completed the worksheets for line 8). When Schedule D isprinted with the official return, the second worksheet appears directly belowthe first one so that the IRS will know for what sale the exclusion applies.

How to Report Wash Sales. If you sell stock at a loss, and within 30 days buyessentially the same stock, you are not allowed to deduct the loss on your re-turn. Instead you must report the sale in much the same way as you reportexcludable gains, but with all signs reversed. You must use two successiveworkheets for line 1 or 8. On the first worksheet report the sale as youwould any other sale, with a loss at line f. On the immediately followingworksheet enter “Wash sale” in line a, Yes for Bypass date checking, and theamount of loss as a POSITIVE number in “NET (your entry if d=0 & e=0.”The loss on the first worksheet will then be canceled by the gain on the sec-ond worksheet.


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PART II, LONG-TERM SALES. This section is reserved for capital gains andlosses on assets held more than one year. It differs from the short-term sec-tion in its additional lines that relate to 28% rate gain or loss -- a result of thecomplex new rules for capital gains tax. Most other lines, however, have adirect parallel in Part I.

Long-term sales reported on Schedule D alone. You should report most ofyour own long-term transactions here except installment sales, which you re-port on Form 6252. (You will report transactions by partnerships, S corpora-tions, and fiduciaries in which you have an interest at line 12.) You MUSTsupply all information on the Gain/Loss Worksheets provided by the softwareat line 8, in the same way as you reported short-term sales at lines 1. Detailsfor the Gain/Loss Worksheets that support these lines are given in the priorshaded pages, which apply to both short-term and long-term holdings.

8 Long-term (d) sales price. (auto-calc) Computed as the total of allsales on the worksheets that support the next line.

8 Long-term (f) Gain/Loss. (Supported by the Long-term Gain/LossWorksheet, Figure 2-11b.) Using one worksheet for each transac-tion, you can report as many transactions as your disk space allows.The net gain or loss on line f of all worksheets is posted here.

Statement for line 8 (itemize). Since the space for description on theIRS form and the worksheet is now very limited, we provide a sepa-rate line to explain any special circumstances to the IRS in a sup-porting statement, which will be cross-referenced on the officialprintout.

Section 1202 exclusion shown on worksheet Type 1. (auto-calc) Thisand the next few lines are provided as cross-checks to help ensurethat any sec. 1202 exclusions you claim are properly reported. Thisline is the sum of exclusions shown on worksheets identified astype 1.

Section 1202 exclusion shown on worksheet Type 2. (auto-calc) Thisis the sum of exclusions shown on worksheets identified as type 2.

ERROR: Type 1 vs. 2 discrepancy. (auto-calc) Computed as the differ-ence between the preceding two lines. Every type 1 worksheetmust be following by a corresponding type 2 worksheet for thesame exclusion. If an amount appears here, you have not satisfiedthe IRS reporting requirements for the sale.

Maximum sec. 1202 exclusion available in CGD. (auto-calc) Com-puted as one-half of the sec. 1202 gain included in capital gain dis-tributions reported on line 13 of this schedule.

Sec. 1202 exclusion claimed on worksheet Type 3. (auto-calc) This isthe sum of exclusions shown on worksheets identified as type 3.

ERROR: Excessive Type 3 claim. (auto-calc) Computed as the precedingclaim less the maximum available. An amount here indicates that ei-ther you have claimed too much for the exclusion or you have failedto report the corresponding capital gain distribution and its sec.1202 part at line 13.

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HINT: Additional Type 3 claim available. (auto-calc) Computed as themaximum available in CGD less the total claimed on the Type 3worksheets. An amount here indicates that you are eligible to claimmore than you have already claimed on the Type 3 worksheets.

28% Rate Gain/Loss in 8(f). (auto-calc) The net gain or loss from allworksheets identified as subject to the 28% rate rules is postedhere.

9 Totals from Schedule D-1, line 9(d) and (f). (auto-calc lines, alwayszero) These three lines are provided by the IRS for totals from amanually-prepared form that has the same format as line 8. Butsince the software provides an unlimited number of worksheets tosupport line 8, and prints a cross-referenced supporting statement inthe same format when they don’t fit on the form, there is no needto use Schedule D-1 with the software.

10 TOTAL LONG-TERM SALES PRICE AMOUNTS. (auto-calc) Computedas the sum of gross sales on lines 8(d) and 9(d).

The total appearing at line 10 must be reconciled with box 2 of the 1099-Band 1099-S forms you receive for long-term sales.

11 Long-term gains and losses from other forms. Long-term capital gains andlosses throughout the return are consolidated here:

Gain from Form 4797, line 7 or 9. (Road Map line, supported by Form4797.) See the IRS instructions for line 9 of Form 4797 for an ex-planation of the amount that is automatically transferred here.

28% rate gain in Form 4797, line 7 or 9. The IRS does not provide for28% gain or loss on Form 4797, but this line is here for complete-ness.

RIC or REIT gain from Form 2439. If you received a Form 2439 as ashareholder in a regulated investment company, you must reporthere the gain on line 1 of that form. HINT: If an amount appears online 2 of the form, you can claim that amount as a credit at line 70aof Form 1040 because it is the amount of tax already paid on thisgain by the investment company.

28% rate gain in Form 2439. Enter the part of the above line thatstems from 28% rate gain or loss.

Installment sale gain on Form 6252. (Road Map line, supported by Form6252.) Any long-term result on Form 6252 that is appropriate forSchedule D is posted here automatically. Five copies of Form 6252are available for five separate installment sales.

28% rate part of Form 6252. (Road Map line, supported by Form6252.) The part of the above line that stems from 28% rate gain orloss is posted here.

Long-term net in Form 4684 line 15. (Road Map line, supported by Form4684.) Any long-term gain or loss resulting from casualties andthefts of personal property is posted here from Form 4684.


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28% rate part of Form 4684. (Road Map line, supported by Form4684.) The part of the above line that stems from 28% rate gain orloss is posted here.

Section 1256 gain or loss from Form 6781. (If Premium Level, supportedby Form 6781.) If you claim the deferral of any gain under the rulesfor like-kind exchanges, you must complete Form 8824. The long-term gain or loss resulting on that form is reported here if it appliesto Schedule D instead of Form 4797 or Form 6252.

28% rate part of Form 6781. (If Premium Level, supported by Form6781.) Enter the part of the above line that stems from 28% rategain or loss.

Like-kind exchange gain or loss from Form 8824. (If Premium Level,supported by Form 8824.) If you claim the deferral of any gain un-der the rules for like-kind exchanges, complete Form 8824. Anylong-term gain or loss resulting on that form is reported here.

28% rate part of Form 8824. (If Premium Level, supported by Form8824.) This is the part of the total for like-kind exchanges thatstems from 28% rate gain or loss.

11 Long-term amounts from other forms. (auto-calc lines) The net gainor loss from the above entries appears here, for all transactionscombined.

28% rate gain or loss in line 11. (auto-calc) The sum of the precedingamounts for 28% rate gain or loss appears here.

12 Net long-term gain or loss from Schedule(s) K-1. (Supported by the Sched-ule K-1 Long-term Gain/Loss Worksheet, Figure 2-12.) Access the worksheetwith the Itemize Key from this line to report long-term capital gains andlosses reported to you on a Schedule K-1 from partnerships, S corporations,and fiduciaries. Details for the Gain/Loss Worksheets that support these linesare given in the prior shaded pages, which apply to both short-term and long-term holdings. The amounts destined for Form 8582 are automatically re-flected in the totals that follow line 14.

28% rate gain or loss in line 12. (auto-calc) The sum of 28% rategain or loss in the supporting worksheets appears here.

13 Capital gain distributions. Capital gain distributions for this line comefrom two sources, as follows.

Reportable CGD from Schedule B. (Road Map line, supported bySchedule B.) Taken from the line on our Schedule B labeled “Nettaxable CGD,” this is the total of capital gain distributions you re-ported on 1099-DIV Worksheets less the part for a nominee.

28% rate part of Schedule B. (auto-calc, supported by Schedule B.)The part of the reportable CGD from Schedule B that stems from28% rate gain or loss is posted here.

Section 1202 gain part of Schedule B. (auto-calc, supported bySchedule B.) The part of reportable CGD from Schedule B that isidentified as sec. 1202 gain is posted here.

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Reportable CGD from Form 8814. (Road Map line, supported by Form8814.) Your entries on Forms 8814 for the capital gains distribu-tions received by your children are summed and posted here. Thenominee part has already been subtracted on Form 8814 from thetotal.

28% rate part of Form 8814. (auto-calc, supported by Form 8814.)The part of reportable CGD from Form 8814 that stems from 28%rate gain or loss is posted here.

Section 1202 gain part of Form 8814. (auto-calc, supported by Form8814.) The part of the reportable CGD from Form 8814that is iden-tified on the 1099-DIV worksheets on Form 8814 as sec. 1202 gainis posted here.

Reportable CGD from other. Enter any capital gain distributions not in-cluded on the preceding lines, excluding any amount attributable toa nominee. The IRS now allows you to report capital gain distribu-tions directly on Schedule D without completing Schedule B. How-ever, we still recommend that you complete Schedule B and supplyall information on our Form 1099-DIV Worksheets so that we canensure that all information on the Forms 1099-DIV you receive isproperly used throughout the return.

28% rate gain part. Enter the part of the reportable CGD from otherthat is 28% rate gain.

Section 1202 gain part of other. Enter the part of the reportable CGDfrom other that is sec. 1202 gain eligible for a 50% exclusion.

13 Capital gain distributions. (auto-calc) Computed as the sum of totalreportable capital gain distributions above, this amount appears online 13(f) of a printout of Schedule D.

Amount to claim on Type 3 worksheet at line 8. (auto-calc.) Computedas one-half of the sec. 1202 part of line 13, this is the maximumamount of CGD that can be excluded from taxable gain under IRSSection 1202.

14 Long-term capital loss carryover from 2005 Capital Loss Carryover Work-sheet. (auto-calc) Taken from line 13 of the Capital Loss Carryover Work-sheet shown on screen 1 of the current Schedule D, this is the long-term losscarried over from tax year 2005.

28% rate part of line 14. (auto-calc) This amount is the same as line 14because all loss carryovers are subject to the 28% rate rules.

Passive Loss Limitations. The next set of lines summarize the interactionwith Form 8582 for automatic handling of the passive loss rules for long-term(LT) gains and losses on Schedule D. These lines directly parallel the lines forshort-term amounts detailed previously, so the entries are described onlybriefly here. See the instructions in the earlier short-term section for more de-tail.

Total LT gain to Form 8582 line 3a. (auto-calc) The sum of gains fromthe preceding worksheets for passive activities.


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Total LT loss to Form 8582 line 3b. (auto-calc) The sum of losses fromthe preceding worksheets for passive activities.

Prior LT passive unallowed loss. This is the loss carryover translatedfrom the prior-year return from passive loss limitations on sales re-ported on screen 7 of the Schedule D for 2005. Analogous to theshort-term amounts, you must appropriately distribute this totalamong the worksheets for lines 8 and 12 yourself so that the unal-lowed amounts calculated on the worksheets reflect the proper pro-rationing among the worksheets. If you fail to do so, a W/S ERRORwill appear below to alert you of your omission.

Passive LT unallowed loss in 2006. (Road Map line, supported by Form8582.) This disallowance comes automatically from Form 8582, butcan only be determined upon the final recalculation of the return.

Significant participation part of prior unallowed losses. You must enterhere the part of the 2005 carryover that is offset by significant par-ticipation gains which you have entered on the worksheets for lines8 or 12.

W/S ERROR in prior unallowed losses. (auto-calc) Computed as thesum of prior unallowed losses you entered on all the worksheets forlines 8 and 12, less the total prior unallowed losses shown above(which you entered or "translate" posted). If this result is nonzero, itmeans that you have not properly allocated the total prior unallowedlosses among all the worksheets you have completed. You MUSTreturn to the worksheets and revise the entries. Your record of un-allowed loss for each item for the previous year should guide yourentries on the worksheets.

W/S ERROR in current unallowed losses. (auto-calc) Computed as thesum of unallowed losses computed the last time you viewed theworksheets for lines 8 and 12, less the total losses unallowedshown above for 2006 (which comes automatically from Form8582). If this result is nonzero, you MUST return to all theGain/Loss Worksheets so that their disallowances can be recalcu-lated based on the final return. This recalculation is automatic whenyou view each worksheet.

Note that the handling of the carryovers, significant participation amounts,and pro-rating among different schedules does not require you to completeany IRS passive activity worksheets yourself. However, you must generallyview all Gain/Loss Worksheets for lines 8 and 12 after the final recalculationof the return to ensure that all disallowances are properly reallocated amongall transactions based on the final results on Form 8582.

28% gain or loss in lines 8 through 14. (auto-calc) Computed as the sum ofthe 28% rate part of lines 8 through 14, this amount in used in figuring theamounts for Schedule D lines 19 and 20.

15 NET LONG-TERM CAPITAL GAIN OR LOSS. (auto-calc) This line is ostensi-bly the sum of all gains and losses in lines 8 through 14. However, the re-sults are modified by a complex interaction with Form 8582, and this line is

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automatically updated as Form 8582 changes due to recalculations through-out the return. If the worksheets are not up-to-date with this result, anamount will appear on one of the above W/S ERROR lines to alert you thatyou should view each worksheet to force its calculation to match the latestcalculation which appears here.

PART III, SUMMARY OF PARTS I AND II. All short-term and long-term gainsand losses are combined here into a net amount:

16 Combine lines 7 and 15. (auto-calc) Computed as the sum of lines 7and 15. If a net gain, it is posted to line 13 of Form 1040. If a loss,you can skip most of the following lines and proceed to line 21; youhave no capital gains, but you have a loss subject to limitation.

17 Are lines 15 and 16 BOTH gains? (auto-calc) If Yes, you must com-plete the rest of this schedule. If No, you can skip lines 18 through21 and proceed to line 22 because you have no capital gains to betaxed at a lower rate.

Tax computations no longer shown on Schedule D. The computation of capi-tal gains taxes is no longer shown on Schedule D, but is relegated to work-sheets that you do not file with the rteurn. However, the computations arestill required. The following section shows the information needed to ensurean accurate computation of tax, and allows you to make certain elections andadjustments for exceptional cases.

INFORMATION FOR TAX COMPUTATIONS. If both lines 15 and 16 ofSchedule D are gains or you have any qualified dividends on line 9b of Form1040, then tax computations are performed using the Schedule D Tax Work-sheet, even though the IRS does not always require its use. This worksheetprovides the most complete computations involving capital gains because ithandles all possible cases, from the most complex cases that require the useof the worksheet to the simple cases covered by the Qualified Dividends andCapital Gain Tax Worksheet provided in the IRS Form 1040 Instructions forline 44. You must therefore ensure that the following information is accuratein order for the tax computation for line 44 of Form 1040 to be accurate.Once you supply all required information, the software has all the informationto ensure the accurate computation of tax upon the final recalculation of thereturn.

Qualified dividends on Form 1040, line 9b. (auto-calc, supported by ScheduleB) These dividends qualify for the lowest capital gains tax rates, and shouldbe shown on Form 1040, as indicated.

Below information required for Form 1040 tax? (auto-calc) The answer will beYes only if both lines 15 and 16 of Schedule D are gains OR you have quali-fied dividends on line 9b of Form 1040. If Yes, the lower tax computed usingthe Schedule D Tax Worksheet will be used in place of the conventional taxfor Form 1040.


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Adjustment required if you file Form 4952. The following entries are requiredwhenever Form 4952 (Investment Interest Expense) is a part of the return inorder to properly compute the tax.

Form 4952, line 4e (or elected amount). (If Premium Level, supported byForm 4952.) Capital gains no longer automatically qualify as in-vestment income when computing deductible investment interest onForm 4952. However, you can elect to include these gains in Form4952 if you agree to have them taxed at your regular tax rate ratherthan the more favorable capital gains tax rates. The amounts on line4e and 4g of Form 4952 are therefore used in the tax computation.Line 4e is the net capital gain from property held for investment,and is usually reported here unmodified. However, you may wantto reduce the part of 4e attributable to 4g if you file Form 1116, inwhich case you would report a lesser amount here. See IRS Instruc-tions for Form 1116 for details. It is used for line 4 of the ScheduleD Tax Worksheet.

Form 4952, line 4g. (If Premium Level, supported by Form 4952.) This isthe amount you elect to include in investment income. It is used forline 25 of Schedule D, Part IV, and line 3 of the Schedule D TaxWorksheet.

28% Rate Gain Worksheet. This IRS worksheet is computed on the basis ofthe information shown below, resulting in the gain subject to the highestcapital gains tax.

28% rate net in lines 8 through 14. (auto-calc) Computed in accordancewith the 28% Rate Gain Worksheet, this is the sum of 28% rategain or loss in lines 8 through 14.

Adjustments to Schedule D total. An adjustment should rarely be nec-essary but is provided for completeness.

Net loss in Schedule D, line 7. (auto-calc) Computed as indicated if line7 shows a loss.

28% rate net for line 18. (auto-calc) Computed as the sum of the firsttwo amounts less the third amount, but no less than zero, thisamount is used for line 18 of Schedule D.

Unrecaptured Section 1250 Gain Worksheet. This IRS worksheet is com-puted on the basis of the information shown below, resulting in a gain that isthe part of long-term capital gains that stems from depreciation taken but notrecaptured as short-term gain. It is taxed at a 25% tax rate.

Adjusted unrecaptured section 1250 gain in Form 4797, Part I. (RoadMap line, supported by Form 4797.) Taken from the results com-puted following the Part III Summary for Form 4797, this is theamount of unrecaptured section 1250 gain reported in Part I ofForm 4797, including amounts reported in Part III of Form 4797 andamounts flowing to Form 4797 through Form 6252 and amountsreported to you on a Schedule K-1 from partnerships and S corpora-tions, limited by net long-term gains on a property-by-property ba-

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sis. All adjustments are computed in accordance with the IRS’s Un-recaptured Section 1250 Gain Worksheet.

Unrecaptured section 1250 gain from Forms 1099-DIV. (auto-calc line,supported by Schedule B and Form 8814.) Taken from the 1099-DIV worksheets you completed on Schedule B and Form 8814, thisis the part of your reportable capital gain distributions that stemsfrom depreciation of sec. 1250 property.

Unrecaptured section 1250 gain in line 12 from Schedules K-1. (auto-calc line, supported by Schedule B and Form 8814.) Taken from theSch. K-1 Worksheets for line 12, this is the unrecaptured sec. 1250gain reported to you by estates and trusts.

Other unrecaptured section 1250 gain. Enter here unrecaptured section1250 gains not included in the preceding lines but reported to youby an estate, trust, real estate investment trust, or mutual fund.(Amounts reported to you by partnerships and S corporations mustbe entered in the Part III Summary of Form 4797, not here.)

Net loss in 28% rate net. (auto-calc) This adjustment is the net loss, ifany, in the combination of 28% gain or loss in lines 8 through 14,the adjustment entered previously for 28% rate amount, and anyloss on line 7.

Unrecaptured section 1250 gain for line 19. (auto-calc) Computed asthe sum of the three sec. 1250 lines less the adjustment figured inaccordance with the IRS Unrecaptured Section 1250 Gain Work-sheet. This result is the total amount taxed at a maximum rate of25% rather than the more favorable rates on other long-term gains.

PART III concluded. The rest of the official form is automatic, but providesyou with access to the Schedule D Tax Worksheet if you want to see howthe tax computations are performed. ll short-term and long-term gains andlosses are combined here into a net amount:

18 Amount from 28% Rate Gain Worksheet. (auto-calc) Taken as the re-sult of the previously-described worksheet.

19 Amount from Unrecaptured Section 1250 Gain Worksheet. (auto-calc) Taken as the result of the previously-described worksheet.

MUST you use the Schedule D Tax Worksheet? (auto-calc) Determinedfrom the entries on the preceding lines of Part III, the answer showsyou when the IRS requires that the worksheet be used. However,as explained earlier, we use the worksheet under a broader range ofcircumstances than the IRS requires. Nevertheless, the computationresults and printout are the same.

Itemize to see Schedule D Tax Worksheet. (Road Map line, supportedby Schedule D Tax Worksheet.) While you can access and view theSchedule D Tax Worksheet through this line, there is no need to doso (other than curiosity) because it is fully automatic, including itsautomatic creation. This worksheet is completed and meaningfulwhenever any capital gains tax is computed for the return, eventhough the IRS requires the worksheet only in certain cases (as de-


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scribed in the next line). It provides the most complete calculationof tax and is correct under all circumstances. While it does notprint with the return when you choose to print Complete Returns orAll Forms Prepared, you can get a complete printout of the ScheduleD Tax Worksheet by choosing to print it alone from our Print Menu.

20 Are lines 18 and 19 BOTH zero? (auto-calc) If Yes, you are not re-quired to use the Schedule D Tax Worksheet, but it is used by thesoftware anyway in lieu of the IRS’s more restrictive Qualified Divi-dends and Capital Gain Tax Worksheet, as explained before. If No,you are required to use the Schedule D Tax Worksheet. In eithercase, you can skip lines 21 and 22 below.

21 Loss deductible this year. (auto-calc) If line 16 shows a loss, it islimited here to $3,000 ($1,500 if married filing separately) thenposted to line 13 of Form 1040.

22 Do you have qualified dividends on Form 1040, line 9b? (auto-calc) IfYes, you are instructed to us the Qualified Dividends and CapitalGain Tax Worksheet to compute the tax on Form 1040, but we usethe less restrictive Schedule D Tax Worksheet instead.

RECONCILIATION. Even though the IRS no longer provides a line for it, youmust still reconcile your Schedule D entries with sales reported to you onForms 1099-B (for stock sales) and 1099-S (for real estate sales), or anequivalent substitute statement, and explain any discrepancies in a supportingstatement.

Total sales on lines 3 and 10. (auto-calc) Taken from the lines as indi-cated, this is the total of all sales reported on the Gain/Loss work-sheets for Schedule D.

Total sales on Forms 1099-B and 1099-S. Enter here the total of allsales prices reported on the Forms 1099-B and 1099-S you receivedfor the year that must be reported on Schedule D. You should NOTreport the sale of your main home if all of the gain on the sale wasexcluded, and should not include the sales amount here.

Difference (itemize BELOW if not zero). (auto-calc) Computed as the dif-ference between the above two lines.

Difference explained (itemize). You must justify any difference shownabove in a supporting statement for this line. For example, a differ-ence could exist if you did not receive a Form 1099-B or 1099-Suntil the year after the year of sale. You could also explain here anyspecial gain calculations, such as why the basis is different from thecost for the sale of property that was inherited, received as a gift,or as a result of a tax-free exchange or involuntary conversion. Thesupporting statement you provide here is printed with the official re-turn and referenced on the title line for Part III of Schedule D.


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Schedule E / Supplemental Income and LossWho is it for? This schedule is an omnibus form for certain types of incomenot reported elsewhere. You MUST file Schedule E if you own rental prop-erty, receive royalties, or receive income reported to you on a Schedule K-1from a partnership or S corporation, an estate or trust, or farming or fishing.Schedule E is accessible through the Road Map at line 18 of Form 1040.

Use one Schedule E for all your properties. The IRS requires that the totalsfrom all your properties appear on one and only one Schedule E. In order tomost conveniently handle this requirement without limiting the number ofproperties you can handle, the software provides special worksheets to sup-port Schedule E, with a separate worksheet page available for each separateproperty, for as many properties as you need to report. The totals required bythe IRS are printed on the main form, and the property-by-property details areprinted in properly cross-referenced supporting statements.

PART I, INCOME OR LOSS FROM RENTAL REAL ESTATE AND ROYALTIES.This section of Schedule E is used to report income from both rental propertyyou own or control and royalties. Rental property for this section includesrental real estate and personal property. However, you must use Schedule Crather than Schedule E to report the rental income if (1) the rental is inciden-tal to services that you provide, (2) the rental period is less than 30 days andyou provide significant other services to the renter, or (3) the rental is real es-tate and you sell real estate as a business (unless it’s for your own invest-ment portfolio, in which case you report it on Schedule E but classify it asnonpassive). Royalties include payments on copyrights of literary or artisticworks you own, and payments on oil, gas, and other mineral properties youown. However, you must use Schedule C rather than Schedule E to reportthe royalty income if (1) you hold an interest in the actual operation of theproperty for which you receive the royalties, or (2) your royalties are associ-ated with your profession as a writer, artist, etc.

Itemize line 3 or 4 to support lines 1 through 19. Details for ALL prop-erty MUST be reported in the Rental/Royalty Worksheets, detailedlater in the shaded text. The answers to IRS questions 1 and 2 ap-pear separately for each property in the supporting statements,which are clearly cross-referenced on the printed Schedule E whenappropriate, so that an unlimited number of properties can be han-dled.

3 and 4, Rents and royalties received. (Supported by the Rental/RoyaltyWorksheet, Figures 2-13a and 2-13b.) Whether you itemize line 3 orline 4 you access the same set of worksheets. You MUST provideproperty-by-property details on these worksheets in order for thepassive loss limitations to be properly applied.

5 through 11. No amounts are shown for these lines and no entries canbe made here. You must enter all data on the worksheets that areaccessible at lines 3 and 4.


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12 Mortgage interest paid to banks, etc. (auto-calc) The sum of line 12from all Rental/Royalty Worksheets described below, this line is al-ready included in the total for lines 5 through 17, below. It is shownseparately here only to satisfy IRS requirements for the final print-out.

Itemize line 12 if there is a discrepancy with Forms 1098. Eventhough line 12 is an auto-calc line, it is accessible for you to itemizeto provide an explanation if its total is more than the total of allForms 1098 that you receive from lenders. See IRS Pub. 535 forguidelines.

13 Other interest. Itemize here (name/address) if the Form 1098 wasreceived by another. If line 13 on any of the worksheets includesany amount reported on a Form 1098 received by another personwith whom you share the interest expense, show the name and ad-dress of that person in a supporting statement for this line.

13 through 17. No amounts are shown for these lines and no entries canbe made here. You must enter all data on the worksheets that areaccessible at lines 3 and 4.

18a through 18e, Other expense (description). Enter in these five linesthe description for any five other categories of expense you want toreport, in 25 characters or less. These lines are intended only forcategories not covered by the IRS in lines 5 through 17 (which ap-pear in the worksheets). The descriptions you enter here will appearon all Rental/Royalty Worksheets for this return and on all officialprintouts. You MUST categorize all your other expenses for all prop-erties into these five lines and no more. (Because of the design ofthe paper IRS form, only the first 19 characters of your entry forline 18a will appear on a printed Schedule E, whereas the full 25-character entries will appear for lines 18b through 18e. No suchlimitation applies to an e-file return.)

19 a-Rental expenses on lines 5 through 18. (auto-calc) The sum of ex-penses (other than depreciation and depletion) for worksheets com-pleted for rentals appears here.

19 b-Royalty expenses on lines 5 through 18. (auto-calc) The sum ofexpenses (other than depreciation and depletion) for worksheetscompleted for royalties appears here.

19 Add lines 5 through 18. (auto-calc) Computed as the sum of lines19a and 19b.

20 a-Depreciation from Form 4562. (Road Map line, supported by Form4562.) This line is reserved FOR RENTALS ONLY. When you accessForm 4562 here with the Itemize Key, you automatically access thecopy of Form 4562 that is linked to Schedule E. When you firstcomplete this copy of Form 4562, you should type "Rental propertyon Schedule E" as the entry for Business or activity. When youcomplete depreciation worksheets for Form 4562, identify eachproperty the same way you do on the Rental/Royalty Worksheets.

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CAUTION: You MUST allocate the total depreciation that appearshere among the properties reported on the Rental/Royalty Work-sheets yourself, so we recommend you use the Quick Print Key togenerate a printout of each depreciation worksheet. (When you re-turn from Form 4562, the total depreciation on that form is postedto line 20a of Schedule E. Note that amortization is not posted toany line on Schedule E because amortization on Form 4562 is notrelevant to Schedule E. In addition, investment property, and there-fore rental property reported here, is not eligible for the Sec. 179expense deduction on Form 4562.)

20 b-Depletion. This line is reserved FOR ROYALTIES ONLY. Report de-pletion in a supporting statement for this line, identifying the royaltyproperty to which it applies. WARNING: You must enter total deple-tion here AND allocate it among the supporting Rental/RoyaltyWorksheets to ensure the proper printouts and the proper applica-tion of the passive loss rules.

20 Depreciation expense or depletion. (auto-calc) The sum of lines 20aand 20b.

21 Total expenses. Add lines 19 and 20. (auto-calc) Computed as indi-cated.

22 Income or loss from rental real estate or royalty properties. (auto-calc) Computed as line 3 plus line 4 less line 21.

Net income for profit rentals. (auto-calc) This is the net incomeshown on the Rental/Royalty Worksheets for profit rental propertiesalone (without regard to PRIOR unallowed losses). The net incomefor loss properties is determined by comparing this amount to thenet for all properties.

Net income for profit royalties. (auto-calc) This is the net incomeshown on the Rental/Royalty Worksheets for profit royalty proper-ties alone. The net income for loss properties is determined by com-paring this amount to the net for all properties.

Details follow for the worksheets cited above.


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Rental/Royalty Work-sheet, Figures 2-13aand 2-13b. This work-sheet not only supportslines 1 through 19 butalso summarizes the ex-penses detailed else-where to provide thecomplete profit and losspicture needed for theproper application of thepassive loss limitations.You must take extracare in completing theworksheets for rentalsto ensure that theproper amounts areposted to the properlines of Form 8582.

1 For each, kind of property. Describe the property or source of incomein 25 characters or less. If you are only a part owner of the prop-erty, show your percentage of ownership here, and report only yourportion of all amounts in the remaining lines.

and location. Enter abbreviated address (without ZIP code) in 25 char-acters or less.

Royalty (vs. rental)? Answer Yes if this worksheet page relates to roy-alty income. CAUTION: Even though you access the worksheetfrom a royalty line, you must still answer this question Yes for royal-ties, because you access the same set of worksheets whether youitemize at the rental line or the royalty line. HINT: For royalty in-come you would normally answer Yes to the following question aswell, since royalty income is usually portfolio income and thereforenonpassive.

Qualifies as nonpassive? Answer Yes if the passive property qualifiesfor an exemption from the passive loss rules. Do NOT answer Yesjust because you think you are not subject to the passive loss limita-tions due to your income level; the software will decide throughForm 8582 whether you qualify for such an exception upon the re-calculation of the return, and the property must retain the properclassification for use in other parts of Form 8582. Most royaltyproperty qualifies as nonpassive, but rarely does rental real estateexcept in the year of sale. Except for low-income housing, rentalreal estate is considered passive activity property, even though itgets potentially more favorable treatment than other properties un-der the passive loss rules. EXCEPTION IN THE YEAR OF SALE: Ifthe sale constituted an entire disposition of the property, and you

RENTAL/ROYALTY-Screen 1of2RENTAL/ROYALTY-Screen 1of2RENTAL/ROYALTY-Screen 1of2RENTAL/ROYALTY-Screen 1of2 1 For each,kind 1 For each,kind 1 For each,kind 1 For each,kind and location and location and location and location Royalty (vs. rental)..? No Royalty (vs. rental)..? No Royalty (vs. rental)..? No Royalty (vs. rental)..? No Qualifies as no Qualifies as no Qualifies as no Qualifies as nonnnnpassve? Nopassve? Nopassve? Nopassve? No Actv part in rent real? No Actv part in rent real? No Actv part in rent real? No Actv part in rent real? No 2 Personal use above allowed? No 2 Personal use above allowed? No 2 Personal use above allowed? No 2 Personal use above allowed? No 3 Rents r 3 Rents r 3 Rents r 3 Rents reeeeceived............. 0ceived............. 0ceived............. 0ceived............. 0 4 Royalties r 4 Royalties r 4 Royalties r 4 Royalties reeeeceived......... 0ceived......... 0ceived......... 0ceived......... 0 5 Adverti 5 Adverti 5 Adverti 5 Advertissssing................ 0ing................ 0ing................ 0ing................ 0 6 Auto and travel............ 0 6 Auto and travel............ 0 6 Auto and travel............ 0 6 Auto and travel............ 0 7 Cleaning & maint 7 Cleaning & maint 7 Cleaning & maint 7 Cleaning & mainteeeenance..... 0nance..... 0nance..... 0nance..... 0 8 Commi 8 Commi 8 Commi 8 Commisssssions................ 0sions................ 0sions................ 0sions................ 0 9 Insu 9 Insu 9 Insu 9 Insurrrrance.................. 0ance.................. 0ance.................. 0ance.................. 0 10 Legal & other pro fees..... 0 10 Legal & other pro fees..... 0 10 Legal & other pro fees..... 0 10 Legal & other pro fees..... 0 11 Management fees............ 0 11 Management fees............ 0 11 Management fees............ 0 11 Management fees............ 0 12 Mortgage interest banks.... 0 12 Mortgage interest banks.... 0 12 Mortgage interest banks.... 0 12 Mortgage interest banks.... 0 13 Other inte 13 Other inte 13 Other inte 13 Other interrrrest............. 0est............. 0est............. 0est............. 0 14 R 14 R 14 R 14 Reeeepairs.................... 0pairs.................... 0pairs.................... 0pairs.................... 0 15 Su 15 Su 15 Su 15 Suppppplies................... 0plies................... 0plies................... 0plies................... 0 [Press PgDn or > for lns16-23] [Press PgDn or > for lns16-23] [Press PgDn or > for lns16-23] [Press PgDn or > for lns16-23]

Figure 2-13a. Rental/Royalty Worksheet, Screen 1

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have an overall loss for that property throughout the return, includ-ing prior unallowed losses, you must reclassify the passive propertyas nonpassive property in the year of sale. (Property with an overallloss, including the sale, qualifies as nonpassive property for the yearof sale, and the previously disallowed losses are allowed in full.Property with an overall gain retains its passive classification, and itqualifies for use on Form 8582 to offset passive losses from otherproperties.) Exception for real estate professionals: For any year inwhich you are a real estate profession, rental activities in which youmaterially participate are NOT passive activities. See Pub. 527 forother details for real estate professionals.

Did you actively participate in the operation of the rental real estateactivity during the tax year? This question can legitimately be an-swered Yes FOR RENTAL REAL ESTATE ONLY. To answer Yes youmust have significantly participated in making management deci-sions or arranging for others to provide needed services to renters.ALL real estate rental activities are reported on Form 8582 whetheror not you actively participate, but the losses qualify for potentiallymore favorable treatment if you do actively participate. ("Materialparticipant" and "significant participant" classifications are not rele-vant for rental real estate activities because they are ALWAYS clas-sified as passive.)

2 Personal use exceeds allowable amount? You must answer Yes ifyou or a member of your family used this property for personal pur-poses for more than the greater of 14 days or 10% of the total daysrented at fair rental value during the tax year. When you must an-swer Yes, the rental is classified as your home, which means thatcertain expenses are not allowed and you must limit your claim forexpenses to no more than the rental income you receive. You mustbe mindful of these limitations as you enter expenses on this work-sheet. Any expenses that you cannot claim this year, however, canbe carried over to future years. See IRS Instructions for Schedule Eand IRS Pub. 527 (Residential Rental Property) for details on thepriorities for expenses.

3 Rents received. Enter gross rents. Any entry here is zeroed if you an-swer Yes to the above royalty question.

4 Royalties received. Enter gross royalty income. Any entry here is ze-roed unless you answer Yes to the above royalty question.

5 Advertising. Enter advertising and marketing expenses here.6 Auto and travel. This line is special because of special IRS reporting

requirements for the use of your car. There are two methods of fig-uring vehicle expenses:

Actual Expenses Method. You MUST use this method for allvehicles if you used more than one vehicle at a time for this activity.Otherwise you may be able to use the method that gives you thehigher deduction. See Form 2106 for more detail. If you use this


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method, enter all out-of-pocket expenses here, but figure car depre-ciation on the copy of Form 4562 that is attached to line 20a ofSchedule E itself. You must complete Part V of Form 4562 to claimthe vehicle depreciation and justify the other expenses. (Once youcomplete Form 4562, the total for the form is posted to line 20a ofSchedule E itself. You must then allocate that total among all ofyour Rental/Royalty Worksheets and enter the appropriate amounton line 20a of each worksheet.)

Standard Mileage Rate Method. If you use this method, figurethe vehicle expense for year 2006 as the number of miles traveledduring the year for this activity times 44.5 cents per mile. Alsocomplete Part V of Form 4562 to justify the expenses (includinglines a, b, and c of the Listed Property Worksheet, but not the $ en-tries).

Meals. You can also deduct here 50% of meal expenses whileaway from home for rental-related travel.

7 through 11. Enter expenses in the listed categories only.12 Mortgage interest paid to financial institutions. This line is special

because the IRS reconciles it with the Form 1098s they receivefrom lenders. It is posted to Schedule E so that the total mortgageinterest is evident for IRS audits. If you claim more interest than theForms 1098 support, you must explain why in a supporting state-ment for line 12 of Schedule E itself, not here at the worksheet.CAUTION: If the Form 1098 received is in someone else's name,enter the interest on line 13 (Other interest) rather than here.

13 Other interest.Enter here in-terest forwhich you didnot received aForm 1098 orfor which thepayee is not afinancial insti-tution. If theForm 1098that applies tothis amountwas receivedby anotherperson, youmust supplythe name andaddress of that

person in a supporting statement for the line supplied for that pur-pose on Schedule E, not here.

RENTAL/ROYALTY-Screen 2of2RENTAL/ROYALTY-Screen 2of2RENTAL/ROYALTY-Screen 2of2RENTAL/ROYALTY-Screen 2of2 16 Taxes...................... 0 16 Taxes...................... 0 16 Taxes...................... 0 16 Taxes...................... 0 17 Util 17 Util 17 Util 17 Utiliiiities.................. 0ties.................. 0ties.................. 0ties.................. 0 18a .......................... 0 18a .......................... 0 18a .......................... 0 18a .......................... 0 18b .......................... 0 18b .......................... 0 18b .......................... 0 18b .......................... 0 18c .......................... 0 18c .......................... 0 18c .......................... 0 18c .......................... 0 18d .......................... 0 18d .......................... 0 18d .......................... 0 18d .......................... 0 18e .......................... 0 18e .......................... 0 18e .......................... 0 18e .......................... 0 19 a-Rental expenses on 5to18 19 a-Rental expenses on 5to18 19 a-Rental expenses on 5to18 19 a-Rental expenses on 5to18▒ 0▒ 0▒ 0▒ 0 b-Royalty expense on 5to18 b-Royalty expense on 5to18 b-Royalty expense on 5to18 b-Royalty expense on 5to18▒ 0▒ 0▒ 0▒ 0 19 Add lines 5 through 18..... 19 Add lines 5 through 18..... 19 Add lines 5 through 18..... 19 Add lines 5 through 18.....▒ 0▒ 0▒ 0▒ 0 20 a-Rental depr 20 a-Rental depr 20 a-Rental depr 20 a-Rental depreeeeciatn(F4562) 0ciatn(F4562) 0ciatn(F4562) 0ciatn(F4562) 0 b-Royalty depl b-Royalty depl b-Royalty depl b-Royalty depleeeetion(Eln20) 0tion(Eln20) 0tion(Eln20) 0tion(Eln20) 0 20 Depreciation or depl 20 Depreciation or depl 20 Depreciation or depl 20 Depreciation or depleeeetion..tion..tion..tion..▒ 0▒ 0▒ 0▒ 0 21 Total e 21 Total e 21 Total e 21 Total exxxxpenses.............penses.............penses.............penses.............▒ 0▒ 0▒ 0▒ 0 22 Income or loss............. 22 Income or loss............. 22 Income or loss............. 22 Income or loss.............▒ 0▒ 0▒ 0▒ 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 Net inclg PRIOR u Net inclg PRIOR u Net inclg PRIOR u Net inclg PRIOR unnnnallowedallowedallowedallowed▒ 0▒ 0▒ 0▒ 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582▒ 0▒ 0▒ 0▒ 0 23 Deductible rental loss..... 23 Deductible rental loss..... 23 Deductible rental loss..... 23 Deductible rental loss.....▒ 0▒ 0▒ 0▒ 0

Figure 2-13b. Rental/Royalty Worksheet, Screen 2

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14 through 17. Enter expenses in the listed categories only.18a through 18e, Other expense (amounts). The text labels for these

five lines come from your entries on Schedule E itself. The same la-bels are used for all properties, in order to conform with the IRS de-sign for Schedule E printouts. Enter here the dollar amounts for thecategories you have already described on Schedule E lines 18athrough 18e. You MUST categorize all your remaining expenses forall properties into these five lines and no more.

19 a-Rental expenses on lines 5 through 18. (auto-calc) Computed asindicated when the Royalty question is answered No.

b-Royalty expenses on lines 5 through 18. (auto-calc) Computed asindicated when the Royalty question is answered Yes.

19 Add lines 5 through 18. (auto-calc) Computed as the sum of lines19a and 19b.

20 a-Rental depreciation (Form 4562). If you complete a Form 4562 forrental property (via line 20a of Schedule E) you MUST enter herethe part of the total on line 20a that applies to THIS property.WARNING: Failure to enter the proper amount here could result inimproper application of the passive loss rules. (REMINDER: Invest-ment property, and therefore rental property reported here, is noteligible for the Sec. 179 expense deduction on Form 4562.)

b-Royalty depletion (as entered on line 20 of Schedule E). If youclaim depletion on line 20b of Schedule E, you MUST enter here thepart of the total on line 20b that applies to THIS property.WARNING: Failure to enter the proper amount here could result inimproper application of the passive loss rules.

20 Depreciation or depletion. (auto-calc) Taken from line 20a or line20b depending on your answer to the Royalty question.

21 Total expenses. Add lines 19 and 20. (auto-calc) Computed as indi-cated.

22 Income or loss from rental or royalty property. (auto-calc) Computedas line 3 or 4 less line 21, and posted to Schedule E for comparisonwith the computation of line 22 on the schedule itself. (Note that nolosses are allowed if the activity is a rental classified as your home.Also note that you may have to file Form 6198 (At-Risk Limitations)if line 22 is a loss, and write “Form 6198” to the left of line 22 onthe copy Schedule E you file with the IRS. In either case you mustreduce your claims on lines 5 through 20 to allowable amounts be-cause limitations for these cases are not applied elsewhere.)

PRIOR-year unallowed loss. Enter the unallowed loss in the prior taxyear for this property as a result of the passive loss limitations(Form 8582). Although this entry is translated from your prior-yearreturn (as long as you answered Yes to "Transfer all prior $amounts" for the translation), it will not generally be correct unlessthe prior-year worksheet was complete and viewed anew after theentire return was complete. Moreover, if any losses were unallowed


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two years ago, the translation may not reflect the proper amountbecause this is the first year that this worksheet has this line.

Net including PRIOR unallowed. (auto-calc) Computed as line 22 lessthe above prior unallowed loss.

Net elsewhere for same activity. You must enter the net gain or lossreported elsewhere on the return for this same passive activity,computed in the same way as the preceding net, in order for thedisallowance computed below to reflect the proper allocation amongall passive properties. If this entry when added to the preceding netresults in an overall gain, any losses reported on this worksheet areallowed in full, and any remaining unallowed losses shown on Form8582 are allocated to other properties instead.

Unallowed THIS year on Form 8582. (auto-calc) This and the follow-ing line are provided to satisfy the printout requirements of the IRS.They do not affect the calculations on the return itself, which fullyautomates Form 8582 and its disallowances. However, in order forline 23 to be evident to the IRS on a property by property basis, theproper disallowance from Form 8582 must appear here as well.CAUTION: You must view this worksheet AFTER the return is finaland complete in order for the proper final reallocation of unallowedlosses to take place. (The final recalculation of the return does NOTinvolve the supporting worksheets individually, but viewing eachworksheet on the screen forces its recalculation using the amountsposted from Form 8582 to Schedule E above line 23.)

23 Deductible rental loss. (auto-calc) Computed as line 22 plus theprior-year unallowed loss less the above disallowance.

In addition to these visible lines, net income for profit properties and amountsfor Form 8582 lines 1a, 1b, 3a, and 3b are computed and carried to ScheduleE.

RENTAL/ROYALTY SUMMARY. The properties reported above are separatedhere into profit properties and loss properties, and the passive loss limitationsare applied to the rental loss properties. WARNING: This section will operateautomatically and accurately only so long as you have made theRental/Royalty Worksheet consistent with the depreciation and depletion de-tails for line 20.

Rental/royalty gains and losses for Form 8582 lines 1a, 1b. (auto-calclines) Taken from the Rental/Royalty Worksheets for rental propertywith active participation.

Rental/royalty gains and losses for Form 8582 lines 3a, 3b. (auto-calclines) Taken from the Rental/Royalty Worksheets for rental propertywithout active participation.

Rental loss included in line 22. (auto-calc) This rental loss is "rental netincome on worksheets" plus lines 19a and 20a less line 3.

The next two lines hold loss carryovers from the prior-year return, and aretaken automatically from that return when you use the translate feature, pro-viding you retained the tax year on that return at 2005. However, proper al-

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location of the following two totals among the Rental/Royalty Worksheets isassured only if you view them on the prior-year return yourself, after final re-calculation of that return, before translating the return to this year's format.

Active rental real estate prior unallowed loss. This is the loss carryoverfrom the prior year's Schedule E stemming from passive loss limita-tions on active rental real estate activities, translated from the prior-year return as noted above.

Other passive prior unallowed loss. This is the loss carryover from theprior year's Schedule E stemming from passive loss limitations onrentals other than active real estate activities, translated from theprior-year return as noted above.

Total unallowed loss in prior year. (auto-calc) Computed as the sumof the above two amounts.

Active rental real estate net loss on worksheets subject to limitation.(auto-calc) Computed as the sum of net losses on the worksheetsfor active participation rental real estate properties for which theoverall net is a loss. This is the total of net losses for active rentalreal estate among which disallowances on Form 8582 should be al-located, and is used in the calculations for Form 8582.

Other passive net loss on worksheets subject to limitation. (auto-calc)Computed as the sum of net losses on the worksheets for proper-ties other than active participation rental real estate for which theoverall net is a loss. This is the total of net losses for other than ac-tive rental real estate among which disallowances on Form 8582should be allocated, and is used in the calculations for Form 8582.

Total on worksheets subject to limitation. (auto-calc) Computed assum of the above two lines. This is the total of all net losses on theworksheets that are subject to limitation by Form 8582.

WARNING: Beware errors in the worksheet entries. In order for the officialprintouts to accurately reflect the allowed rental real estate losses on a prop-erty by property basis, you must properly allocate the totals for prior unal-lowed losses, current depreciation, and current unallowed losses among theindividual worksheets. You may therefore have to return to the worksheets acouple of times during the preparation of the return to update their entries.You can allocate the prior unallowed losses when you start the return (al-though they may already be correct if the return is properly translated), andyou can allocate the depreciation deductions once Form 4562 is complete.Once these two are correct you must also determine the overall net for eachactivity among the different forms on which the activity is reported, and enteran accurate number for "net elsewhere for the same activity." But you cannotupdate the current unallowed losses among the worksheets until the returnand its final recalculations are complete. You should then view each work-sheet, and the new totals will be automatically allocated among the proper-ties. (Unlike other worksheets, there is NO W/S ERROR LINE to give you awarning when the Rental/Royalty Worksheets are not up-to-date. You musttherefore check the worksheets yourself once the return is complete.)


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The next two lines show the disallowance for this year, posted here fromForm 8582. Proper disallowances are assured after the final recalculation ofthe return. Although you can access Form 8582 from these lines, there israrely a need to do so since Form 8582 is automatically generated and com-pleted when needed upon final recalculation of the return. However, in orderfor these disallowances to be reflected in the Rental/Royalty Worksheets, youmust view all Rental/Royalty Worksheets after the return is complete.

Active rental real estate unallowed loss for 2006. (Road Map line, sup-ported by Form 8582.) This is the disallowance from Form 8582 foractive rental real estate alone, which can be carried over to the nexttax year.

Other passive activity unallowed loss for 2006. (Road Map line, sup-ported by Form 8582.) This is the disallowance from Form 8582 forall but active rental real estate, which can be carried over to thenext tax year.

23 Deductible rental loss. (auto-calc) Computed as the "rental loss inline 22" less the disallowances from Form 8582 (both "Active rentalreal estate unallowed loss for 2006" and "Other passive activity un-allowed loss for 2006").

24 Income. (auto-calc) The sum of the profit lines "rental income onworksheets" and "royalty income on worksheets."

25 Losses. Add losses on lines 22 and 23. (auto-calc) The sum of theallowed rental loss on line 23 and the royalty loss determined as the"royalty income on worksheets" plus line 19b plus line 20b less line4.

26 Total income or (loss) on lines 24 and 25. (auto-calc) Line 24 less line25, and reflected in the total at line 40.

Enter rental real estate income or loss in line 26 that is NOT from apassive activity. Your entry here does not affect any calculationsbut alerts the IRS that nonpassive amounts are included in line 26,so that they will take this into account in their audits. Any amountyou enter here will appear with the label NPA on the dotted line forSchedule E line 26.

PART II, INCOME OR LOSS FROM PARTNERSHIPS AND S CORPORATIONS.All income for this section is reported on the Partnerships and S Corps Work-sheets described below. The amounts for these worksheets should be avail-able from the Schedules K-1 you receive from the entities. (If you reportlosses for activities for which you are not at risk, you must also file Form6198, which is built into the Premium Level only. See the official IRS instruc-tions.)

CAUTION: To avoid a penalty, if any entity is a tax shelter you must fileForm 8271 with the return. (If Premium Level, supported by Form 8271.) Form8271 is an informational form that does not affect any calculations. You useit to report the tax shelter name, tax shelter registration number, and taxshelter ID number for all tax shelters reported on the return.

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27 Any prior unallowed losses due to at-risk or basis limitations, passivelosses NOT on Form 8582, or unreimbursed partnership expenses? Note thatyou do NOT have to answer Yes for unallowed passive losses if you reportedthem on Form 8582.

If “Yes,” see page E-5 first. You may need to complete Form 6198! Thereference is to page E-5 of the IRS 2006 Instructions for ScheduleE, which details at risk and other rules. (Form 6198 is built in forPremium Level software.)

28 YOUR and SPOUSE nonfarm and farm activities. (Supported by the Part-nerships and S Corps Worksheet, Figure 2-14.) Four separate sets of work-sheets are provided: for your nonfarm income, spouse's nonfarm income,your farm income, and spouse's farm income. You must identify the incomeand losses you report here as passive or nonpassive, using our instructionsfor Form 8582 as your guide. If you are a general partner or part of an S Cor-poration, you can generally report your gains and losses on the nonpassivelines if you participated in the business more than 500 hours during the year(that is, you are a "material participant"), or you participated in the activityfor more than 100 hours but no more than 500 hours during the tax year andhad a net gain overall for the activity (that is, you are a "significant partici-pant"). However, if you are a limited partner in a limited partnership you sel-dom qualify for either material participation or significant participation, so youmust usually report all amounts on the passive lines. However, there are ex-ceptions, as detailed in our instructions for Form 8582. For example, if yousold your entire interest in the partnership during the year, and you have anoverall loss for the year including all gains and losses from the activity, youmust report all amounts for the activity as nonpassive amounts throughoutthe return (and all losses will be allowed in full). For more information, see"How unallowed losses are allowed when you sell" in our instructions forForm 8582.

Partnerships and S Corps Worksheet, Figure 2-14. Accessed at four separatelines for line 28 in Part II, you use this worksheet to report most ordinary in-come and losses from partnerships and S Corporations. Most of the informa-tion is shown on the Schedules K-1 that you receive from the entities,Schedule K-1 (Form 1065) for partnerships and Schedule K-1 (Form 1120S)for S corporations:

a. Name. Enter the name of the entity in 25 characters or less. If this isa tax shelter enter "(See 8271)" at the end of this entry and com-plete and file a Form 8271 for each tax shelter with the return.

b. Partnership or S Corporation (P or S). Enter P for partnership or S forS Corporation to identify the entity named above.

c. Foreign partnership? Answer Yes only if applicable.d. Employer identification number. Enter the Employer IDN of the payer

in the standard 10-character format (00-0000000).All at risk? Unless you can answer Yes you must complete Form 6198

(built into the software for Premium Level) to determine how muchof the loss to report below.


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e. Some NOT at risk? (auto-calc) Automatically the opposite of theabove answer.

You MUST file Form 6198 if Yes. (auto-calc) Automatically the same asthe preceding answer, this line is provided to alert you to the needto file a Form 6198 when you have amounts not at risk...

Active rental realestate? An-swer Yes ifyour interest inthe partnershipqualifies as ac-tive rental realestate. Cau-tion: Limitedpartners in alimited part-nership seldomqualify. Onlygeneral part-ners can usu-ally qualify toanswer Yeshere. If youcan answer

Yes, all amounts reported below for passive income or loss will beposted to the Active Rental Real Estate section of Form 8582 forpotentially favorable treatment.

Significant participant in the activity? If you answer Yes here, all pas-sive and nonpassive income reported below will be included in thesignificant participation net for the entire return. See our instruc-tions for Form 8582 for details on what constitutes significant par-ticipation. CAUTION: See "Special procedures for significant partici-pation activities," which immediately follows this shaded section,for instructions on changing your entries depending on the final de-termination on Form 8582 of the overall net gain from significantparticipation activities.

Net elsewhere for same activity. You must enter the net gain or lossreported elsewhere on the return for this same passive activity,computed using both current gains and losses and prior unallowedlosses without limitation from Form 8582, in order for the disallow-ance computed below to reflect the proper allocation among all pas-sive properties. If this entry when added to the passive net on thisworksheet results in an overall gain, any losses reported on thisworksheet are allowed in full, and any remaining unallowed lossesshown on Form 8582 are allocated to other properties instead.

PARTNERSHIPS AND S CORPSPARTNERSHIPS AND S CORPSPARTNERSHIPS AND S CORPSPARTNERSHIPS AND S CORPS a. Name a. Name a. Name a. Name b. Ptr or S Corp. (P or S) b. Ptr or S Corp. (P or S) b. Ptr or S Corp. (P or S) b. Ptr or S Corp. (P or S) c. Foreign partnrship......? No c. Foreign partnrship......? No c. Foreign partnrship......? No c. Foreign partnrship......? No d. Employer I. D. Number d. Employer I. D. Number d. Employer I. D. Number d. Employer I. D. Number All @ risk................? No All @ risk................? No All @ risk................? No All @ risk................? No e. Some NOT at risk.......... e. Some NOT at risk.......... e. Some NOT at risk.......... e. Some NOT at risk..........▒ No▒ No▒ No▒ No You MUST file Form 6198 if Yes You MUST file Form 6198 if Yes You MUST file Form 6198 if Yes You MUST file Form 6198 if Yes▒ No▒ No▒ No▒ No Active rental real est? No Active rental real est? No Active rental real est? No Active rental real est? No Significant pa Significant pa Significant pa Significant parrrrticipnt? Noticipnt? Noticipnt? Noticipnt? No Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 PASSIVE loss on K-1... 0 PASSIVE loss on K-1... 0 PASSIVE loss on K-1... 0 PASSIVE loss on K-1... 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582▒ 0▒ 0▒ 0▒ 0 f. PASSIVE loss(8582) f. PASSIVE loss(8582) f. PASSIVE loss(8582) f. PASSIVE loss(8582) ▒ 0▒ 0▒ 0▒ 0 g. PASSIVE income(K-1) 0 g. PASSIVE income(K-1) 0 g. PASSIVE income(K-1) 0 g. PASSIVE income(K-1) 0 h. NONPASSIVE loss(K-1) 0 h. NONPASSIVE loss(K-1) 0 h. NONPASSIVE loss(K-1) 0 h. NONPASSIVE loss(K-1) 0 i. Sec179expense dedu i. Sec179expense dedu i. Sec179expense dedu i. Sec179expense deducccction 0tion 0tion 0tion 0 j. NONPASSIVE income(K-1) 0 j. NONPASSIVE income(K-1) 0 j. NONPASSIVE income(K-1) 0 j. NONPASSIVE income(K-1) 0 Self-empl net income(Ptr only) 0 Self-empl net income(Ptr only) 0 Self-empl net income(Ptr only) 0 Self-empl net income(Ptr only) 0 Self-empl gross incm(Ptr only) 0 Self-empl gross incm(Ptr only) 0 Self-empl gross incm(Ptr only) 0 Self-empl gross incm(Ptr only) 0

Figure 2-14. Partnerships and S Corps Worksheet

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PASSIVE loss on Schedule K-1. Enter the loss from passive activitieshere, as reported to you on Schedule K-1, or a reduced amount asdetermined by Form 6198, which is built into the Premium Levelsoftware. Include any section 179 deduction for PASSIVE activitieshere, NOT on line j. Do NOT include amounts for a Publicly TradedPartnership (PTP); instead, see "Special procedures for PubliclyTraded Partnerships (PTPs)," which follows this shaded section, forinstructions. CAUTION: If you sell your entire interest in a passiveproperty and the net throughout the return for that property is a netloss, you must report all gains and losses for that property onNONPASSIVE lines, because the property is reclassified as nonpas-sive property in the year of sale under these circumstances. Formore information, see "How unallowed losses are allowed when yousell" in our instructions for Form 8582.

PRIOR-year unallowed loss. Enter the unallowed loss in the prior taxyear for this property as a result of the passive loss limitations(Form 8582). Although this entry is translated from your prior-yearreturn (as long as you answered Yes to "Transfer all prior $amounts" for the translation), it will not generally be correct unlessthe prior-year worksheet was complete and viewed anew after theentire return was complete but before the translation was per-formed.

Unallowed THIS year on Form 8582. (auto-calc) This entry may not beaccurate until the final recalculation of the return is complete andyou subsequently view the worksheet. This entry does not affectthe TOTALS for line f that are printed on Schedule E itself nor thefinal results of the return, but it affects the individual net for line gin the printed supporting statement for each property. (The realloca-tion is automatically brought up to date whenever you view theworksheet.) HINT: You may not need to perform this step if the sumof disallowances reported on the worksheets already matches thedisallowances reported above line 29b of Schedule E.

f. PASSIVE loss (Form 8582). (auto-calc) Computed as passive loss onSchedule K-1 less unallowed loss on Form 8582.

g. PASSIVE income (Schedule K-1). Enter the income from passive ac-tivities here, as reported to you on Schedule K-1.

h. NONPASSIVE loss (Schedule K-1). Enter the loss from nonpassive ac-tivities here, as reported to you on Schedule K-1.

i. Section 179 expense deduction (nonpassive). Enter the section 179expense deduction reported to you on Schedule K-1 for non-passiveactivities only. Sec. 179 deductions for passive activities should beincluded in your entry for "PASSIVE loss on Schedule K-1," above,not here. CAUTION: The aggregate of all section 179 deductionsthroughout the return is limited by law to $108,000 for 2006 (andless if married filing separately), so you may have to report a lesser


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amount than is reported to you on Schedule K-1. See our instruc-tions for Form 4562 for details.

j. NONPASSIVE income (Schedule K-1). Enter the income from nonpas-sive activities here, as reported to you on Schedule K-1.

Self-employment net income in above. If any of the partnership incomeabove qualifies as self-employment income, you must enter theamount here. This amount should appear in line 15a of the ScheduleK-1 that you receive from the partnership. REMINDER: Those whopractice their profession in the partnership, such as doctors andlawyers, must enter the total gain or loss here. Any amount re-ported here is posted automatically to Schedule SE and reflected inthe computation of earned income on Form 1040. (Do not enteramounts here for S Corporations. S Corp. income is not generallyconsidered earned income, but if so it is reported to the taxpayer ona Form W-2 and entered on the W-2 Worksheets for line 7 of Form1040, not here.)

Self-employment gross income. If self-employment income is reportedabove, report here your share of the gross income (before deductingexpenses) for the partnership. This amount should appear in line15b or 15c of the Schedule K-1 that you receive from the partner-ship. This amount is posted automatically to Schedule SE for use inthe optional methods on Schedule SE. Furthermore, if you accessedthe worksheet from one of the farm lines, this amount is automati-cally reflected in line 41 of Schedule E.

In addition to the above entries, several amounts relating to passive activitiesare generated from the worksheets and posted to Schedule E itself, for sub-sequent posting to Form 8582.

Special procedures for significant participation activities. You cannot de-termine whether to report income or loss from significant participation activi-ties as passive or nonpassive until the final recalculation of the return is com-plete. You must therefore initially report the income in the passive or nonpas-sive category based on your best guess, and identify the activity as a signifi-cant participation activity on the worksheet. If, after the final recalculation ofthe return, you find that

1 the net of all significant activities is a gain, but you wrongly reportedthe amounts as passive, or

2 the net of all significant activities is not a gain, but you reported theamounts as nonpassive,

you must return to the worksheets and correct the reporting. Unlike normalpassive activities, improper reporting for these activities can lead to an erro-neous result for the final return. (The net for all significant participation activi-ties throughout the return is displayed on the first screen of Form 8582.)

Special procedures for Publicly Traded Partnerships (PTPs). PTPs are subjectto special handling by the IRS. Even though they are subject to the passiveloss rules, they must be handled individually and separately from all other in-

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vestments. Since passive losses are deductible only to the extent of passivegains, this means that no overall loss can be claimed for a PTP except in theyear of its sale. In order to prevent any entries from affecting Form 8582 forother activities, you must reduce any losses by the unallowed loss for thatproperty, computed as if it were the only passive property on the return, thenreport the resulting net amounts on the NONPASSIVE lines of the Partnershipand S Corps Worksheet. You should also identify the partnership as a PubliclyTraded Partnership by ending your description on line a of the worksheetswith the letters PTP. (The IRS instructions indicate that you should reportsome of the amounts on passive lines. But such reporting would cause theautomatic involvement of the Form 8582 for the entire return. The only sideeffect of our reporting approach is that you may have to make an adjustmentto line 6 of Form 8582 to remove any passive PTP amounts included.)

Summary for Partnerships and S Corporations. The remaining lines for Part IIof Schedule E are automatic except for lines that require entries from theprior-year return:

29a Totals for (g) Passive Income. (auto-calc) The sum of all worksheetentries for "PASSIVE income on K-1."

29a Totals for (j) Nonpassive Income. (auto-calc) The sum of all work-sheet entries for "NONPASSIVE income on K-1."

Total self-employment income for YOU and SPOUSE. (auto-calc lines)Summed from the net self-employment income on all worksheets.

Partnership/S Corp gain or loss for Form 8582 lines 1a and 1b. (auto-calc lines) Summed from all four sets of worksheets for activerental real estate.

Active rental real estate prior-year unallowed loss. This is the loss car-ryover from the prior year Schedule E stemming from passive losslimitations on losses from active rental real estate. It is automaticallytransferred by the software from the prior-year return when you usethe translate feature with tax year retained on the prior-year returnat 2005. However, proper allocation among the Partnerships & SCorps Worksheets is assured only if you view them on the prior-yearreturn yourself, after final recalculation of that return, befor trans-lating the return to this year's format.

Active rental real estate unallowed loss for 2006. (Road Map line, sup-ported by Form 8582.) The proper disallowance for this year ap-pears here from Form 8582 after the final recalculation of the re-turn. However, you must allocate this total among the Partnership/SCorp Worksheets yourself.

Partnership/S Corp gain or loss for Form 8582 lines 3a and 3b. (auto-calc lines) Summed from all four sets of worksheets for other thanactive rental real estate.

Other passive prior unallowed loss. This is the loss carryover from theprior year Schedule E stemming from passive loss limitations onlosses from passive activities other than active rental real estate. Itis automatically determined by the software from the prior-year re-


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turn when you use the translate feature with tax year retained onthe prior-year return at 2005. However, proper allocation among thePartnerships & S Corps Worksheets is assured only if you viewthem on the prior-year return yourself, after final recalculation ofthat return, before translating the return to this year's format.

Other passive activity unallowed loss for 2006. (Road Map line, sup-ported by Form 8582.) The proper disallowance for this year willappear here from Form 8582 after the final recalculation of the re-turn. However, you must allocate this total among the Partnership/SCorp Worksheets yourself.

Significant participation part -- prior unallowed loss. Enter the part ofthe carryover from last year that relates to each significant participa-tion activity for this year and that does not exceed the gain fromeach such activity. An entry here affects only the significant partici-pation net used in aggregating all significant participation activitieson Form 8582.

W/S ERROR in prior plus 2006 unallowed loss. (auto-calc) Computed asthe sum of your worksheet entries for prior-year unallowed loss andthe computed current-year unallowed losses, less the prior-year andcurrent-year unallowed losses shown above. WARNING: If anamount appears on this line, your entries on the worksheets forprior-year unallowed loss are inconsistent with the preceding totalsfor prior unallowed loss, or the unallowed losses for the current yearhave not been updated on the worksheet. You can correct the latterproblem by viewing the worksheets once the return is completeand fully calculated so that the automatic reallocations can takeplace. But you can correct the former problem only by changingyour entries for prior unallowed losses on the worksheets and/or thetotals on the form.

29b Totals for (f) Passive loss. (auto-calc) The sum of losses for Form8582 lines 1b and 3b, plus the prior-year unallowed losses, less theunallowed losses for 2006.

(h) Nonpassive loss. (auto-calc) Summed from all four sets of work-sheets.

(i) Section 179 expense. (auto-calc) Summed from all four sets ofworksheets. CAUTION: If this total plus any section 179 expenseyou claim elsewhere on the return exceeds $108,000 for 2006, youmust return to the worksheets and reduce your claims for section179 expense such that the aggregate section 179 expense through-out the return is no more than $108,000. See Part I of Form 4562for more detail.

30 Add columns (g) and (j) of 29a. (auto-calc) The sum of lines 29a(g)and 29a(j), this is total income.

31 Add columns (f), (h), and (i) of 29b. (auto-calc) Computed as the sumof lines 29b(f), 29b(h), and 29b(i), this is the total loss and section179 deduction.

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32 Total partnership and S corporation income (or loss). (auto-calc)Line 30 less line 31.

The result on line 32 is automatically reflected in the total on line 41, below.

PART III, INCOME OR LOSS FROM ESTATES AND TRUSTS. The format forreporting income and loss from estates and trusts is similar to that for part-nerships in Part II, and the link with Form 8582 is identical.

Estates and TrustsWorksheet, Figure 2-15. Accessed at line34a(d), the first line ofPart III, you use thisworksheet to reportmost income andlosses from estatesand trusts, whetherreceived or not. Mostof the information isshown on the Sched-ules K-1 (Form 1041)that you receive fromthe estate or trust:

a. Name. Enterthe name of the entity in 55 characters or less. (The 30 charactersyou enter on the first line for this entry and the 25 characters youenter on the second are concatenated together into one 55-character entry for printing on the official form.)

b. Employer identification number. Enter the Employer IDN of the payerin the standard 10-character format (00-0000000).

Active rental real estate? Answer Yes if your interest in the estate ortrust qualifies as active rental real estate. If you can answer Yes, allamounts reported below for passive income or loss will be posted tothe Active Rental Real Estate section of Form 8582 for potentiallyfavorable treatment.

Significant participant in the activity? If you answer Yes here, all pas-sive and nonpassive income reported below will be included in thesignificant participation net for the entire return. See our instruc-tions for Form 8582 for details on what constitutes significant par-ticipation. CAUTION: Special procedures are required when report-ing amounts from significant participation activities on this work-sheet, as detailed previously.

Net elsewhere for same activity. You must enter the net gain or lossreported elsewhere on the return for this same passive activity,computed using both current gains and losses and prior unallowedlosses without limitation from Form 8582, in order for the disallow-ance computed below to reflect the proper allocation among all pas-

ESTATES & TRUSTS WORKSHEETESTATES & TRUSTS WORKSHEETESTATES & TRUSTS WORKSHEETESTATES & TRUSTS WORKSHEET a. Name : a. Name : a. Name : a. Name :

b. Employer I. D. Number b. Employer I. D. Number b. Employer I. D. Number b. Employer I. D. Number Active rental real est? No Active rental real est? No Active rental real est? No Active rental real est? No Significant pa Significant pa Significant pa Significant parrrrticipnt? Noticipnt? Noticipnt? Noticipnt? No Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 PASSIVE loss on K-1... 0 PASSIVE loss on K-1... 0 PASSIVE loss on K-1... 0 PASSIVE loss on K-1... 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582▒ 0▒ 0▒ 0▒ 0 c. PASSIVE loss (8582) c. PASSIVE loss (8582) c. PASSIVE loss (8582) c. PASSIVE loss (8582) ▒ 0▒ 0▒ 0▒ 0 d. PASSIVE i d. PASSIVE i d. PASSIVE i d. PASSIVE innnncome(K-1) 0come(K-1) 0come(K-1) 0come(K-1) 0 e. NONPASSIVE loss(Sch K-1) 0 e. NONPASSIVE loss(Sch K-1) 0 e. NONPASSIVE loss(Sch K-1) 0 e. NONPASSIVE loss(Sch K-1) 0 f. NONPASSIVE income (K-1) 0 f. NONPASSIVE income (K-1) 0 f. NONPASSIVE income (K-1) 0 f. NONPASSIVE income (K-1) 0 Significant partn net. Significant partn net. Significant partn net. Significant partn net.▒ 0▒ 0▒ 0▒ 0 Farm or fishing gross in above 0 Farm or fishing gross in above 0 Farm or fishing gross in above 0 Farm or fishing gross in above 0

Figure 2-15. Estates and Trusts Worksheet


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sive properties. If this entry when added to the preceding net resultsin an overall gain, any losses reported on this worksheet are allowedin full, and any remaining unallowed losses shown on Form 8582are allocated to other properties instead.

PASSIVE loss on Schedule K-1. Enter the loss from passive activitieshere, as reported to you on Schedule K-1, or a reduced amount asdetermined by Form 6198, which is built into the Premium Level.The amount for lines c and d should be reported to you on theSchedule K-1 that you receive. Be sure to enter only loss amounts(negative net income) here, and income amounts (positive net in-come) on line d, below. CAUTION: If you sell your entire interest ina passive property and the net throughout the return for that prop-erty is a net loss, you must report all gains and losses for that prop-erty on NONPASSIVE lines, because the property is reclassified asnonpassive property in the year of sale under these circumstances.

PRIOR-year unallowed loss. Enter the unallowed loss in the prior taxyear for this property as a result of the passive loss limitations(Form 8582). Although this entry is translated from your prior-yearreturn (as long as you answered Yes to "Transfer all prior $amounts" for the translation), it will not generally be correct unlessthe prior-year worksheet was complete and viewed anew after theentire return was complete.

Unallowed THIS year on Form 8582. (auto-calc) This entry may not beaccurate until the final recalculation of the return is complete andyou subsequently view the worksheet. This entry does not affectthe TOTALS for line c that are printed on Schedule E itself nor thefinal results of the return, but it affects the individual net for line cin the printed supporting statement for each property. (The realloca-tion is automatically brought up to date whenever you view theworksheet.) HINT: You may not need to perform this step if the sumof disallowances reported on the worksheets already matches thedisallowances reported above line 34b of Schedule E.

c. PASSIVE loss (Form 8582). (auto-calc) Computed as passive loss onSchedule K-1 less unallowed loss on Form 8582.

d. PASSIVE income (Schedule K-1). Enter the income from passive ac-tivities here, as reported to you on Schedule K-1.

e. NONPASSIVE loss (Schedule K-1). Enter the loss from nonpassive ac-tivities here, as reported to you on Schedule K-1. The amount forlines e and f should be reported to you on line 4 of the Schedule K-1 that you receive. If line 4 is negative, enter it as a positive here. Ifline 4 is positive, enter it as a positive on line f, below.

f. NONPASSIVE income (Schedule K-1). Enter the income from nonpas-sive activities here, as reported to you on Schedule K-1.

Significant participation net. (auto-calc) Computed as income (lines dand f) less losses (lines c and e) when you answer Yes to the sig-nificant participant question, above.

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Farm or fishing gross in above. If the estate receives any income fromfarming or fishing, the estate should report the gross income fromthose source on the Schedule K-1 (Form 1041) that you receive.You should report here the amount identified as such, for automaticinclusion in line 42 of Schedule E.

In addition to the above entries, several amounts relating to passive activitiesare generated from the worksheets and posted to Schedule E itself, for sub-sequent posting to Form 8582.

Summary for Estates and Trusts. The remaining lines for Part III of ScheduleE are automatic except for lines that require entries from the prior-year return:

34a Totals for (d) Passive income. (Supported by the Estates and TrustsWorksheet, Figure 2-15.) this is the main access line to the work-sheets that support all of Part III. This line reflects the sum of allworksheet entries for "PASSIVE income (K-1)."

(f) Nonpassive income. (auto-calc) The sum of all worksheet entriesfor "NONPASSIVE income (K-1)."

Estate gain or loss for Form 8582 lines 1a and 1b. (auto-calc lines)Summed from all worksheets for active rental real estate.

Active rental real estate prior-year unallowed loss. This is the loss car-ryover from the prior year Schedule E stemming from passive losslimitations on losses from active rental real estate. It is automaticallytransferred by the software from the prior-year return when you usethe translate feature with tax year retained on the prior-year returnat 2005. However, proper allocation among the Estates and TrustsWorksheets is assured only if you view them on the prior-year re-turn yourself, after final recalculation of that return, before translat-ing the return to this year's format.

Active rental real estate unallowed loss for 2006. (Road Map line, sup-ported by Form 8582.) The proper disallowance for this year willappear here from Form 8582 after the final recalculation of the re-turn. However, you must allocate this total among the Estates andTrusts Worksheets yourself.

Estate gain or loss for Form 8582 lines 3a and 3b. (auto-calc lines)Summed from all worksheets for other than active rental real estate.

Other passive prior unallowed loss. This is the loss carryover from theprior year Schedule E stemming from passive loss limitations onlosses from passive activities other than active rental real estate. Itis translated from the prior-year return when you use the translatefeature with tax year retained on the prior-year return at 2005.However, proper allocation among the Estates and Trusts Work-sheets is assured only if you view them on the prior-year returnyourself, after final recalculation of that return, before translatingthe return to this year's format.

Other passive activity unallowed loss for 2006. (Road Map line, sup-ported by Form 8582.) The proper disallowance for this year willappear here from Form 8582 after the final recalculation of the re-


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turn. However, you must allocate this total among the Estates andTrusts Worksheets yourself.

Significant participation part -- prior unallowed loss. Enter the part ofthe carryover from last year that relates to each significant participationactivity for this year and does not exceed the gain from each such activ-ity. An entry here affects only the significant participation net used inaggregating all significant participation activities on Form 8582.

Aggregate net gain from ALL significant participation activities? (RoadMap line, supported by Form 8582.) The answer to this questioncomes automatically from Form 8582, but can only be determinedupon the final recalculation of the return. If this answer is differentupon the final recalculation of the return than it was when youcompleted the Estate & Trust or Partnership & S Corp Worksheets,you must return to all those worksheets and move your entries tothe proper lines (to passive lines if this answer is No and to nonpas-sive lines if this answer is Yes).

W/S ERROR in prior plus 2006 unallowed loss. (auto-calc) Computed asthe sum of your worksheet entries for prior-year unallowed loss andthe computed current-year unallowed losses, less the prior-year andcurrent-year unallowed losses shown above. WARNING: If anamount appears on this line, it means that either your entries on theworksheets for prior-year unallowed loss are wrong or the calcu-lated unallowed losses for the current year are not up-to-date. Youcan correct the latter problem merely by viewing the worksheetsonce the return is complete and fully calculated so that the auto-matic reallocations can take place. But you can correct the formerproblem only by changing your entries for prior unallowed losses onthe worksheets to more accurately reflect the facts.

34b Totals (c) Passive loss. (auto-calc) The sum of losses for Form8582 lines 1b and 3b, plus the prior-year unallowed losses, less theunallowed losses for 2006.

(e) Nonpassive loss. (auto-calc) Summed from all four sets of worksheets.35 Add columns (d) and (f) of 34a. (auto-calc) The sum of lines 34a(d)

and 34a(f), this is total income.36 Add columns (c) and (e) of 34b. (auto-calc) Computed as the sum of

lines 34b(c) and 34b(e), this is the total loss.37 Total partnership and S corporation income (or loss). (auto-calc)

Line 35 less line 36.ES PAYMENT CLAIMED. If estimated taxes were credited to you from

a trust (Schedule K-1, line 14(a)) enter the amount here rather thanany of the preceding lines. This amount and the label for this linewill be printed for the official printout on the dotted line for line 37.CAUTION: You must also include this amount in your entries on theControl Form for FEDERAL ESTIMATED TAX PAID so that it will beproperly reflected on Form 1040.

The result on line 37 is automatically reflected in the total on line 41, below.

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PART IV, INCOME OR LOSS FROM REAL ESTATE MORTGAGE INVESTMENTCONDUITS (REMICs). This section is used to report income received as aholder of a residual interest in a REMIC. The information for this section is re-ported to you on a Schedule Q (Form 1066) from the REMIC. TIP: If a holderof a regular interest in a REMIC, you must report the income as interest in-come on Schedule B, line 1, or Form 1040, line 8a, not here.

38 Net from REMICs, (d) Schedule Q line 1b. (Supported by the Real Es-tate Mortgage Worksheet, Figure 2-16.) You must report allamounts on the supporting worksheets, described below, using aseparate REMIC Worksheet for each Schedule Q received. The totaltaxable income or loss (line 1b of Schedules Q) from all worksheetscombined is posted to this line.

Net from REMICs, (e) Schedule Q line 3b. (Supported by the Real Es-tate Mortgage Worksheet, Figure 2-16.) The total income (line 3b ofSchedules Q) from all worksheets combined is posted to this line.

Minimum taxable income, Schedule Q, line 2c. (Supported by theReal Estate Mortgage Worksheet, Figure 2-16.) The total excess in-clusion (line 2c of Schedules Q) from all worksheets combined isposted to this line.

39 Combine columns (d) and (e). (auto-calc) Computed as the sum oflines 38(d) and 38(e), this is the total net income from all REMICs.

Line 39 is included in line 41 of Schedule E.

Real Estate MortgageWorksheet, Figure 2-16.All information for thisworksheet is reportedto the taxpayer on aForm 1066, Sch. Q.

a. Name. EnterREMIC’s namein 25 char-acters or less.

b. Employer I.D. Number. Enter 9-digit EIN in the xx-xxxxxxx format.c. Schedule Q, line 2c (excess). Enter here the excess inclusion from line

2c of Schedule Q. This special amount is reflected in the income re-ported on line 37(e) of Schedule E (from line 3b of Schedule Q), butis claimed as an itemized deduction on line 22 of Schedule A(posted automatically by the software). It is special because it rep-resents the smallest amount of taxable income that you may reporton Form 1040, and is therefore used in the computation of taxableincome at line 43 of Form 1040. When this amount is more thanthe taxable income that would otherwise result on line 43, it is usedfor line 43 and "Sch. Q" is printed beside line 43 on the officialprintout of Form 1040.

d. Schedule Q, line 1b (taxable). Enter here the taxable net income online 1b of Schedule Q.

REMICs WORKSHEETREMICs WORKSHEETREMICs WORKSHEETREMICs WORKSHEET a. Name a. Name a. Name a. Name b. Employer I.D.Number b. Employer I.D.Number b. Employer I.D.Number b. Employer I.D.Number c. Sched. Q, line 2c (excess) 0 c. Sched. Q, line 2c (excess) 0 c. Sched. Q, line 2c (excess) 0 c. Sched. Q, line 2c (excess) 0 d. Sch. Q, line 1b(taxable) 0 d. Sch. Q, line 1b(taxable) 0 d. Sch. Q, line 1b(taxable) 0 d. Sch. Q, line 1b(taxable) 0 e. Sch. Q, line 3b (income) 0 e. Sch. Q, line 3b (income) 0 e. Sch. Q, line 3b (income) 0 e. Sch. Q, line 3b (income) 0 Lines d and e combined. Lines d and e combined. Lines d and e combined. Lines d and e combined.▒ 0▒ 0▒ 0▒ 0

Figure 2-16. REMICs Worksheet


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e. Schedule Q, line 3b (income). Enter here the income on line 3b ofSchedule Q.

Lines d and e combined. (auto-calc) Computed as indicated.The last line is posted to line 38 of Schedule E, and is reflected in the totaltaxable income for Schedule E.

PART V, SUMMARY. This section holds not only the totals for Schedule E, butalso certain farming and fishing income.

Gross farm rental on Form 4835. (Road Map line, supported by Form4835.) Gross income (before deductions) from farm rentals isposted here from line 7 of Form 4835.

40 Net farm rental income or (loss) on Form 4835. (Road Map line, sup-ported by Form 4835.) Net income (after deductions) from farmrentals is posted here from line 33 of Form 4835.

Other income not reported elsewhere. This line is provided for write-in amounts when no IRS line applies. You should explain any entryin a supporting statement for this line.

41 TOTAL income or loss. (auto-calc) The sum of lines 26, 32, 37, 39,and 40 plus the above additional income. This total is the grand to-tal for Schedule E, and is posted to line 17 of Form 1040.

Reconciliation of gross farming and fishing income. The remaining linesare not posted anywhere and do not affect any calculations, but ratherare used to satisfy IRS reporting requirements.

Gross farm self-employment in Part II. (auto-calc) Taken from theself-employment gross income lines of all Farm Partnership work-sheets for you and spouse.

Gross farming and fishing income in Part III. (auto-calc) Taken fromthe farm or fishing gross line of all Estate and Trust worksheets.

Gross farm rental income in line 40. (auto-calc) Taken from the entryabove line 40 for farm rental gross.

Other gross farming and fishing income. Enter here any adjustmentto the above amounts.

42 Reconciliation of Farming and Fishing Income. (auto-calc) Computedas the sum of the above four lines, this total is the sum of grossfarm and fishing income throughout the return.

43 Reconciliation for Real Estate Professionals. If a real estate profes-sional, enter the net income or loss you reported anywhere on thereturn from all rental real estate activities in which you materiallyparticipated.


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Schedule EIC / Earned Income CreditWho is it for? The Earned Income Credit is designed to help low income tax-payers who work. If the total investment income on the return (as speciallydefined for the earned income credit) is no more than $2,800 and all otherqualifications are met, any one of the following will result in a credit:

A Two children lived with you, both earned income and adjusted grossincome are less than $36,348 ($38,348 if married filing jointly), andearned income is at least $1. (The maximum credit for this case is$4,536 for 2006.)

B One child lived with you, both earned income and adjusted gross in-come are less than $32,001 ($34,001 if married filing jointly), andearned income is at least $1. (The maximum credit for this case is$2,747 for 2006.)

C No child lived with you, but you (or spouse if filing jointly) are at leastage 25 but under age 65, both earned income and adjusted grossincome are less than $12,120 ($14,120 if married filing jointly), andearned income is at least $1. (The maximum credit for this case is$412 for 2006.)

The credit is claimed at line 66a of Form 1040, where Schedule EIC is acces-sible through the Road Map.

Your investment income may be lower than you think! You cannot claim thecredit if your investment income is too high, but investment income is definedin a unique manner for the purposes of this credit. The IRS’s 2006 1040 In-structions state that investment income is just the sum of lines 8a, 8b, 9a,and 13 of Form 1040, which is interest, dividends, and capital gains. But thatinstruction is grossly oversimplified, and ignores one major subtraction thataffects many taxpayers. More complete instructions are provided in IRS Pub.596 (Earned Income Credit), where a 15-line worksheet is provided for com-puting investment income! (See Worksheet 1 on page 8 of the publication foryear 2006 returns.) This worksheet involves not only the cited lines of Form1040 but also various amounts on Schedule E, other parts of Form 1040,and, most critically, Form 4797. Investment income as properly defined inIRS Pub. 596 EXCLUDES from line 13 of Form 1040 the amount of capitalgains stemming from sales shown on Form 4797 (line 7(g) or 9(g)). Thesesales include the sale of business property and rental real estate, and so canbe very substantial for some taxpayers. The software properly takes accountof such subtleties, ensuring the lowest valid amount for investment income.

Fully automatic based on entries found elsewhere. The printed Schedule EICis now used by the IRS only for providing information on a qualifying child,and is not otherwise needed to support a credit at line 66a of Form 1040.However, the schedule is used by the software to compute the credit eventhough it may not be printed with the official return. The software now con-tains no user entries on Schedule EIC itself; the schedule is automaticallygenerated and completed by the software when an Earned Income Credit isavailable based on entries elsewhere in the return. However, you should be


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aware of what entries are involved in computing the credit so that you aresure to supply all required information. Among the critical entries in the returnare the following:

A You must supply information on qualifying children on the Depend-ents’ Worksheets at line 6c of Form 1040 if you are claiming thecredit based on children. Not only is qualification determined there,but all information about the child that is printed on the officialSchedule EIC is entered there.

B You must supply information on yourself (and spouse, if married)found on the first two screens of our Form 1040 page 1. This in-cludes valid SSNs that qualify you to work and answers to ques-tions about residency and being an EIC-qualified child of someoneelse. If you (and spouse, if married) are not a U.S. resident for morethan 6 months of the year, you do not qualify for the childless ver-sion of the credit. If you (or spouse, if married) are an EIC-qualifiedchild of another, you cannot qualify for any credit. You also do notqualify for the childless version of the credit if neither you norspouse was at least age 25 but under 65 at year-end, or if either ofyou was a dependent on someone else’s return.

C You must enter amounts from Form 2555 of Form 2555-EZ abovelines 21 and 36 of Form 1040, because the existence of suchamounts can disqualify you for the credit.

Due diligence requirements for paid preparers (Form 8867) satisfied here.The IRS now places special responsibilities on paid preparers for collecting theproper information to justify claims for the Earned Income Credit. Paid prepar-ers must now have a record of all information requested on IRS Form 8867,Paid Preparer’s Earned Income Credit Checklist. However, the IRS does NOTrequire you to use that form, but only to have the same information in a pa-per or electronic record. Tax Preparer now contains all necessary recordswithin the software. You can satisfy the IRS requirements with Quick Printcopies of Schedule EIC, Form 1040, and the Dependents’ Worksheets for line6c of Form 1040. (Quick Prints show all required information, while officialprintouts do not. Moreover, the line numbering on a Quick Print of ourSchedule EIC matches the line numbers on the IRS Form 8867 for easytracking of the information.)

On-screen Schedule EIC follows Form 8867 and IRS Pub. 596. The printedSchedule EIC is now only a printout of information on two of your qualifyingchildren. (All required information is entered on the Dependents’ Worksheetsfor line 6c of Form 1040.) However our on-screen Schedule EIC collects foryou information that lets you track how the calculations for the Earned In-come are performed, including the EIC checklists required of paid preparerson IRS Form 8867, and the EIC worksheets found in IRS Pub. 596 for situa-tions more complex than those given in the IRS instructions for Form 1040.

EIC CHECKLIST (Form 8867 Part I). The first part of our Schedule EIC showsthe information in Part I of IRS Form 8867.

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1 Taxpayer’s name. (auto-calc) The first and last name of the principaltaxpayer, as entered on Form 1040, are shown here.

2 Filing status is other than MFS? (auto-calc) Taken from Form 1040, ifmarried filing separately (MFS, filing status 3), you do not qualify forthe credit.

Your SSN on Form 1040. (auto-calc) Taken from Form 1040, as indi-cated.

Spouse SSN on Form 1040. (auto-calc) Taken from Form 1040, as in-dicated.

3 You have the required SSN(s)? (auto-calc) You (and spouse, if mar-ried) must have a social security card that qualifies you to work. Acard that just identifies you, such as cards with numbers startingwith 9, are not enough. The software therefore answers No hereunless you supplied on our Form 1040 an SSN for you (and spouse,if married) ranging from 1xx-xx-xxxx to 8xx-xx-xxxx.

ELIGIBLE SO FAR? (auto-calc) Answered Yes only if the answers toquestions 2 and 3 are both Yes.

EIC investment income. (auto-calc) Computed from amounts on Form1040, Schedule B, Schedule D, Schedule E, and Form 4797 in ac-cordance with Worksheet 1 of the IRS Pub. 596 for 2006 returns,which is a complete representation of the law, unlike the IRS in-structions for Form 1040.

4 Is investment income over $2,800? (auto-calc) If Yes, you cannot takethe credit.

YOU qualifying child of another? (auto-calc) Taken from your entryon our Form 1040.

SPOUSE qualifying child of another? (auto-calc) Taken from your en-try on our Form 1040. If married filing jointly, you cannot claim anycredit if someone else can claim a credit based on spouse beingtheir qualifying child.

5 Qualifying child of another? (auto-calc) Answered Yes if the aboveanswer for you (or spouse, if married) is Yes. You cannot claim anycredit if someone else can claim a credit based on you being theirqualifying child.

Form 2555 exclusion/deduction on Form 1040. (auto-calc) Computedas the exclusion from Form 2555 that you entered for line 21 (buttaken as a positive number) plus the foreign housing deduction youentered above line 36 of Form 1040.

5a You file Form 2555 or 2555-EZ. (auto-calc) Answered Yes if there isan amount on the preceding line. If Yes, you cannot take the credit.

ELIGIBLE SO FAR? (auto-calc) Answered Yes only if the answers toquestions 2 and 3 are both Yes and the answers to questions 4, 5,and 5a are all No.

WITH QUALIFYING CHILD (Form 8867 Part II). The second part of ourSchedule EIC summarizes the results of the Dependents’ Worksheets on Form1040.


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Number of EIC-qualified children on Dependents’ Worksheets. (auto-calc) Taken from the “Number qualified for earned income credit”above line 6d of Form 1040, which is determined from your entrieson the Dependents’ Worksheets for line 6c of Form 1040.

Number used for Schedule EIC (2 maximum). (auto-calc) You getcredit for no more than 2 children, so the IRS requires informationon no more than 2 qualifying children. The software therefore printson the official Schedule EIC only information on the first two De-pendents’ Worksheets that have qualifying children.

6-11 See Dependents’ Worksheets at line 6c for info on 8867 lines 6 to11. All information for Part II of Form 8867 is carried by the De-pendents’ Worksheets. You should therefore refer to the details forthat worksheet for more information.

ELIGIBLE FOR CHILD CREDIT? (auto-calc) Answered Yes if eligible inPart I and the preceding number of children is 1 or 2.

WITHOUT CHILD (Form 8867 Part III). The third part of our Schedule EICsummarizes the results for those who have no qualifying children.

YOU nonresident of the U.S. 6 months or more? (auto-calc) Takenfrom your entry on our Form 1040.

SPOUSE nonresident of the U.S. 6 months or more? (auto-calc) Takenfrom your entry on our Form 1040.

12 Main home in U.S. more than 6 months? (auto-calc) AutomaticallyYes if either of the preceding two is Yes (except that the answer forspouse is ignored if not married filing jointly).

YOUR age on Form 1040. (auto-calc) Taken from your entry on thefirst screen of our Form 1040.

SPOUSE age on Form 1040. (auto-calc) Taken from your entry on thesecond screen of our Form 1040.

13 One age at least 25, but under 65? (auto-calc) If you (or spouse ifmarried) are of the eligible middle age, you may qualify for thechildless credit.

YOU dependent on another return? (auto-calc) Taken from your en-try on the first screen of our Form 1040.

SPOUSE dependent on another return? (auto-calc) Taken from yourentry on the second screen of our Form 1040.

14 Eligible as a dependent on another return? (auto-calc) AnsweredYes if you (or spouse if married) have a Yes answer above.

ELIGIBLE FOR CHILDLESS CREDIT? (auto-calc) Answered Yes if NOTeligible for the child-based credit and the answers to questions 12,13, and 14 are Yes, Yes, and No, respectively.

Extra line for personal memos. The supporting statement you create for thisline will not be printed as a part of the official return, but is provided for pri-vate notes or reminders.

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Computations for AGI and Earned Income simplified. In a laudable attemptat simplification, the requirements for calculating the Earned Income Credithave been changed. The AGI on Form 1040, line 38, is now used in com-puting the credit instead of a complex modified version that required somepreparers to use a special worksheet in IRS Pub. 596. And nontaxableearned income is no longer figured into the computation of the earned incometo be used (except for nontaxable combat pay, which you can elect to includeabove line 66a of Form 1040). The software therefore now displays no sec-tion for computing a modified AGI, and the special lines for nontaxable earnedincome on both Form 1040 and the IRS Worksheet B (below) are eliminated(except for nontaxable combat pay).

IRS Pub. 596, Worksheet B. 2006 earned income and the earned income creditare computed automatically using Worksheet B in IRS Pub. 596 (which nowappears in the IRS Instructions for Form 1040 as well). Except for a possibleadjustment for line 4a of the worksheet, all lines are completed automaticallybased on entries throughout the return. Lines 1 through 4a are used to de-termine “Total 2006 earned income” (at the bottom of screen 3 of ScheduleEIC). That result includes nontaxable combat pay if you made the election touse it above line 66a of Form 1040, and is used for line 4b. The remainder ofthe worksheet, lines 5 through 11, are completed based on earned income atline 4b, AGI on line 38 of Form 1040, and the 2006 Earned Income Credit(EIC) Table in the IRS Instructions for Form 1040. The result on line 11 isposted to line 66a of Form 1040 as the Earned Income Credit.


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Schedule F / Profit or Loss from FarmingWho must use Schedule F? Schedule F is used to report income as the soleproprietor of a farm business. (Schedule C is used for nonfarm businesses.)You can report only one farm business on any one Schedule F, so five sepa-rate copies of Schedule F are built into the software.

And who must not? Schedule F can be used only for sole proprietorships, andnot for partnerships, joint ventures, or corporations. A husband and wife whojointly own a farm business are considered to have formed a partnership forpurposes of the Federal income tax. They must therefore not use Schedule F,but rather file a Partnership Return (Form 1065) and enter the amounts fromthe Schedules K-1 of that return in Part II of Schedule E of this return. SeeIRS Pub. 533 (Self-Employment Tax) for details. You must file Schedule C orC-EZ instead of Schedule F if the principal source of income is from agricul-tural services such as soil preparation, veterinary, farm labor, horticulture,management for a fee or on a contract basis, or you engage in the businessof breeding, raising caring for dogs, cats, or other pet animals.

GENERAL INFORMATION. Your answers to some of the following questionsare critical to the proper operation of the software:

Copy number (1 through 5). (auto-calc) The number for the copy youselected from the menu appears here automatically.

Spouse owns (not you)? Each of the five available copies of Schedule Fcan be designated for either spouse. You must identify the properspouse for each copy so that computations that depend on aspouse’s individual self-employment income, such as the self-em-ployment tax, are properly computed.

A Principal product. Describe the main crop or output for the tax yearin 25 characters or less.

B Enter code. Enter the IRS 6-digit code in Table 2-10 that best de-scribes the source of most of your income. These codes also appearin Part IV at the end of the form, and on the last screen of the soft-ware. (HINT: If no code in this table that describes your business,you may be reporting the income on the wrong form. See the longlist of nonfarm business categories in the IRS Instructions forSchedule C. If your business fits one of those categories better thanany of the farm categories, you should report the income and ex-penses for the business on Schedule C, not Schedule F.)

C Accounting method:(1) Cash? With the Cash Method you must report income in theyear you receive it (in Part I) and expenses in the year you pay them(in Part II). Your answer here controls whether Part I or Part III isused in line 11, below. (Per IRS rules, you can use only onemethod, cash or accrual, for any one farm, and you can report onlyone farm business on a single Schedule F.)

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Table 2-10. Codes for Principal Agricultural Activity

(2) Accrual? Automatically the opposite of your answer to the Cashquestion, with this method you report income in the year you earn it(Part III) and expenses in the year you incur them (Part II).

D Employer ID number (EIN). You must enter the farm’s EIN here inthe standard 10-character format (00-0000000) if the farm was re-quired to file employment, excise, alcohol, tobacco, or firearms taxreturns. CAUTION: Do NOT enter social security number here.

E Did you "materially participate" in the operation of this businessduring 2006? If you can answer Yes, you are not subject to thepassive loss limitations, and no gain or loss from this schedule willbe used in Form 8582. You can generally answer Yes if you partici-pated in the operation of the business for more than 500 hoursduring the year. See our instructions for Form 8582 for details.

Were you a "significant participant" in the operation of this business?If you do not satisfy the requirements for material participation, youmay be classified as a significant participant. You are tentativelyconsidered to be a significant participant if you participated in theactivity for more than 100 hours but no more than 500 hours duringthe tax year. See our instructions for Form 8582 for details on whatconstitutes significant participation.

PART I, FARM INCOME - CASH METHOD. Complete lines 1 through 10 if thefarm operates on a cash basis. Use Part III instead if the farm operates on anaccrual basis.

1 Sales of livestock and other items you bought for resale. Enter the to-tal gross sales of these items here.

CODE ACTIVITY

Crop production: Crop production: Crop production: Crop production: 111100 Oilseed and grain farming 111210 Vegetable and melon farming 111300 Fruit and tree nut farming 111400 Greenhouse, nursery, and floriculture production 111900 Other crop farming

Animal production: Animal production: Animal production: Animal production: 112111 Beef cattle ranching and farming 112112 Cattle feedlots 112120 Dairy cattle and milk production 112210 Hog and pig farming 112300 Poultry and egg production 112400 Sheep and goat farming 112510 Animal aquaculture 112900 Other animal production

Forestry and Logging: Forestry and Logging: Forestry and Logging: Forestry and Logging: 113000 Forestry and logging (including forest nurseries and timber tracts)


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2 Cost or other basis of livestock and other items you bought for resale.Enter here only costs for the items reported on line 1.

3 Subtract line 2 from line 1. (auto-calc) Computed as indicated.4 Sales of products you raised. Enter all sales of livestock, produce,

grains, and other products you raised.5a Total distributions from cooperatives (Forms 1099-PATR). Enter the

totals from any Forms 1099-PATR that you receive, including ALLpatronage dividends.

5b Taxable amount in line 5a. Enter the part of line 5a that is taxable.This is usually the amount on line 5a less the patronage dividendsfrom buying personal items, capital assets, or depreciable assets.

6a Total agricultural program payments. Enter both cash and noncashpayments, including price support payments, diversion payments,and cost-share payments, and payments in the form of materialsand services reported to you on Forms 1099-G or CCC-182.

6b Taxable amount in line 6a. Enter the full amount on line 6b unlesssome of the payments are nontaxable, such as payments receivedunder certain conservation programs. See IRS Pub. 225 (Farmer’sTax Guide) for details.

7a Commodity credit loans reported under election. Enter here the loanproceeds from any loans from the Commodity Credit Corporation(CCC) which you elect to report as income when received, showingthe details of the loans in a supporting statement for this line.

7b CCC loans forfeited. Report the full amount forfeited even if you re-ported the loan proceeds as income.

7c Taxable amount related to line 7b. If you did NOT elect to report theamount forfeited as income, enter here the same amount as line 7b.If you DID elect to report the amount forfeited as income, but theamount forfeited is different from your basis in the commodity, youmay still have to make an entry here. See IRS Pub. 225 (Farmer’sTax Guide) for details.

8 Crop insurance proceeds and certain disaster payments. You shouldreport on the following lines total crop insurance proceeds, includingdisaster payments under the Federal disaster assistance acts, actu-ally received in 2006, whether you elect to include them as incomethis year or next year.

8a Amount received in 2006. Enter total crop proceeds here.8b Taxable amount in line 8a. Unless you elect to include them as in-

come next year, as indicated by your answer to 8c, enter the fullamount on line 8a here.

8c Do you elect to defer the proceeds to 2007, and attach statement? Ifyou make the election you must justify it in a supporting statementfor this line. See IRS Pub. 225 (Farmer’s Tax Guide) for details onwhat to include.

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8d Amount deferred from 2005. If you elected on your 2005 return toinclude crop insurance proceeds from that year in 2006 income, en-ter that amount here.

9 Custom hire (machine work) income. Enter income received for use ofyour farm machinery.

10 Other income. Report here any other taxable income, including• barter income,• fuel credit refunds,• profit or loss on sales of commodity futures if they were made as

a hedge against price changes,• recapture on Form 4797, line 35 (sections 179 and 280F(b)(2))

that relates to deductions previously taken for this farm,• any inclusion amount on leased property other than vehicles,• amount canceled or forgiven on discharge of your business debt,• recovery of bad debts,• recapture of credits taken for clean-fuel vehicles, and• recapture of credit taken for clean-fuel vehicle refueling property.

11a Gross income from Cash Method. (auto-calc) Computed as the sumof lines 3, 4, 5b, 6b, 7a, 7c, 8b, 8d, 9, and 10.

11b Gross income from Accrual Method. (auto-calc) Computed as theresult on line 51 of Part III.

Cash method chosen (vs. Accrual). (auto-calc) If only one of the abovetwo totals is nonzero, the corresponding method is chosen and theanswer to question C, above, is forced to be consistent. But if youinadvertently entered amounts in both Part I and Part III, your previ-ous answer to question C is used to determine the choice.

11 GROSS INCOME. (auto-calc) Either line 11a or line 11b, dependingon your choice for accounting method.

The amount on line 11 is used in computing the Farm Optional Method onSchedule SE for the corresponding spouse.

PART II, FARM EXPENSES. You must report all expenses here whether youuse the Cash Method or the Accrual Method. CAUTION: If you use the CashMethod, prepaid farm supplies you enter here (supplies not yet consumed bythe end of the tax year) cannot exceed 50% of all other expenses combined.You can generally deduct the remaining 50% only in the year those suppliesare consumed, but see IRS instructions for exceptions. (Cost of Goods Sold isconsidered an adjustment to income, not an expense deduction.)

2004 tax bill expanded deductibility of certain expenses. The American JobsCreation Act of 2004 added a number of provisions for certain special inter-est groups. Among these are two groups of expenses applicable to farms thatcan now be deducted currently rather than amortized over time: certain start-up costs (up to $5,000), and certain forestation and reforestation costs. Therules apply to costs paid or incurred for these items after the enactment ofthe bill, October 22, 2004. See IRS Pub. 535 for details.


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Car and truck expenses. The rules for deducting vehicle expenses are similarto those detailed for employees on Form 2106. You can generally use eitherthe standard mileage rate method or the actual expenses method described inthe details for Form 2106. However, in spite of the IRS label for line 12, thereporting of car expenses on Schedule F involves more than one line of theform. Lines 12, 16, and 26a are all relevant parts of the formula. We there-fore provide the following entries to help guide you into the proper reportingof the expenses. CAUTION: You MUST provide information on your vehicleon Form 4562 if you make an entry at line 12. You must complete columns athrough c of Section A and all of Sections B and C of Part V of Form 4562(accessed at line 16, below).

Used more than four vehicles at the same time? Answer Yes only ifyou used five or more vehicles in the business at the same time,such as in a fleet operation. You do not have to answer Yes if youalternated use among several vehicles but never used more thanfour at any one time.

Actual expense REQUIRED for ALL. (auto-calc) Automatically Yes if youanswered Yes above. If you used more than four vehicles at the sametime you are not allowed to use the Standard Mileage Rate method forany of the cars. A Yes answer here prevents your use of the followingsection for the Standard Mileage Rate. You must instead report actualexpenses in the section that follows the next one.

for cars and trucks using Standard Mileage Rate Method: You can use this method only if you owned the vehicle and always

used this method for it, or leased the vehicle and used the methodfor the entire lease period, and did not use the vehicle for hire.

Total 2006 business miles. Enter the total business mileage driven in2006 for cars and trucks that you choose to report under the Stan-dard Mileage Rate method.

Deduction for line 12. (auto-calc) Computed as the mileage drivenduring year 2006 times 44.5 cents per mile. This is the total deduc-tion allowed for those cars and trucks that you choose to report un-der the Standard Mileage Rate method.

for cars and trucks using Actual Expense Method: You cannot use this method if you leased the vehicle and ever used

the Standard Mileage Rate method for the vehicle.Rent or lease payments. Enter total rent or lease payments for carsand trucks. These payments are deducted at line 26a, not line 12,subject to the following limitation.

Inclusion amount from IRS Pub. 463. The IRS publishes an extensivetable of inclusion amounts for “luxury vehicles.” The amount oflease expenses you can deduct as a business expense is reduced bythis inclusion amount. The reduction generally applies only to leasesbeginning after 1986 for vehicles with an initial market value in ex-cess of $12,800 if begun before 1991, $13,400 if begun in 1991,$13,700 if begun in 1992, $14,300 if begun in 1993, $14,600 if

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begun in 1994, $15,500 if begun in 1995 or 1996, $15,800 ifbegun in 1997 or 1998, $15,500 if begun in 1999 through 2002,$18,000 if begun in 2003, $17,500 if begun in 2004, and$15,200 if begun in 2005 or 2006. See IRS Pub. 463 (Travel, En-tertainment, Gift, and Car Expenses) for details.

Deduction for line 26a. (auto-calc) Computed as the rent or leasepayment less the preceding inclusion amount, this total is used atline 26a of Schedule F, not here.

Depreciation – report on Form 4562 for line 16, NOT here. When youuse the Actual Expenses method, depreciation is an allowable part ofthe actual expense you can deduct. However, the IRS requires you toreport that depreciation on the copy of Form 4562 for this business,not here. This depreciation will then flow from Form 4562 to line 16of Schedule F. (The proper copy of Form 4562 is accessed when youitemize line 16 of Schedule F. The proper deduction is then returnedto Schedule F when you return from Form 4562. Note that you mustalso complete the information on vehicles in Part V of Form 4562, ir-respective of which expense method you use.)

Other actual expense. All other actual expenses are deducted at line12. Enter here all expenses not deducted at line 16 or 26a for carsthat you choose to report under the Actual Expenses method. In-clude expenses for gasoline, oil, repairs, insurance, tires, licenseplates, etc. Exception: You can also enter here your parking fees ortolls, irrespective of the expense method you use. (Parking fees andtolls are the only actual expenses allowed for cars and trucks re-ported under the Standard Mileage Rate method.)

12 Car and truck expenses (Form 4562 required). (auto-calc) Computedas the sum of the deduction for line 12 from the Standard MileageRate method plus your entry above for other actual expenses.

Other expenses. All other expenses are deducted through lines 13 through 34:13 Chemicals. Enter the expenses identified.

Conservation expenses. Enter expense to conserve soil or water toprevent erosion. See IRS Pub. 225 for details.

Conservation expense carryover from 2005. Enter the amount disal-lowed on line 14 last year because of the limitation described below.

14 Conservation expenses (limited). (auto-calc) Computed as the sumof the preceding two entries but no more than one-quarter of line11 (gross income). Technically, the limit should be based on thegross farming income throughout the return excluding gains fromselling assets. You may therefore be justified in overriding this line ifyou have farm income on another copy of Schedule F or elsewhereon the return. However, you must make sure that the sum of line14 from ALL copies of Schedule F does not exceed one-quarter ofthe sum of gross income from ALL copies of Schedule F.

Conservation expense carryover to 2007. (auto-calc) Computed asthe sum of the two data entry lines that precede line 14 less the


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limited amount allowed on line 14, this is the disallowed amount ofconservation expense, and is carried over to Schedule F for nextyear.

15 Custom hire (machine work). This expense applies only when themachine operator furnished the equipment.

16 Depreciation and section 179 deduction. (Road Map line, supportedby Form 4562.) A separate copy of Form 4562 is attached to eachseparate copy of Schedule F. The proper copy is automatically cho-sen when you access Form 4562 from this line. When you returnfrom the form, the total depreciation is posted here, and the totalamortization is posted to line 34b.

17 Employee benefit programs. Do not include amounts entered on line25 for pension and profit-sharing plans, nor amounts for you or yourfamily.

18 Feed purchased. Generally, feed to be consumed in the current year.19 through 23. Enter the expenses identified on each line.

Labor hired. Enter amount paid for farm labor, including cost ofboarding farm labor.

Employment credit. Enter any Work Opportunity Credit from Form5884, Welfare-to-Work Credit from Form 8861, Empowerment ZoneCredit from Form 8844, Indian Employment Credit from Form 8845,or Credit for Employers Affected by Hurricane Katrina, Rita, orWilma from Form 5884-A.

24 Labor hired (net). (auto-calc) Labor hired less employment credits.25 Pension and profit-sharing plans. Enter the employer's contribution

to employee pension and profit-sharing plans.26 Rent or lease. Deductions must be separated into those for equip-

ment and those for other property.Vehicles (entered above line 12). (auto-calc) This is the amount com-puted above line 12 for rent and lease payments on cars and trucks,reduced by the IRS inclusion amounts for luxury vehicles. See thedetails above line 12 of this schedule.

Machinery and equipment. Enter equipment rentals here.26a Vehicles, machinery, and equipment. (auto-calc) Computed as the

sum of the preceding two amounts.26b Other (land, animals, etc.). Enter all other rent and lease payments

here, including those for office space, pasture or farm land, andanimals.

27 through 31. Enter the expenses identified on each line.32 Utilities. Enter amounts paid for gas, electricity, water, etc., for

business use on the farm. (You cannot deduct the base rate of theFIRST phone line into your house.)

33 Veterinerary, breeding, and medicine. Enter the expenses identified.34 Other expenses. Report here all expenses that don’t fit into the

categories of lines 12 through 33:

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a Amortization (Form 4562). (Road Map line, supported by Form4562.) The same copy of Form 4562 that supports line 16 alsosupports this line.

b Other itemized. You must list any other expenses in a supportingstatement for this line. Because the space on the IRS Schedule F islimited, you should keep your descriptions in the itemized list to 18characters or less each. See IRS instructions for examples of otherexpenses you can deduct. If you have preproductive period ex-penses that you capitalize, you must follow a special procedure thatinvolves a negative entry in support of this line. See the followingshaded section for details.

35 TOTAL EXPENSES (lines 12 through 34). (auto-calc) Computed as thesum of lines 12 through 34.

Preproductive Period Expenses. Certain expenses for real or tangible prop-erty must be capitalized rather than expensed, such as through amortizationcomputed on Form 4562. However, you may be able to deduct expenses forproducing a plant with a preproductive period of more than 2 years. If youelect to deduct the expenses, you report them in the normal manner on lines12 through 34. However, if you capitalize these preproductive expenses,whether by choice or requirement, the IRS defines a special procedure forhighlighting this fact. Instead of eliminating these expenses from lines 12through 34 and claiming a depreciation or amortization deduction on Form4562, as you would for most capitalized expenses, the IRS instructs you toenter the full expenses in lines 12 through 34 then cancel them through amatching negative entry in a supporting statement for line 34, with the de-scription “263A” in the support. You still must claim the capitalized amountthrough Form 4562, but the above negative procedure is required to flag theexistence of these preproductive period expenses in the form.

SUMMARY. Income and expenses are netted here:Tentative net income. (auto-calc) Computed as line 11 less line 35.

$ amount of loss NOT at risk (Form 6198). If "Tentative net income"shows a net loss, you must enter the part of the loss that is NOT atrisk here. Your losses for any activity are limited to the amount thatyou have at risk, which is the amount that you personally stand tolose from that activity. This generally includes cash and the adjustedbasis of any property you contributed to the activity plus anyamount borrowed for which you are personally liable. Use Form6198 (built into the Premium Level software) to determine theamount you have at risk, and file the form with your return.

Prior unallowed passive loss. This is the loss carryover from the prioryear stemming from passive loss limitations on this activity for2005. This carryover is automatically transferred by the softwarefrom the prior-year return when you use the translate feature on areturn that has 2005 as the entry for tax year on Form 1040.


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Part allowed in significant participation net. (auto-calc) If "Tentativenet income" is a loss, no amount will appear here. But if it is a gain,and you identified this farm as a significant participation activitybelow line E, the part of the above carryover that does not exceedthe tentative net income appears here.

Significant participation net. (auto-calc) If you identified this farm asa significant participation activity, this line is calculated as "Tenta-tive net income" less the above part of carryover allowed.

Net gain from ALL significant participation activities? (Road Map line,supported by Form 8582.) Taken automatically from Form 8582, thisanswer can is reliable only upon the final recalculation of the return.

Passive loss unallowed in 2006. (auto-calc line, supported by Form8582.) The unallowed loss from Form 8582 for the current year isposted here, but it may not be accurate until the final recalculationof the return. It is the proper pro-rated portion of the amount shownon Form 8582. If line 36 reflects a disallowance from Form 8582 orreflects an additional loss due to a carryover from 2005, "PAL" isprinted beside the result on the official printout of Schedule F.

36 NET FARM PROFIT OR LOSS. (auto-calc) Computed as line 11 less line35 with losses not at risk and unallowed passive losses removed.

37 If you have a loss, check. One of the following questions will be an-swered Yes if the tentative net income is a loss:

37a All investment is at risk. (auto-calc) Yes if there is NOT an entryfor "$ loss NOT at risk (6198)."

37b Some investment is not at risk. (auto-calc) Yes if there IS an en-try for "$ of loss NOT at risk (6198)."

If line 37b is “Yes,” you MUST file Form 6198! Form 6198 is built intothe Premium Level software.

The sum of line 36 for this copy and all other copies of Schedule F is postedto line 18 of Form 1040.

PART III, FARM INCOME - ACCRUAL METHOD. Complete this part ONLY ifthe farm operates on an accrual basis (that is, you report income when youearn it, not when you receive it):

38 Sales during the tax year. Enter all sales of livestock, produce,grains, and other products you raised.

39a Total distributions from cooperatives (1099-PATR). Enter totals ofany Forms 1099-PATR you receive, including patronage dividends.

39b Taxable amount in 39a. Enter the part of line 39a that is taxable.This is usually line 39a reduced by patronage dividends from buyingpersonal items, capital assets, or depreciable assets.

40a Total agricultural program payments. Enter both cash and noncashpayments, as detailed in the instructions for line 6a.

40b Taxable amount in 40a. Enter the full amount on line 40b unlesssome of the payments are nontaxable, such as payments receivedunder certain conservation programs. See IRS Pub. 225 (Farmer’sTax Guide) for details.

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41a Commodity credit loans reported under election. Enter loan pro-ceeds described in the instructions for line 7a.

41b CCC loans forfeited. Report the full amount forfeited as detailed inthe instructions for line 7b.

41c Taxable amount related to line 41b. Enter the taxable amount asdetailed in the instructions for line 7c.

42 Crop insurance proceeds. Enter insurance proceeds detailed in theinstructions for line 8a.

43 Custom hire (machine work) income. Enter income received for useof your farm machinery.

44 Other income. Report here any other taxable income, including barterincome, fuel credit refunds, and profit or loss on sales of commodityfutures if they were made as a hedge against price changes.

45 Add right column of lines 38 through 44. (auto-calc) Computed as thesum of lines 38, 39b, 40b, 41a, 41c, 42, 43, and 44.

46 Inventory at beginning of year. Enter here the starting inventory of alllivestock, produce, grains, and other products. (This amount is takenfrom last year’s line 49 if you started the return by translating a prior-year return with the tax year on the Control Form retained at 2005.)

47 Cost of products purchased during year. Enter cost of livestock,produce, grains, and other products incurred during the year.

48 Add lines 46 and 47. (auto-calc) Computed as indicated.49 Inventory at end of year. Enter here ending inventory of livestock,

produce, grains, and other products.Unit-livestock, farm-price method? Answer Yes if you use the unit-livestock-price method or the farm-price method of valuing inventory.A Yes answer here will result in a unique calculation for lines 50 and51 to ensure that line 50 is never negative, as instructed by the IRS.

50 Cost of products sold. (auto-calc) Normally computed as line 48 lessline 49, this is the cost of livestock, produce, grains, and otherproducts sold during the year. However, if you answered Yes to thequestion above line 50, and line 49 is greater than line 48, this lineis computed instead as line 49 less line 48.

51 GROSS INCOME. (auto-calc) Normally computed as line 45 less line 50.However, if you answered Yes to the question above line 50, and line49 is greater than line 48, this line is computed as line 45 plus line 50.

The result on line 51 is automatically posted to line 11b of Part I of this form.

PART IV, PRINCIPAL AGRICULTURAL ACTIVITY CODES. The codes to beused when completing line B at the beginning of Schedule F appear here.See the previous details for line B for more information.



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Schedule H / Household Employment TaxesWho is it for? Schedule H is used to report and pay social security, Medicare,and federal unemployment taxes, and any withholding deducted from wagespaid, for any household employees (maids, butlers, cooks, gardeners, baby-sitters, etc.) you may have had during the tax year. If you

• paid $1,500 or more in 2006 to any one household worker, OR• withheld any Federal income tax during 2006 on behalf of the worker, OR• paid $1,000 or more in any one quarter of 2005 or 2006 to all workers

combined,you must do the following:

• file Schedule H,• get an employer identification number (EIN) from the IRS, AND• file a Form W-3 with the Social Security Administration, along with Copy

A of a Form W-2 for each employee showing the amount of social secu-rity and Medicare tax paid on behalf of each employee, AND

• give each employee a copy of his or her Form W-2.To get an EIN you must file Form SS-4 with the IRS, and you can get a FormSS-4 by downloading it from the IRS through our web site

http://www.howardsoft.com

by clinking on our link to the forms section of the IRS web site. You can alsoget Forms SS-4, W-2, or W-3 sent to you by calling 1-800-TAX-FORM. Youcan often get W-2 forms at stationary stores as well. (Schedule H is accessi-ble through the Road Map at line 62 of Form 1040.)

GENERAL INFORMATION. The following entries help automate the schedule:Social security number for this copy. (auto-calc) Taken from your entry

on Form 1040 using the following answer.Is this spouse’s copy (vs. you). (auto-calc) Based on the choice you

made when entering this schedule.Filing this schedule without Form 1040? A Yes answer is appropriate

ONLY if you are filing this schedule by itself because your are nototherwise required to file Form 1040 (or 1040A, et al.) If you an-swer Yes, the name and address you enter on our Form 1040 isshown below and printed on Schedule H. You must sign Schedule Hif you file it without Form 1040.

Address (no. and street) or P.O. Box. (auto-calc) Taken from your entryon Form 1040 if the above answer is Yes.

City or p.o., state. (auto-calc) Taken from Form 1040, as above.ZIP code. (auto-calc) Taken from Form 1040, as above.Employer identification number (EIN). Enter your EIN in standard 10-

character format (00-0000000).

Cash wages:Total cash wages of ALL employees combined. Include ALL employees,

not just those to whom you paid $1,500 or more. Do not includewages paid to your spouse, your parent, your child under age 21, or

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anyone under 18 who is a student. See IRS instructions for excep-tions.

Disability payments subject to social security and Medicare tax. Ifyour employees received payments from a state disability plan thatwithheld social security and Medicare tax from the payments, enterthe total disability payments here. You are liable for the employer’spart of the social security and Medicare tax.

Total taxable wages. (auto-calc) Computed as the “Total for ALL em-ployees combined” plus the preceding disability payments. You areliable for FUTA tax on the first $7,000 of each employee’s wages.

Were these for just one employee? If you had only one household em-ployee, then all remaining lines in this section are completed for youautomatically. If you had more than one, however, you must enterthe required data yourself because there is not yet enough informa-tion for the software to do it for you.

Part of above total for those employees to whom you paid $1,500 ormore. Include ONLY employees to whom you paid at least $1,500.You are liable for social security and Medicare tax only for theseemployees.

Part subject to Medicare tax. (auto-calc) Automatically the same asthe preceding line because ALL of an individual’s wages are nor-mally subject to this tax. You may override this line if any employeequalifies for a special exception.

Part over $94,200 per employee. If for just one employee, this isautomatically the preceding total less $94,200, but no less thanzero. Otherwise, you must determine for each employee theamount of wages that exceed $94,200, and enter here the sum ofall these excess amounts.

Part subject to Social Security tax. (auto-calc) Computed as thewages for those paid $1,500 or more less the preceding excessamount, this is the amount liable for the federal social security tax.

Total over $7,000 per employee. If for just one employee, this is auto-matically “Total taxable wages” computed earlier less $7,000, butno less than zero. Otherwise, you must determine for each em-ployee the amount of wages that exceed $7,000, and enter herethe sum of all these excess amounts.

Wages subject to FUTA tax. (auto-calc) Computed as the “Total taxablewages” computed earlier less the preceding excess amount, this isthe amount liable for federal unemployment tax.

Withholding:Federal income tax withheld. Enter the total of all amounts withheld on

behalf of the employees.Advance Earned Income Credit (EIC) payments. Enter any advance EIC

payments made to employees. See IRS Pub. 15 (Employer’s TaxGuide) for more information on how much Earned Income Credit youcan advance to your employees.


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Tax state withheld from disability payments. (auto-calc) Assuming thatthe state does not make an error in its deductions, and no one em-ployee received more than $94,200 in disability payments, this lineis computed automatically as 7.65% of your previous entry for totaldisability payments.

Who Must File. This section tests the three circumstances under which youmust file this schedule:

A Did you pay ANY ONE household employee cash wages of $1,500 ormore in 2006? (auto-calc) Automatically Yes if you made an entryfor "Part of above total for those to whom you paid $1,500 ormore."

B Did you withhold Federal income tax during 2006 for any householdemployee? (auto-calc) Automatically Yes if you entered an amountabove for "Federal income tax withheld." If Yes, you must completePart I of this schedule.

C Did you pay TOTAL cash wages of $1,000 or more in ANY calendarQUARTER of 2005 or 2006 to household employees? AutomaticallyYes if the previously-computed amount for “Total taxable wages” is$4,000 or more, because then at least one quarter must have hadat least $1,000 of wages. Otherwise, subject to you own answer.

Must you file Schedule H? (auto-calc) If the answer to all three of theabove questions is No, you do not have to file this schedule.

Must you complete Part II? (auto-calc) If the answer to Question C isYes, the answer to this question will be Yes and you MUST com-plete Part II of this schedule.

PART I, SOCIAL SECURITY, MEDICARE, AND INCOME TAXES. This part isfully automatic based on the above answers. (All lines will be properly zero ifthe answers for Questions A and B are both No.)

1 Total cash wages subject to social security taxes. (auto-calc) Takenfrom the previously-computed result for “Part subject to Social Se-curity tax."

2 Social security taxes. (auto-calc) Computed as 12.4% of line 1.3 Total cash wages subject to Medicare taxes. (auto-calc) Taken from

the previously-computed result for “Part subject to Medicare tax."4 Medicare taxes. (auto-calc) Computed as 2.9% of line 3.5 Federal income tax withheld. (auto-calc) Taken from your prior entry

for "Federal income tax withheld."Amount withheld from disability payments. (auto-calc) Taken fromthe previously-computed result for “Tax state withheld from disabil-ity payments.” An amount here will cause the word DISABILITY tobe printed beside line 6 on the official printout, as required by theIRS.

6 Add lines 2, 4, and 5. (auto-calc) Computed as the sum of lines 2, 4,and 5 less the preceding amount withheld from disability payments.

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7 Advance Earned Income Credit (EIC) payments. (auto-calc) Takenfrom your prior entry for "Advance earned income credit payments."

8 TOTAL SOCIAL SECURITY, MEDICARE, AND INCOME TAXES. (auto-calc) Computed as line 6 less line 7.

9 Did you pay TOTAL cash wages of $1,000 or more in ANY calendarQUARTER of 2005 or 2006 to household employees? (auto-calc)Taken from the answer to Question C, above.

PART II, FEDERAL UNEMPLOYMENT (FUTA) TAX. You must complete thispart if your answer was Yes for Question C. To properly complete this part,you must be familiar with the rules for your state concerning unemploymentinsurance.

10 Did you pay unemployment contributions to only one state? Answeras indicated.

11 Did you pay all state unemployment contributions for 2006 by April16, 2007? Answer as indicated.

12 Were all wages that are taxable for FUTA tax also taxable for yourstate's unemployment tax? Answer as indicated.

You must complete Section A. (auto-calc) If you answered Yes to allthree questions, above, and you are required to complete Part II,you must complete Section A, below, and leave Section B blank.

You must complete Section B. (auto-calc) If you answered No to any ofthe above questions and are required to complete Part II, you mustcomplete Section B and its worksheet, and leave Section A blank.

SECTION A. This section handles the simplest form of FUTA reporting.13 Name of state where you have to pay unemployment contributions.

Use the standard 2-character code for the state.14 State reporting number as shown on state unemployment tax return.

Enter the state ID number in the usual format for your state.15 Contributions paid to your state unemployment fund. Enter the total

you paid in 2006.Is state experience a 0% rate? If line 15 is zero because your stateexperience rate is zero, you must confirm this here so that theproper note is printed on the official form for the IRS.

16 Total cash wages subject to FUTA tax. (auto-calc) Taken from yourprior entry for "Total cash wages subject to FUTA tax."

17 FUTA tax. (auto-calc) Computed as 0.8% of line 16.

SECTION B. This section handles a more general form of FUTA reporting.18 Itemize for worksheet. (Supported by the State Fund Contributions

Worksheet, Figure 2-17.) You must supply the detailed informationin the worksheets, which will be reflected in lines 19(h) and (i).

19 Totals, (h) and (i). (auto-calc lines) Taken from columns (h) and (i) ofthe State Fund Worksheets.

20 Add columns (h) and (i) of line 19. (auto-calc) Computed as indicated.21 Total cash wages subject to FUTA tax. (auto-calc) Taken from your

prior entry for "Total cash wages subject to FUTA tax."


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22 Multiply line 21 by 6.2%. (auto-calc) Computed as indicated.23 Multiply line 21 by 5.4%. (auto-calc) Computed as indicated.24 Enter the smaller of line 20 or line 23. (auto-calc) As indicated.25 FUTA tax. (auto-calc) Computed as line 22 less line 24.

PART III, TOTAL HOUSEHOLD EMPLOYMENT TAXES. This section collectsthe results of Parts I and II, but is blank if you are not required to completePart II or you are filing this schedule with Form 1040.

26 Amount from line 8. (auto-calc) Computed as indicated.27 Add line 17 (or line 25) and line 26. (auto-calc) Computed as indi-

cated, using line 17 if Section A was completed and line 25 other-wise.

28 Are you required to file Form 1040 or 1040A? (auto-calc) Taken fromyour answer to "Filing this schedule without 1040?" at the begin-ning of this schedule.

PART IV, ADDRESS AND SIGNATURE. The address entries for this section donot appear on the screen, but are printed on the official printout if you indi-cated at the beginning of this schedule that you are filing Schedule H alone.Otherwise this section is left blank on the official printout.

State Fund Contribu-tions Worksheet, Figure2-17. This worksheet isused to claim credit foramounts paid to thestate unemploymentfund. Up to 5.4% ofwages can be deductedfrom the federal liability.

a. Name of State.Enter the stan-dard 2-charac-

ter code for the state.b. State reporting number. Enter the state I.D. number you use when

filing the state unemployment tax return. A space of only 10 char-acters is provided on the IRS form, so you may have to remove hy-phens, spaces, and other extraneous characters.

c. Taxable wages. Enter wages defined by the state as subject to theirunemployment tax, even if you pay no tax because your state expe-rience rate is zero.

d. State experience period from. This and the next entry are date en-tries for the period upon which the state has based your unemploy-ment tax rate. Enter starting date here in the mm/yy format.

State experience period to. Enter ending date here in the mm/yy for-mat.

e. State experience rate. Enter experience rate as a percentage.

STATE FUND CONTRIBUTIONSSTATE FUND CONTRIBUTIONSSTATE FUND CONTRIBUTIONSSTATE FUND CONTRIBUTIONS a. Name of state............. a. Name of state............. a. Name of state............. a. Name of state............. b. State reporting no. ...... b. State reporting no. ...... b. State reporting no. ...... b. State reporting no. ...... c. Taxable wages........... 0 c. Taxable wages........... 0 c. Taxable wages........... 0 c. Taxable wages........... 0 d. Exp per from.............. d. Exp per from.............. d. Exp per from.............. d. Exp per from.............. Exp to.................... Exp to.................... Exp to.................... Exp to.................... e. State exp rt............. 0 e. State exp rt............. 0 e. State exp rt............. 0 e. State exp rt............. 0 f. Mult c x .054............ f. Mult c x .054............ f. Mult c x .054............ f. Mult c x .054............▒ 0▒ 0▒ 0▒ 0 g. Mult c by e.............. g. Mult c by e.............. g. Mult c by e.............. g. Mult c by e..............▒ 0▒ 0▒ 0▒ 0 h. Sub g from f............ h. Sub g from f............ h. Sub g from f............ h. Sub g from f............▒ 0▒ 0▒ 0▒ 0 i. State unemployment contrib 0 i. State unemployment contrib 0 i. State unemployment contrib 0 i. State unemployment contrib 0

Figure 2-17. State Fund Contributions Worksheet

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f. Multiply c by .054. (auto-calc) Computed as 5.4% of line c.g. Multiply c by e. (auto-calc) Computed as line c times line e divided by

100.h. Subtract g from f. (auto-calc) Computed as indicated, this is the dol-

lar amount by which the state amount exceeds 5.4%.i. State unemployment fund contributions. Enter the total amount actu-

ally paid to the state unemployment fund.Lines h and i are separately totaled among the worksheets and are posted toline 19(h) and (i) of the schedule.


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Schedule J / Income Averaging for Farmers & FishermenA break for taxpayers with farm or fishing income. This schedule allows tax-payers to figure the tax on their farm (and, since 2004, fishing) income as ifit were spread over the previous three years. It is therefore used to computethe tax on the farm part of your 2006 income by adding one-third of it toyour 2003, 2004, and 2005 returns, recomputing the tax on those returns,then add the tax increase to the tax on your current return with farm incomeremoved. As you can imagine, the computation is quite complex because itinvolves the tax tables and tax rate schedules for all of those earlier years,and the unique tax computations for capital gains for those years. However,Tax Preparer handles it all automatically, with the tax computations for thoseprior years built in. You need only enter selected information from those ear-lier returns, and the software does the rest. Furthermore, if the return had aSchedule J for 2005, most of the entries from earlier returns are automati-cally translated from the prior-year return as long as you retained the tax yearon the Control Form at 2005. (HINT: You do not have to be a full-time farmerto qualify. If you have ANY farm income, no matter how small relative toyour other income, you are qualified to use this schedule.) (Schedule J is ac-cessible through the Road Map from the Schedule J line above Form 1040,line 44.)

Fishermen now eligible to use Schedule J. Starting tax year 2004, you canuse Schedule J to average income from your fishing business as if it werefarming income by electing to include it in line 2 of Schedule. Although theIRS has expanded the title of this schedule to include fishermen, they havealso redefined the word “farm” to include fishing for the purposes of thisschedule. As a result, when you see the phrase “farming income” in the IRSinstructions (or ours) it should be taken to mean “farming and fishing in-come.”

ELECTED FARM INCOME. First you must identify the amount of farm incomethat is reported on your 2006 tax return, and how much of it you want to in-come average. The result is “elected farm income” at line 2, which is nowdefined by the IRS to mean “the amount of your taxable income from farmingor fishing that you elect to include on line 2.” If all your farm income is re-ported on Schedule F and you choose to income average all of it (and only it),this section may already be complete without any additional entries from you.

Used Schedule J for 2005 tax? If you started this return by translatingthe prior-year return with tax year still retained at 2005, the appro-priate amounts from 2005, including the answer for this question,should already be completed.

Used Schedule J for 2004 tax? Similarly, if you started this return bytranslating as above, any amounts required from the 2004 schedulethat appear on the 2005 schedule should already be completed, in-cluding the answer to this question.

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Used Schedule J for 2003 tax? Similarly, if you started this return bytranslating as above, any amounts required from the 2003 schedulethat appear on the 2005 schedule should already be completed, in-cluding the answer to this question.

Elect to use income averaging for 2006? Answer Yes ONLY if you willenter amounts from ALL prior returns on the remaining data entrylines of Schedule J.

If so, complete ALL entries. If you answered Yes above but don’t com-plete all remaining entries, an improper tax may be computed forSchedule J and used inappropriately on Form 1040.

1 Taxable income on 1040, line 43. (auto-calc) Computed as indicated,this is your current taxable income before deducting the part thatwill be used for income averaging.

Farm income on 1040, line18. (auto-calc) Computed as indicated, thisis your net operating income on Schedule F.

Other farm income in AGI. Enter all other farm income here, includingboth gains and losses from the sale of property from your farmbusiness (Form 4797) and net farm income from a partnership (PartII of Schedule E).

Fishing income in AGI. Enter all taxable fishing income reported onthe return, such as a Schedule C devoted to a fishing business.

Amount NOT to income average. Enter the part of the above threeamounts that you choose NOT to include in income averaging. Itmay be to your advantage to income average less than the fullamount if the taxable income on your prior returns is not consider-able lower than the taxable income on your current return. HINT:The best entry is the one that results in the lowest tax at line 22.Therefore, after supplying all the information from your prior returnson lines 5 through 20, you may experiment with this entry to de-termine the best one to use.

2 ELECTED FARM INCOME. (auto-calc) Computed as farm income online 18 of Form 1040, plus the other farm income in AGI identifiedabove, less the amount you are choosing NOT to income average.

3 Subtract line 2 from line 1. (auto-calc) Computed as indicated.Filing status for 2006. (auto-calc) Taken from the filing status onForm 1040. All tax calculations on this schedule depend on filingstatus.

Entries required for the capital gains tax. If you have net long termcapital gains then it is to your benefit to use Schedule D to computeyour tax. The software does this for you throughout Schedule J as longas you supply all required information from Schedule D for the variousyears. For the most recent year, the amounts from Schedule are takendirectly from Schedule D for you. However, you must identify howmuch of the farm income identified in line 2 is included in each of theseSchedule D lines:


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2006 Schedule D Tax Worksheet line 9. (auto-calc) Taken from theSchedule D Tax Worksheet as indicated, this is the net long-termgain less the elected investment income from Form 4952, the lesserof line 4e or 4g.

Part included in line 2. You must indicate how much of the precedingamount stems from the farm income on line 2.

Adjusted Schedule D Tax Worksheet line 9 for Schedule J line 4. (auto-calc) Computed as the original amount less the preceding allocationto line 2.

2006 Schedule D line 18. (auto-calc) Taken from Schedule D as indi-cated, this is the amount of gain subject to a 28% rate


Adjusted Schedule D line 18 for Schedule J line 4. (auto-calc) Computedas the original amount less the preceding allocation to line 2.

2006 Schedule D line 19. (auto-calc) Taken from Schedule D as indi-cated, this is the unrecaptured section 1250 gain subject to a 25%rate.


Adjusted Schedule D line 19 for Schedule J line 4. (auto-calc) Computedthe original amount less the preceding allocation to line 2.

Qualified dividends on 1040 line 9b for Schedule J line 4. (auto-calc)Taken from the corresponding amount shown on screen 8 ofSchedule D, this and the next two amounts do not have a farm part,so no adjustment is necessary.

Form 4952 line 4g for Schedule J line 4. (auto-calc) Taken from the cor-responding amount on screen 8 of Schedule D.

Form 4952 line 4e for Schedule J line 4. (auto-calc) Taken from the cor-responding amount on screen 8 of Schedule D.

4 Tax on line 3 at 2006 rates. (auto-calc) Computed using the currenttax rates and regulations, this is the tax that would exist on the cur-rent return if the elected farm income were not included, taking intoaccount how much of capital gains applies to that elected income.

Regular 2006 tax on line 1. (auto-calc) Computed using the currenttax rates and regulations, this is the tax that would exist on the cur-rent return if there were no special tax calculations from other formsand schedules, like this one. It is used at the end of Schedule J indetermining whether Schedule J provides a benefit to the taxpayer.It is also used in the computation of line 34 of Form 6251.

2003 TAX REFIGURED. The tax that would appear on the 2003 return if one-third of the 2006 elected farm income were included is computed here.

Line 11 of 2005 Schedule J. Enter amount indicated if not translated.Line 15 of 2004 Schedule J. Enter amount indicated if not translated.Line 3 of 2003 Schedule J. Enter amount indicated if not translated.

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2003 Form 1040, line 40–See page J-2. Normally you would enter thetaxable income that appears on the 2003 tax return. However, ifthis taxable income is zero or less, and you did not use Schedule Jin the past, you must use the 2003 Taxable Income Worksheet –Line 5 (on page J-2 of the IRS 2006 Instructions for Schedule J) todetermine the amount to enter here.

5 2005 Sch. J line 11, 2004 Sch. J line 15, 2003 Sch. J line 3, or 2003 Form1040 line 40. (auto-calc) Taken as one of the preceding entries de-pending on what years you used Schedules J.

6 Divide line 2 by 3.0. (auto-calc) Computed as indicated, this is one-third of the farm income you elected to average.

7 Add lines 5 and 6. (auto-calc) Computed as indicated, but no lessthan zero.

Filing status for 2003. Enter the filing status from your 2003 tax re-turn.

2003 Schedule D Tax Worksheet line 9 or adjusted amount from priorSchedule J. Use the Schedule D amount only if there is no ScheduleJ for 2003.

1/3rd of analogous amount in line 2. (auto-calc) The amount allocatedfrom the analogous gain on the current return to line 2 is spreadequally among the past 3 years.

Adjusted D worksheet line 9 for line 8. (auto-calc) Computed as theworksheet amount for 2003 (or previously adjusted amount) plusthe preceding amount allocated to 2003.

2003 Schedule D Tax Worksheet line 20 or adjusted amount fromprior Schedule J. Use the Schedule D amount only if there is noSchedule J for 2003.



2003 Schedule D line 19 or adjusted amount from prior Schedule J.Use the Schedule D amount only if there is no Schedule J for 2004.


Adjusted Schedule D line 19 for line 8. (auto-calc) Computed as theSchedule D amount for 2003 (or previously adjusted amount) plusthe preceding amount allocated to 2003.


Adjusted Schedule D line 35 for line 8. (auto-calc) Taken as the pre-ceding entry. There is no adjustment from line 2 because there is no


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identifiable analogous amount in line 2. (Schedule D, line 35, wasqualified 5-year gain, which was a category unique to the 2003Schedule D.)

2003 Schedule D line 17b or adjusted amount from prior Schedule J.Use the Schedule D amount only if there is no Schedule J for 2003.


Adjusted Schedule D line 17b for line 8. (auto-calc) Computed as theSchedule D amount for 2003 (or previously adjusted amount) plusthe preceding amount allocated to 2003.

2003 qualified dividends for Schedule J line 8. Enter the qualified divi-dends on the 2003 Form 1040, line 9b.

2003 Form 4952 line 4g for Schedule J line 8. Enter the indicated amountfrom the 2003 Form 4952.

2003 Form 4952 line 4e for Schedule J line 8. Enter the indicated amountfrom the 2003 Form 4952.

8 Tax on line 7 at 2003 rates. (auto-calc) Computed using the built-in2003 tax rates and regulations.


2005 Schedule J, line 15. Enter amount indicated only if not trans-lated.

2004 Schedule J, line 3. Enter amount indicated only if not translated.2004 Form 1040, line 42 – See page J-5. Normally you would enter thetaxable income that appears on the 2004 tax return. However, ifthis taxable income is zero or less and you did not use Schedule Jfor 2004, you must use the 2004 Taxable Income Worksheet – Line9 (on page J-5 of the IRS 2006 Instructions for Schedule J) to de-termine the amount to enter here.

9 2005 Sch. J line 15, 2004 Sch. J line 3, or 2004 Form 1040 line 42. (auto-calc) Taken as one of the preceding three entries depending onwhat years you used Schedules J in the past.

10 Amount from line 6. (auto-calc) Taken from line 6 as indicated, this isone-third of the farm income you elected to average.

11 Add lines 9 and 10. (auto-calc) Computed as indicated, with a nega-tive result allowed.

Filing status 2004. Enter the filing status from your 2004 tax return.



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2004 Form 4952 line 4g for Schedule J line 12. Enter the indicatedamount from the 2004 Form 4952.

2004 Form 4952 line 4e for Schedule J line 12. Enter the indicatedamount from the 2004 Form 4952.

12 Tax on line 11 at 2004 rates. (auto-calc) Computed using the built-in 2004tax rates and regulations.


2005 Schedule J, line 3. Enter amount indicated only if not translated.2005 Form 1040, line 43—See page J-8. Normally you would enter thetaxable income that appears on the 2005 tax return. However, ifthis taxable income is zero or less and you did not use Schedule Jfor 2005, you must use the 2005 Taxable Income Worksheet – Line13 (on page J-8 of the IRS 2006 Instructions for Schedule J) to de-termine the amount to enter here.

13 2005 Sch. J line 3, 2005 Form 1040 line 43, or worksheet amount.(auto-calc) Taken as one of the preceding two entries depending onwhat years you used Schedules J in the past.

14 Amount from line 6. (auto-calc) Taken from line 6 as indicated.15 Add lines 13 and 14. (auto-calc) Computed as indicated.

Filing status 2005. Enter the filing status from your 2005 tax return.


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2005 Form 4952 line 4g for Schedule J line 16. Enter the indicatedamount from the 2005 Form 4952.

2005 Form 4952 line 4e for Schedule J line 16. Enter the indicatedamount from the 2005 Form 4952.

16 Tax on line 15 at 2005 rates. (auto-calc) Computed using the built-in2005 tax rates and regulations.

RESULT OF INCOME AVERAGING. The remaining lines are used to computethe total tax for Schedule J and require your entry of tax on the prior returns.

17 Add lines 4, 8, 12, and 16. (auto-calc) Computed as indicated.Line 12 of 2005 Schedule J. Enter amount indicated only if not trans-lated.

Line 16 of 2004 Schedule J. Enter amount indicated only if not trans-lated.


2003 Form 1040, line 41*. Enter amount indicated only if not trans-lated. *Do not include any tax from Form 8814, Form 4952, oreducation credit recapture.

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18 2005 Sch. J, line 12, 2004 Sch. J line 16, 2003 Sch. J line 4, or 2003Form 1040, line 41. (auto-calc) Taken as one of the preceding threeentries depending on what years you used Schedules J in the past.




19 2005 Sch. J, line 16, 2004 Sch. J line 4, or 2004 Form 1040, line 43.(auto-calc) Taken as one of the preceding three entries dependingon what years you used Schedules J in the past.



20 2005 Schedule J, line 4 or 2005 Form 1040, line 44. (auto-calc) Takenas one of the preceding three entries depending on what years youused Schedules J in the past.

21 Add lines 18 through 20. (auto-calc) Computed as indicated.22 Subtract line 21 from line 17. (auto-calc) Computed as indicated.Schedule J amount for Form 1040. (auto-calc) If the amount on line 22 is

less than the tax on line 1 computed using the Tax Tables, TaxComputation Worksheet (or the equivalent Tax Rate Schedule),Qualified Dividends and Capital Gain Tax Worksheet, or the Sched-ule D Tax Worksheet (whichever applies), and there is no tax fromForm 8615 on the return, line 22 appears here and is posted to theSchedule J portion of line 44 of Form 1040. Otherwise, the amountis zero.



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Schedule R / Credit for the Elderly or DisabledFor eligible elderly taxpayers: automatically generated. This schedule isautomatically generated when it appears from the results on Form 1040 thata taxpayer or spouse is eligible for this credit on the basis of age and income(unless you chose to block its auto-creation through the Control Form). Youwill nevertheless have to access Schedule R to supply more information if youreceived any nontaxable pensions that were NOT reported on line 16 or 20 ofForm 1040. (Schedule R is accessible through the Road Map at Form 1040,line 49.)

For disabled taxpayers: manually generated. If you qualify for the creditbased on disability, you must access Schedule R (accessible through the RoadMap from line 49 of Form 1040) and supply additional information in order toclaim the credit. TIP: You no longer have to file a physician’s statement withthe return. However, you must keep such a statement with your records ifrequired.

ELIGIBILITY QUESTIONS. Eligibility is determined from your answers to thefollowing questions. Answer all questions separately for you and spouse ifmarried.

YOUR age (from Form 1040 page 1). (auto-calc lines) Taken from yourentries on our Form 1040 page 1 for your age at year-end.

SPOUSE'S age (from Form 1040 page 1). (auto-calc lines) Taken fromyour entries on our Form 1040 page 1 for spouse's age at year-end.

Spouse claiming credit...A was permanently and totally disabled on Jan. 1, 1976 or Jan. 1, 1977,

OR on the date retired? Answer Yes if EITHER statement is true.B had not reached the mandatory retirement age of employer's plan by

Jan. 1, 2006? You cannot claim the credit for disableds if your em-ployer's retirement plan would have required you to retire by thebeginning of the tax year.

C was unable to engage in any gainful activity in 2006? You can an-swer Yes only if, due to your continued disability condition, youwere unable to engage in any substantial gainful activity in 2006(or, if disability started during 2006, anytime after the disabilitystarted).

D received taxable disability income of ($). Do NOT include anyamount received from an employer's pension plan after reachingmandatory retirement age.

ELIGIBLE TO USE SCHEDULE R. (auto-calc lines) Your answers to theabove questions for you and spouse are used to determine your eli-gibility for either the credit for the elderly (65 or older) or the creditfor the disabled (under 65), or both.

PART I, FILING STATUS AND AGE. (auto-calc lines) The Filing Status forSchedule R is determined from your entries on Form 1040 and above. A Yeswill appear on one of the filing status lines (1 to 9) if you qualify for the

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credit. (Note that the two lines labeled "Single" actually apply to taxpayersfiling as Head of Household or Qualifying Widow(er) as well as Single.)


PART II, STATEMENT OF DISABILITY. Complete this part ONLY if a Yes ap-pears in Part I at line 2, 4, 5, 6, or 9. You must answer at least the firstquestion for the appropriate spouse to determine whether or not you need tocomplete the rest of the section for that spouse. An identical set of questionsappears for you and spouse.

1 Did you file the required statements in 1983 or before, OR after 1983but your physician signed Box B? You can answer Yes only if youfiled a physician's statement for this disability for 1983 or an earlieryear, or you filed a statement for tax years after 1983 and yourphysician checked Box B on the statement.

2 Are you unable to engage in gainful activity in 2006? (auto-calc)Taken from your answer to Questions C of the earlier eligibilityquestions for the appropriate spouse.

PHYSICIAN'S STATEMENT REQUIRED? (auto-calc) Answered No only ifyou could answer Yes to BOTH of the above two questions.

If a physician’s statement is required, you must have a physician sign thestatement at the end of the IRS Instructions for Schedule R and keep thissigned statement with your records. You should no longer file the statementwith your return.

PART III, AMOUNT OF YOUR CREDIT. The computation is based on theabove entries plus any adjustment you make to line 13, below. When all cal-culated entries are zero it means that you are not eligible for the credit.

10 Amount based on answers in Part I. (auto-calc) $5,000, $7,500, or$3,750 will appear here based on the Schedule R filing status de-termined above.

11 Taxable disability income. (auto-calc) Taken from your prior entriesfor taxable disability income, depending on your Schedule R filingstatus.

12 Line 10, or smaller of lines 10 and 11. (auto-calc) Taken as line 10 ifline 11 is zero, and the smaller of lines 10 and 11 otherwise.

Nontaxable social security benefits not in Form 1040 line 20a. Enterhere all nontaxable social security (and railroad retirement benefitstreated as social security) not included in line 20a of Form 1040.

13a Nontaxable part of social security benefits. (auto-calc) Computedas line 20a less line 20b of Form 1040 plus the above amount.

Nontaxable pensions not in Form 1040 line 16a. Enter here any othernontaxable part of pensions received, including nontaxable veteran'spensions (but NOT military disability pensions) and any other pen-sion, annuity, or disability benefit that is excluded from income un-


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der any other provision of federal law (but NOT disability under sec-tion 808 of the Foreign Service Act of 1980). Enter as a negativehere the part of line 16a of Form 1040 that is a return of capital.

13b Nontaxable part of other pensions. (auto-calc) Computed as line16a less line 16b of Form 1040 plus the above additional amount.

13c Add lines 13a and 13b. (auto-calc) Computed as indicated.14 Amount from Form 1040, line 38. (auto-calc) Automatically taken

from Form 1040 as indicated.15 Amount based on answers in Part I. (auto-calc) $7,500, $10,000, or

$5,000 depending on the Schedule R filing status.16 Subtract line 15 from line 14. (auto-calc) Computed as indicated.17 Enter one-half of line 16. (auto-calc) Computed as indicated.18 Add lines 13c and 17. (auto-calc) Computed as indicated.19 Subtract line 18 from line 12. (auto-calc) If the sum of the reductions

at lines 13c and 17 equals or exceeds the base on line 12, line 19will be zero and you cannot take the credit.

20 Multiply line 19 by 15%. (auto-calc) Computed as indicated.21 Amount from Form 1040, line 46. (auto-calc) Taken from Form 1040

as indicated.22 Add amounts on Form 1040, lines 47 and 48. (auto-calc) The sum of

amounts on Form 1040 are computed as indicated.23 Subtract line 22 from line 21. (auto-calc) Computed as indicated.24 CREDIT FOR THE ELDERLY OR DISABLED. (auto-calc) Computer as

the lesser of line 20 or line 23.The result on line 24 is posted to line 49 of Form 1040.

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Schedule SE / Self-Employment TaxWho is it for. This form is for self-employed taxpayers who owe social secu-rity and Medicare tax on their self-employment income. Liable income in-cludes business income, farm income, certain partnership income, and wagesfrom a church that elects exemption from employer social security taxes. Thistax applies no matter how old you are, and whether or not you are alreadyreceiving social security benefits. See IRS Instructions for Schedule SE andIRS Pub. 533 (Self-Employment Tax).

Fully automatic for most liable taxpayers. Schedule SE is automatically gen-erated when required based on results on Form 1040, unless you choose toblock its auto-creation through the Control Form. However, you may have tosupply additional information directly on Schedule SE if you are a church em-ployee, a minister, or a member of some other special group. (Schedule SE isaccessible through the Road Map at Form 1040, line 58.)

GENERAL INFORMATION. Schedule SE contains a short form (Section A)and a long form (Section B). The software completes the proper one based onyour entries.

Social security number for this copy. (auto-calc) One copy of ScheduleSE is available for each spouse. The social security number enteredon Form 1040 for the spouse whose copy you chose when you en-tered Schedule SE appears here.

Is this spouse's copy (vs. you)? (auto-calc) This answer is also based onthe copy you chose.

Who Must File Schedule SE. If you have net self-employment of more than$433.13 ($400 divided by 0.9235), or church employee income (other thanfor services as a minister or member of a religious order) of $108.28 or more,you must file this schedule.

EXCEPTIONS:Exempt from Schedule SE tax based on an IRS-approved Form 4361 or

4029? (auto-calc lines, supported by Control Form) If you claimed anexemption from this copy of Schedule SE on our Control Form(claiming an approved Form 4361 or 4029 that applies to ALL ofyour self-employment income), a Yes answer will appear here.

IRS approved your Form 4361 claim not to be taxed, but you have otherearnings subject to self-employment tax? If your ONLY self-employment income was from earnings as a minister, you do nothave to file Schedule SE if you file Form 4361 and receive IRS ap-proval. But if you have more than $433.13 of OTHER self-employment earnings you may have to file Schedule SE anyway.See “ADJUSTMENTS FOR CLERGY” on the next page.

WAGE AND TIP INCOME. The remaining entries help determine which sectionyou must use, and are then used in the appropriate section:

Qualifying church wages on W-2. If you are an employee of a church ora qualified church-controlled organization that has in effect a certifi-


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cate electing exemption from employer social security taxes, a taxapplies even when your self-employment income is less than $400,and you must use the Long Schedule SE. (If CLERGY, see “Adjust-ments for Clergy,” next, and do not make an entry here.)

Social security wages from Forms W-2 reported on Form 1040. (auto-calc) Taken from your entry for social security wages on the W-2Worksheets for the appropriate spouse.

Adjustment to social security wage total. Enter here any additionalwages that qualify for inclusion that were not included as social se-curity wages on the W-2 Worksheet, such as certain railroad retire-ment compensation, or any special adjustment.

Net social security wages. (auto-calc) Computed as the social secu-rity wages plus the above adjustment less the Medicare qualifiedgovernment wages. If you are not eligible for the Short ScheduleSE, this result is used for line 8a of the Long Schedule SE.

Unreported tips subject to social security tax. (If Premium Level, auto-calc line supported by Form 4137.) Tips not reported to your em-ployer that are subject to social security tax through Form 4137 arereported here from line 9 of Form 4137. This entry is used for line8b of the Long Schedule SE.

ADJUSTMENTS FOR CLERGY. Because of the way clergy are often compen-sated for their services, special rules must often be followed for clergy in-come. You should make entries on the following lines only for clergy who aresubject to the social security tax:

Social security wages not taxed on W-2. (auto-calc) Taken from the W-2 Worksheets for line 7, this is the amount identified as clergywages subject to the social security tax but for which withholdingon Form W-2 was excepted. It will be added to net and gross non-farm income for Schedule SE.

Net income on C not social security liable. If you report all ministerialincome on Schedule C or C-EZ but that income is exempt from so-cial security tax by way of Form 4361, enter the net income forthat Schedule C here so that it can be subtracted from the net non-farm income posted to Schedule SE from Schedule C or C-EZ.

Gross income on C not social security liable. If you report all ministerialincome on Schedule C or C-EZ but that income is exempt from so-cial security tax by way of Form 4361, enter the gross income forthat Schedule C here so that it can be subtracted from the grossnonfarm income posted to Schedule SE from Schedule C or C-EZ.

Nontaxable income that is social security liable. Enter here any amountnot subject to regular income tax but still subject to the social secu-rity tax, such as housing allowance or rental value of your homeprovided to you as a minister. This amount will be added to net andgross nonfarm income for Schedule SE. (Note that clergy no longerhave to include as self-employment income retirement benefits re-

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ceived from a church plan after retirement and the rental value of ahome or an allowance for a home furnished after retirement.)

EXEMPT Notary Public Income. Enter fees received for services performed asa notary public that are reported on a Schedule C. These fees are not subjectto the self-employment tax, and are therefore subtracted from the amount inline 2 (whether the short or long form is used) when computing line 3."EXEMPT NOTARY" will print next to line 3 on the official printout of Sched-ule SE if you make an entry here.

FARM SELF-EMPLOYMENT INCOME. Farm self-employment income is com-puted from amounts on Schedules E and F for the proper spouse, as follows: Net farm income:

Net profit or loss from Schedule F. (auto-calc) Taken from line 18 ofForm 1040.

Net farm profit or loss from Schedule K-1. (auto-calc) Taken from thenet farm self-employment income you identified on the Partnershipand S Corp Worksheets in Part II of Schedule E.

Adjustment to farm net. Enter here any net farm self-employment in-come for the proper spouse not reported on Schedule E or F, or anyother special adjustments.

Net farm profit or loss. (auto-calc) Computed as the sum of the abovethree lines.

Gross farm income:Gross income from Schedule F. (auto-calc) Taken from line 11 of

Schedules F.Gross farm income from Schedule K-1. (auto-calc) Taken from Part II of

Schedule E.Other gross farm income. Enter any gross farm self-employment in-

come for the proper spouse not included above.Gross farm income. (auto-calc) Computed as the sum of the above

three lines. Elect to use the Farm Optional Method? If net farm self-employment in-

come is low, you may choose to use an optional method in order toraise your social security contributions or to ensure a child care orearned income credit. The software will automatically control alllimitations that apply to current-year amounts.

FARM OPTIONAL METHOD USED. (auto-calc) This answer is Yes only ifyou elect the method and meet all the monetary requirements com-puted in Part II of this schedule.

NONFARM SELF-EMPLOYMENT INCOME. Nonfarm self-employment incomeis computed from amounts on Schedules C and E, as follows: Net nonfarm income:

Net profit or loss from Schedule C or C-EZ. (auto-calc) Taken fromSchedule C or C-EZ through line 12 of Form 1040.


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Amount on Schedule C or C-EZ received as a statutory employee.(auto-calc) Taken as the net income on any Schedule C or C-EZidentified as completed for a statutory employee.

Net profit on Schedule C or C-EZ for Schedule SE. (auto-calc) Computedas the net profit or loss on Schedule C or C-EZ less the above statu-tory amount. (Statutory employees have already paid social securityand Medicare tax as reported on their W-2 forms.)

Net nonfarm profit or loss from Schedule K-1. (auto-calc) Taken fromthe net nonfarm self-employment income you identified on the Part-nership and S Corp Worksheets in Part II of Schedule E.

Adjustment for clergy. (auto-calc) Taken from the entries in the previ-ous ADJUSTMENTS FOR CLERGY section as described there.

Other net nonfarm income. Enter here any net nonfarm self-employment income for the selected spouse not reported on Sched-ule C, C-EZ, or E, or any other special adjustments.

Net nonfarm profit or loss. (auto-calc) Computed as the sum of all theabove lines.

Gross nonfarm income:Gross income from Schedule C or C-EZ. (auto-calc) From line 7 of

Schedules C and C-EZ.Gross nonfarm income from Schedule K-1. (auto-calc) From Part II of

Schedule E.Adjustment for clergy. (auto-calc) Taken from the entries in the previ-

ous ADJUSTMENTS FOR CLERGY section as described there.Other gross nonfarm income. Enter any gross nonfarm self-employment

income not included above.Gross nonfarm income. (auto-calc) Computed as the sum of all the

above lines. Elect to use the Nonfarm Optional Method? If your net nonfarm self-

employment income is low, you may choose to use this optionalmethod in order to raise your social security contributions or to en-sure a child care or earned income credit. The software will auto-matically control all limitations that apply to current-year amounts,but there are further restrictions that depend on earlier years, asfollows.

Self-employment net was $400 or more 2 of the last 3 years? You can-not use the Nonfarm Optional Method unless you can answer Yes.(Only 92.35% of your self-employment income is subjected to the$400 test, due a deduction based on the rate of this tax.)

Number of years previously used Nonfarm Optional Method. You can-not use the Nonfarm Optional Method unless you can enter 4 or lesshere, because you cannot use the method more than five times inyour lifetime.

NONFARM OPTIONAL METHOD USED. (auto-calc) This answer is Yes onlyif you elect the method and meet all the monetary requirementscomputed in Part II of this schedule.

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SECTION A, SHORT SCHEDULE SE. If you are eligible to use the short ofSchedule SE, it is completed automatically here based on the preceding en-tries. For 2006 only the first $94,200 of income is subject to the full 15.3%tax, and all remaining income is taxed at a 2.9% rate. The results on lines 5and 6 are posted to lines 58 and 27 of Form 1040, respectively. (The soft-ware uses the flow chart on page 1 of the official Schedule SE to determineeligibility to use the short Schedule SE.)

SECTION B, LONG SCHEDULE SE. Conversely, if you are required to use thelong version of Schedule SE, it is completed automatically here, and lines 12and 13 are posted to lines 58 and 27 of Form 1040, respectively.

Part I, Self-Employment Tax. The tax is figured in this part, which is fullyautomatic. For 2006 only the first $94,200 of income is subject to the full15.3% tax, and all remaining income is taxed at a 2.9% rate. The results onlines 12 and 13 are posted to lines 58 and 27 of Form 1040, respectively.

Part II, Optional Method to Figure Net Earnings. If you answered Yes to oneof the Optional Method questions previously, and are otherwise eligible for it,this section is used to determine the income for line 4b of Section B, Part I,and is completely automatic. However, income must be quite low to qualifyfor one of the Optional Methods:• Farm Optional Method. You cannot use this method unless your net farm

profits were less than $1,733 or your gross farm income was $2,400 orless. (Net and gross farm income is shown on screen 2 of this schedule.)

• Nonfarm Optional Method. You cannot use this method unless your netnonfarm profits are less than BOTH $1,733 AND 72.189% of your totalgross nonfarm income. (The gross and net nonfarm amounts are seen onscreen 3 of this schedule.)

Extra line for personal memos. The supporting statement you create for thisline is not printed as a part of the official return, but is intended for privatenotes or reminders for this schedule.

Exempt from filing (NOTARY). (auto-calc) Automatically Yes if you made anentry earlier for “EXEMPT Notary Public Income,” had less than $433.14 ofother self-employment earnings, did NOT elect one of the Optional Methods,do not have to file Schedule SE, and owe no self-employment tax. If Yes,Schedule SE will be omitted from printing, and “EXEMPT Notary” will beprinted next to line 58 of Form 1040 on the official printout of the return tolet the IRS know.


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Form 1116 / Foreign Tax Credit(Included in Standard and Premium Level software ONLY. )

Purpose. Form 1116 is used to claim credit for income taxes paid to a quali-fying foreign country or U.S. possession. It’s purpose is to prevent you frombeing double-taxed on the same income – once by the U.S. and once by theforeign country. Form 1116 is accessible through the Road Map at line 47 ofForm 1040. Ten copies of Form 1116 are built into the software.

Prepare Form 1116 only after Form 1040 is complete and final through line46. Because of the unique structure of Form 1116, you should prepare Forms1116 only after the return is complete and final through line 46 of Form1040. Especially important are all income items through line 22, itemizeddeductions on Schedule A for line 40, and tax on lump-sum distributions onForm 4972 for line 44b. If any of these amounts change after you prepareForms 1116, you must itemize to the worksheets accessed at line 1 of Form1116 and view all worksheets so that they are updated with the newamounts, since worksheets only recalculate when you view them.

You may qualify for the credit without filing Form 1116. You can claim thecredit without filing Form 1116 if all of the following conditions are met:

(1) All foreign income was investment income. Income that falls into thiscategory includes interest, dividends, royalties, rents, annuities, gainfrom sale of investment property, and capital gains not associated withyour active conduct of a trade or business. (The IRS confusingly callsthis the “passive income” category, but it has no relation to “passive ac-tivity income” defined for Form 8582. Rather, it includes “portfolio in-come” as defined for Schedule D and is therefore “nonpassive income” inthe context of Form 8582!)

(2) All foreign income and withholding were reported to you on a qualifiedstatement. Qualified statements include Form 1099-INT, 1099-DIV, andSchedule K-1.

(3) Total foreign taxes do not exceed $300 ($600 if married filing jointly).Only creditable foreign taxes count in this determination.

However, the ability to omit Form 1116 does not give you the ability to ig-nore its rules. You must still reduce your credit by amounts described in IRSinstructions for line 12 of Form 1116, which generally means that you cannotclaim credit for taxes on income that you have excluded from U.S. incometax. CAUTION: It may be to your benefit to use Form 1116 even when youare qualified to omit it, because you cannot carry over any unused credit toanother year if you omit Form 1116.

Copy 1 is ALWAYS REQUIRED. Unlike other forms for which we provide mul-tiple copies, copy 1 is mandatory for Form 1116 because of the unconven-tional design of the form by the IRS. The IRS requires that you post the cred-its from all Forms 1116 to Part IV of a single Form 1116, leaving Part IVblank for all other copies of Form 1116. The result in Part IV of that oneForm 1116 is then posted to line 47 of Form 1040. We have therefore desig-

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nated copy 1 of Form 1116 as the single copy for which Part IV is com-pleted. As a result, if you do not create a copy 1 of Form 1116, no credit willbe posted to Form 1040. Therefore, whether you need one or more copies ofForm 1116, copy 1 must be one of the copies.

IMPORTANT: Use IRS resources for important details. The IRS Instructionsfor Form 1116 includes several topics that may require your attention, in-cluding a list of foreign taxes that are not eligible for the Foreign Tax Credit,situations that may require a redetermination of the credit on an amended re-turn, and adjustment of income to compensate for the lower rates that applyto capital gains. IRS Pub. 514 (Foreign Tax Credit for Individuals) provideseven more detail on what taxes qualify for the credit and includes helpfulfilled-in examples for Form 1116. We strongly recommend that you carefullyread both documents before preparing Form 1116, unless you are onlyclaiming a credit for foreign taxes paid on interest and dividends receivedfrom foreign sources.

Category of income. You must identify the category of income to which thiscopy of Form 1116 applies. You must use a separate Form 1116 for foreigntax related to each separate category.

a. Passive income. This is generally portfolio income or other invest-ment income from sources in which you are not an active partici-pant. It is the most popular category because it includes dividendsfrom foreign stocks. It also includes interest, royalties, rents, annui-ties, gain from sale of investment property, and capital gains notassociated with your active conduct of a trade or business.(CAUTION: This category has no relation to “passive activity in-come” defined by the IRS for Form 8582. Rather, it is related to“portfolio income” as defined for Schedule D and is therefore“nonpassive income” in the context of Form 8582.)

b. High withholding tax interest. This is foreign interest subject to highwithholding rates – 5% or more.

c. Financial services income. This is generally income derived by a fi-nancial services entity (banks, insurance companies, etc.) andtherefore does not apply to individuals unless they are sole proprie-tors of financial services entities. You must report in a supportingstatement for this line the type of income and amount for each in-come item that qualifies as financial services income. Failure to doso will cause an e-filed return to be rejected by the IRS.

d. Shipping income. This is income derived from transport in foreigncommerce, such as cargo services.

e. Dividends from a DISC or former DISC. These are dividends from aDomestic International Sales Corporation) that are treated as for-eign-source income.

f. Certain distributions from a foreign sales corporation (FSC) or for-mer FSC. These are distributions from a Foreign Sales Corporationattributable to foreign trade income.


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g. Lump-sum distributions. These are foreign-source lump-sum distribu-tions from a pension plan. If you elected to have this income taxedusing one of the options on Form 4972, a separate limitation ap-plies, as explained later in these details. The IRS instructs you NOTto use copy 1 of Form 1116 for this category if you are filing morethan one Form 1116; nevertheless, the return will show the propercredits even if you do.

h. Section 901(j) income. This is income derived from certain sanctionedcountries. No tax credit is allowed for these countries, but youmust still complete Form 1116 through line 16 to determine for-eign source taxable income. Unlike the other categories, you mustuse a separate copy of Form 1116 for each separate country fromwhich you receive section 901(j) income. The IRS instructs youNOT to use copy 1 of Form 1116 for this category if you are filingmore than one Form 1116; nevertheless, the return will show theproper credits even if you do.

i. Certain income re-sourced by treaty. This is income you elect totreat as foreign source income by application of an income taxtreaty with the country.

j. General limitation income. This is all other foreign income, includingwages or salary as an employee, income from your conduct of abusiness not described above, and gains from sale of inventory ordepreciable property from a trade or business not described above.

Country or U.S. possession:k. Resident of (name of country or U.S. possession). Name the country

in 15 characters or less, abbreviating if necessary. (Even thoughthere is room on the form for a longer entry, we limit your entry to15 characters because that is all the IRS will process.)

Preparation for completing Parts I and II of Form 1116. Before you can com-plete Parts I and II, you must complete a number of special sections we haveprovided in order to automate the form. The need for these entries is not evi-dent from the form itself but is buried in the IRS Instructions for Form 1116and IRS Pub. 514 (Foreign Tax Credit for Individuals). You should refer tothose sources if you have questions not answered here.

Deductions for lines 3a and 3b. In determining the taxable income attributableto a particular category and country, Form 1116 includes the reporting of ex-penses that cannot be definitely attributable to any one category and country.Those expenses apply to all countries reported on Forms 1116 but are dividedamong them and the U.S. in proportion to their respective gross incomes.Each column of Form 1116, Part I (and each worksheet that Tax Preparerprovides to support them) shows the required prorating, which is generallydifferent for each country. But the expenses to which the prorating is appliedare the same for all countries and categories. We therefore provide the ex-pense entries for lines 3a and 3b here to eliminate duplicate data entry thatmight otherwise be required.

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3a Certain itemized deductions or standard deduction. You report hereeither your standard deduction or a portion of your itemized deductions,depending on which is used for line 40 of Form 1040:

Schedule A used for Form 1040, line 40? (auto-calc) Taken from Form1040, as indicated. If No, all amounts below from Schedule A willbe zero and you need make no entries below for line 3a of Form1116. But if Yes, you must determine the amounts to exclude fromselected parts of Schedule A for the purposes of this line.

If Yes, enter Schedule A amounts to exclude, The amounts you mustexclude below are amounts that cannot be prorated because they aredefinitely related to either foreign or U.S. source income. Only amountsthat cannot be identified as relating to particular income can be pro-rated.

Medical and dental (Schedule A, line 4). (auto-calc) Taken fromSchedule A, this is the medical expense deducted.

Part to exclude from line 3a. Enter the part of the preceding amountthat applies to a particular category and country, or applies to theU.S. An amount that applies to a particular category and countrywill be reported on line 2 of the respective worksheet instead.

General sales tax (Schedule A, line 5). (auto-calc) Taken from Sched-ule A, this is the deduction for general sales tax, if any. If incometax was deducted at Schedule A, line 5, rather than sales tax, noamount will appear here.


Real estate tax (Schedule A, line 6). (auto-calc) Taken from ScheduleA, this is the deduction for real estate tax.


Reduction % on Schedule A. (auto-calc) The amounts to be used online 3a are subject to the same high-income limitations as are ap-plied on Schedule A. To determine the proper reduction, a reductionpercentage is computed by dividing the amount disallowed onSchedule A (shown above line 28 on the screen) by the total ofamounts on Schedule A that are subject to the limitation (allamounts on Schedule A except lines 4, 13, 19, and the gamblingand Form 4684 parts of line 27).

3a Amount for line 3a of all Forms 1116. (auto-calc) If itemized deduc-tions were used for Form 1040, line 40, this line is computed as thesum of the above amounts for Schedule A lines 5 and 6, less theentered exclusions, reduced by the preceding percentage, plus theamount for Schedule A line 4 less its entered exclusion. Otherwise,


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the standard deduction used on Form 1040, line 40, appears here.This result is used for line 3a of all worksheets for Form 1116 (ex-cept those for category g with a Form 4972 election, as describedlater).

3b Amount for line 3b of all Forms 1116. Enter any other deductionsthat do not definitely relate to any particular type of income orcountry. Do not include interest expense or losses here; they will bereported on lines 4 and 5 instead. You must explain your entry insupporting statements on screen 5, using a separate supportingstatement for each column used. Failure to do this will cause an e-filed return to be rejected by the IRS.

Gross income for prorating. The prorating of amounts not definitely related toa particular type of income or country requires a knowledge of the gross in-come for the type and country, entered on line 3d of the respective work-sheet, and the gross income for all sources combined, including the U.S. Thelatter amount is computed here and is used for line 3e of all worksheets.

Gross income on Form 1040, line 22. (auto-calc) Taken from line 22 ofForm 1040, as indicated.

Income excluded via Form 2555 or 2555-EZ. (auto-calc) Taken fromthe Form 2555 and 2555-EZ components of Form 1040, line 21,but shown as a positive number. This is the amount by which grossincome was reduced in computing Form 1040, line 22, and must beadded back to income for the purposes of Form 1116, line 3e.

Other deductions and losses reflected in Form 1040, line 22. For thepurposes of lines 3d and 3e, the IRS defines gross income as in-come without regard to deductions and losses. You must thereforeenter any other deductions and losses that reduced income in com-puting Form 1040, line 22, and must be added back to income forthe purposes of Form 1116, line 3e.

3e Gross income without exclusions, losses, and deductions. (auto-calc) Computed as Form 1040, line 22, with the preceding twoamounts added back to income.

Gross income with exclusions for line 4a worksheet. (auto-calc)Computed as the preceding result reduced by the exclusions fromForms 2555 and 2555-EZ. The prorating for line 4a is different fromthat for lines 3a and 3b in that the exclusions from Forms 2555 and2555-EZ are not added back to income for the purposes of the for-mer. This result is used on the worksheets in computing the pro-rated amount for line 4a.

Information for deduction at line 4a. The prorating for line 4a is computed oneach worksheet, but the amount to be prorated is the same for all worksheetsand is the amount deducted on Schedule A for home mortgage interest.

Schedule A, lines 10 through 12. (auto-calc) Taken from Schedule A,as indicated, this is the amount shown on Schedule A for homemortgage interest, including deductible points. If Schedule A wasnot used for Form 1040, line 40, this amount will be zero.

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Reduction % on Schedule A. (auto-calc) Taken from the previously-computed percentage, shown above line 3a, this is the amount bywhich the preceding deduction must be reduced before being usedon Form 1116.

4a Amount for line 4a BEFORE pro rate. (auto-calc) If itemized deduc-tions were used for Form 1040, line 40, computed as the amounton lines 10 through 12 of Schedule A reduced by the precedingpercentage. Otherwise, zero. This result is prorated on each indi-vidual worksheet for Form 1116 in accordance with a worksheet inthe IRS instructions. TIP: If your gross foreign source income (in-cluding income excluded on Forms 2555 and 2555-EZ) does notexceed $5,000, you are allowed to allocate all of this home mort-gage interest to the U.S. instead of any foreign country. To makethis election, use the Override Key to access this computed line andchange it to zero.

Election for category g. Lump-sum distributions (category g) are eligible forfavorable tax treatment under certain conditions through Form 4972 (Tax onLump-Sum Distributions). The participant in the plan from which the distribu-tions were made must have been born before January 2, 1936, but if youqualify you may elect a 10-year option or, if capital gains are included, a capi-tal gain election through that form. If you make such an election for the for-eign-source lump-sum distribution you report here, you must so identify inthis section so that the proper special limitations are applied. When you makethis choice the normal instructions for Part III of Form 1116 are replaced byspecial instructions on the IRS Worksheet for Lump-Sum Distributions, all ofwhich is performed automatically by the software based on your followingentries and the amounts you report on our worksheets for line 1, later.CAUTION: You must prepare Form 4972 (if Premium Level, accessiblethrough the Road Map at line 44b of Form 1040) before you prepare thiscopy of Form 1116 in order for the proper calculations to be applied.

Form 4972, line 6. (If Premium Level, supported by Form 4972) Theamount on line 6 of Form(s) 4972 for the return is reported here.

Form 4972, line 12. (If Premium Level, supported by Form 4972) Theamount on line 12 of Form(s) 4972 for the return is reported here.

Elected Form 4972 for this income? You can answer Yes only if youhave already prepared a Form 4972 for the return and you havechosen category g for this copy of Form 1116. Amounts from Form4972 will then appear below.

Form 4972, lines 6 and 12. (auto-calc) If the preceding answer is Yes,computed as the sum of amounts from lines 6 and 12 of Form4972; otherwise, zero. This is the total of all lump-sum distributionsreported on the form(s). This total is used for line 17 of this copy ofForm 1116 in place of the normal amount.

Foreign source part of the above. Enter the amount you reported onForm 4972 for the foreign-source distribution reported here. Yourentry can be no more than the amount on the preceding line.


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CAUTION: This entry is critical for a Form 1116 that uses the Form4972 election. It is used for line 16 of this copy of Form 1116 inplace of the normal amount.

Form 4972, line 30. (auto-calc) If Form 4972 elected, taken from Form1040, line 44b; otherwise, zero. This tax is used for line 19 of thiscopy of Form 1116 in place of the normal amount.

In addition to the modifications to lines 16, 17, and 19 noted above, if youmake this election the computations for lines 18, 20, and 21 are modified aswell, as noted in our instructions for those lines. Furthermore, the work-sheets you prepare in support of line 1 will have lines 1 through 6 zeroed;you will make monetary entries only in Part II so that line (x) has an amount,which will be reflected in line 8 of Form 1116 and used in the computation atline 21.

PART I, TAXABLE INCOME OR LOSS FROM SOURCES OUTSIDE THE UNITEDSTATED. After all the preparation in the preceding sections, you are nowready to compute the taxable foreign-source income for the category you se-lected for this copy of Form 1116. You must use the worksheets accessed atline 1 in this section for all monetary entries for Parts I and II of Form 1116(lines 1 through 8).

Foreign qualified dividends and capital gains. Because of their favorable taxtreatment, qualified dividends and capital gains are handled in a special wayon this form. Generally only a fraction of these sources of income are in-cluded in foreign-source income for lines 1 and 5 of Form 1116, and the tax-able income from all sources for line 17 is reduced in proportion to this typeof income from all sources. As a result, both line 16 (for foreign-source in-come) and line 17 (for all-source income) are adjusted lower than the total in-come for each, which affects the computation of the credit for this form.However, an exception applies if certain conditions are met, as explained forthe next two data entry lines:

Foreign qualified dividends + net capital gains. Enter the sum of yourforeign-source qualified dividends plus your foreign-source net capi-tal gains, where foreign-source net capital gain is defined by the IRSas the amount by which foreign-source net long-term capital gainexceeds foreign-source net short-term capital loss. If this amount is$20,000 or more, you do not qualify for an exception to the ad-justment of qualified dividends and capital gains on Form 1116.

Qualify for “adjustment exception.” (auto-calc) Automatically Yes onlyif both of the following two conditions are met:(1) Line 17 of the Schedule D Tax Worksheet does not exceed speci-fied thresholds. Although the IRS defines the exception using otherworksheets as well, only the Schedule D Tax Worksheet need beconsidered for Tax Preparer because Tax Preparer creates theSchedule D Tax Worksheet whenever the specified types of incomemust be taxed at a reduced rate. (The thresholds are the end of the4th tax bracket for 2006: $154,800 if single, $188,450 if married

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filing jointly or qualifying widow(er), $94,225 if married filing sepa-rately, and $171,650 if head of household.)(2) Foreign qualified dividends + net capital gains is less than$20,000. This test is based on your preceding entry.

If you qualify for the exception, none of your entries for qualified dividends,capital gains, or capital losses are reduced at lines 1 and 5, and the taxableincome for line 17 reflects Form 1040, line 41 without adjustment. (The taxcode is so complex that you can choose to make your own determination ofadjustments by consulting IRS sections 1(h)(11)(C)(iv) and 904(b)(2). If youdo so, you will have to modify your entries on the worksheets so that the re-sults at lines 1 and 5 match the results of your own determination.)

For category on screen 1. Entries for both Part I and Part II of Form 1116 aresupplied on the worksheets that support line 1 and must relate, either directlyor through prorating, to the category you specified for this copy of Form1116. See the section following Part II for special lines that allow you tocreate special statements to justify amounts on lines 2 and 8.

1a Gross income from sources within country entered. (Supported bythe Foreign Source Worksheet, Figures 2-18a and 2-18b.) Youmust complete the supporting worksheets for the type of incomeyou previously specified in lines a through j. When you return fromthe worksheets the sum of line 1a of all worksheets appears here.(If this copy of Form 1116 is for a lump-sum distribution you re-ported on Form 4972, the amount on this line will be zero if youproperly identified the Form 4972 election earlier.)

Type of income. This entry applies to all worksheets prepared for thiscopy of Form 1116. You must identify the type of income reportedon the worksheets. For example, you would enter “Interest anddividends” if you chose category a for this form and the type ofpassive income you reported was comprise solely of interest anddividends. Abbreviate your entry if necessary to fit the 25-characterentry width provided.

1b through 5. These lines are visible only on the worksheets you accessat line 1a, above. See the details for the Foreign Source Worksheeton the next page.

6 Add lines 2, 3g, 4a, 4b, and 5. (auto-calc, supported by the ForeignSource Worksheet, Figures 2-18a and 2-18b) Computed as the sumof line 6 for all worksheets that support line 1 combined.

7 Subtract line 6 from line 1. (auto-calc) Computed as indicated, this isyour foreign-source taxable income for the category chosen for thiscopy of Form 1116 (before adjustment).

PART II, FOREIGN TAXES PAID OR ACCRUED. In this section you report thetaxes you paid or accrued for each separate country listed in Part I. Lines (m)and (n) of this section are entered below, but lines (o) through (x) are enteredon screen 2 of the worksheets that support line 1, using one worksheet foreach separate country or U.S. possession.


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Credit is claimed for taxes:(m) Paid. You would normally answer Yes here if you report incomeon a cash basis. However, you can elect to use the accrual methodfor foreign taxes by answering No here; but once you make thiselection you must make it in all future years as well.

(n) Accrued. (auto-calc) Automatically the opposite of your precedinganswer.

(o) through (x). These lines are visible only on screen 2 of the work-sheets you access at line 1, above. See the details for the ForeignSource Worksheet on the next page.

8 Add lines A through C, column (x). (auto-calc, supported by the For-eign Source Worksheet, Figures 2-18a and 2-18b) Computed as thesum of line (x) for all worksheets that support line 1 combined, thisis your total foreign taxes paid or accrued for the category chosenfor this copy of Form 1116. If no amount appears here, check yourentries in Part II of the worksheets for line 1 because no tax creditwill result on this copy of Form 1116 unless an amount appearshere.

Foreign Source Worksheet, Figures 2-18a and 2-18b. You must use a separateworksheet for each separate country or U.S. possession from which you re-ceived income in the category you identified for this copy of Form 1116.Note that each worksheet consists of two screens: screen 1 for Part I lines 1through 4b, screen 2 for Part I lines 5 and 6 and Part II lines (o) through (x).

Screen 1 of 2:PART I, TAXABLE INCOME OR LOSS FROM SOURCES OUTSIDE THE U.S.

I Name country of U.S. possession. Enter the country or possession in10 characters or less, abbreviating your entry to fit (because of theseverely limited space the IRS provides on the form). U.S. posses-sions that qualify for this credit are Puerto Rico, Guam, Common-wealth of the Mariana Islands, and American Samoa. Taxes paid toany subdivision of the country or U.S. possession also qualify, butyou should combine all such amounts (for the selected income cate-gory) with any amounts paid directly to the country or U.S. posses-sion, and enter only the name of the country or U.S. possessionhere.

Category g with Form 4972 election? (auto-calc) If this copy of Form1116 is for a lump-sum distribution (category g) and you indicatedon screen 3 that you elected to use Form 4972 for the distribution,the answer here will be Yes. For a Yes answer lines 1 through 6 ofthis worksheet will be zero, in accordance with IRS instructions,and you should proceed to Part II on the second screen of theworksheet. Otherwise you must complete the rest of Part I.

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Qualified divi-dends andcapital gains.Qualified divi-dends andcapital gainsare generallyreported at areducedamount be-cause of theirfavorable taxtreatment, un-less you qual-ify for the ex-ception de-scribed earlierin the para-graph Foreignqualified divi-dends and capital gains. The amount of reduction can be complex ifyou have a complex Schedule D. But for most situations the incometo report is 42.86% of the full amount. The amount you enter herewill be multiplied by 0.4286 before being included in line 1, below,unless you qualify for the exception as indicated by a Yes answerfor “Qualify for adjustment exception” on screen 2 of Form 1116.If you are required to file Schedule D, you may have to enter amodified amount here such that your entry times 0.4286 producesthe proper adjusted amount for line 1. See pages 7 through 12 ofthe IRS Instructions for Form 1116 for details. CAUTION: Enter onlycapital gains here; capital losses are reported separately at line 5.

Other gross income from the country or U.S. possession and cate-gory. Enter all other income here that applies to the identified cate-gory and country. Do not reduce your entry here by any losses ordeductions that are reported in lines 2 through 5.

Form 2555 or 2555-EZ exclusion for the country or U.S. possessionand category. Enter any exclusion on Forms 2555 and 2555-EZthat relates to the specified country and category. This amount willreduce the gross income for the purposes of line 1.

1a Gross income from sources within country. (auto-calc) Computed asthe “Other gross income” less “Form 2555 or 2555-EZ exclusion”plus either (a) the full amount of “Qualified dividends and capitalgains” if you qualify for the “adjustment exception” (described pre-viously and shown at the top of screen 4 of Form 1116), or (b)0.4286 times “Qualified dividends and capital gains” if you do not.

1b Used alternative basis to determine source of compensation? An-swer Yes if line 1a is compensation for personal services as an em-

FOREIGN SOURCE(screen1of2)FOREIGN SOURCE(screen1of2)FOREIGN SOURCE(screen1of2)FOREIGN SOURCE(screen1of2)I-TAXABLE INCOME OR LOSSI-TAXABLE INCOME OR LOSSI-TAXABLE INCOME OR LOSSI-TAXABLE INCOME OR LOSS I Name country or U.S. poss. I Name country or U.S. poss. I Name country or U.S. poss. I Name country or U.S. poss. Category g with 4972 election? Category g with 4972 election? Category g with 4972 election? Category g with 4972 election?▒ No▒ No▒ No▒ No If Yes, skip lines 1 through 6 If Yes, skip lines 1 through 6 If Yes, skip lines 1 through 6 If Yes, skip lines 1 through 6 Qlfd divs & capital gains. 0 Qlfd divs & capital gains. 0 Qlfd divs & capital gains. 0 Qlfd divs & capital gains. 0 Othr gross for country/cat 0 Othr gross for country/cat 0 Othr gross for country/cat 0 Othr gross for country/cat 0 2555 excls for country/cat 0 2555 excls for country/cat 0 2555 excls for country/cat 0 2555 excls for country/cat 0 1a Gross income from country.. 1a Gross income from country.. 1a Gross income from country.. 1a Gross income from country..▒ 0▒ 0▒ 0▒ 0 b Used alt basis to determine? No b Used alt basis to determine? No b Used alt basis to determine? No b Used alt basis to determine? No Answer No if not pers svc emp Answer No if not pers svc emp Answer No if not pers svc emp Answer No if not pers svc emp or all source comp undr $250K or all source comp undr $250K or all source comp undr $250K or all source comp undr $250K 2 Expense DEFINITELY RELATED. 0 2 Expense DEFINITELY RELATED. 0 2 Expense DEFINITELY RELATED. 0 2 Expense DEFINITELY RELATED. 0 3 Pro rate other deductions: 3 Pro rate other deductions: 3 Pro rate other deductions: 3 Pro rate other deductions: ▒▒▒▒ a Crtn itemized or std ded... a Crtn itemized or std ded... a Crtn itemized or std ded... a Crtn itemized or std ded...▒ 0▒ 0▒ 0▒ 0 b Other deductions........... b Other deductions........... b Other deductions........... b Other deductions...........▒ 0▒ 0▒ 0▒ 0 c Add lines 3a and 3b........ c Add lines 3a and 3b........ c Add lines 3a and 3b........ c Add lines 3a and 3b........▒ 0▒ 0▒ 0▒ 0 d Gross foreign source inc... d Gross foreign source inc... d Gross foreign source inc... d Gross foreign source inc...▒ 0▒ 0▒ 0▒ 0 e Gross income all sources... e Gross income all sources... e Gross income all sources... e Gross income all sources...▒ 0▒ 0▒ 0▒ 0 f Divide 3d by 3e............ f Divide 3d by 3e............ f Divide 3d by 3e............ f Divide 3d by 3e............ g Multiply 3c by 3f.......... g Multiply 3c by 3f.......... g Multiply 3c by 3f.......... g Multiply 3c by 3f..........▒ 0▒ 0▒ 0▒ 0

Figure 2-18a. Foreign Source Worksheet, Screen 1


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ployee, your total compensation from all sources is $250,000 ormore, and you used an alternative basis to determine its sources. Ifyou answer Yes, you must provide detailed information in a sup-porting statement for the line at the top of screen 5.

2 Expenses DEFINITELY RELATED to the income on line 1. Enter herethe expenses that can be identified as pertaining only to the incomeon line 1. All other expenses are reported on lines 3 through 5 as aprorated share of expenses in accordance with IRS instructions. Ifyou include here any amounts deducted on Schedule A that aresubject to the high-income limitation (all amounts on Schedule Aexcept lines 4, 13, 19, and the gambling and Form 4684 parts ofline 27), you must reduce your entry by the “Reduction % onSchedule A” shown on screen 2 of our Form 1116. If any of theseamounts were reported on Schedule line 4, 5, 6, or 18, you mustalso exclude them from the applicable amounts on screen 2 of ourForm 1116. CAUTION: You must explain your entry for line 2 ofany worksheet in a separate supporting statement accessible fromscreen 5 of our Form 1116. Failure to do so will cause an e-filed re-turn to be rejected by the IRS.

3 Pro rata share of other deductions NOT DEFINITELY RELATED:a Certain itemized deductions or standard deduction. (auto-calc)Taken from the result for line 3a on screen 2 of our Form 1116, thisis either a portion of itemized deductions or the entire standard de-duction depending on whether or not the standard deduction is usedfor Form 1040, line 39.

b Other deductions. (auto-calc) Taken from the result for line 3b onscreen 2 of our Form 1116, this is other deductions to be proratedamong countries (including the U.S.) and categories.

c Add lines 3a and 3b. (auto-calc) Computed as indicated.d Gross foreign source income. (auto-calc) Computed as sum of“Qualified dividends and capital gains” and “Other gross incomefrom the country or U.S. possession and category” entered aboveline 1, this is the gross income used for the purposes of proratingthe expenses (for the country and category indicated). It is a line 1without any 0.4286 adjustment for capital gains and with exclu-sions from Forms 2555 and 2555-EZ added back to income.

e Gross income from all sources. (auto-calc) Taken from the resultfor line 3e on screen 3 of our Form 1116, this is the gross incomefor the entire return, including all foreign and U.S. sources, for thepurposes of prorating expenses.

f Divide line 3d by line 3e. (auto-calc) Computed as indicated andshown as a decimal to 4 places, this is the fraction of deductions online 3c to be deducted from income on line 1.

g Multiply line 3c by line 3f. (auto-calc) Computed as indicated, thisis the part of deductions on line 3c to be applied to the income forthis worksheet (that is, this country and category).

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Screen 2 of 2:4 Pro rata share of interest expense:

a Home mortgage interest. (auto-calc) This is a prorated share of theamount for line 4a on screen 3 of our Form 1116. The prorating forline 4a differs from that for line 3 in that the exclusions from Forms2555 and 2555-EZ are not added back to income when computinggross income. As a result, the prorating fraction is computed as theamount on line 3d reduced by the exclusions on Forms 2555 and2555-EZ, divided by the amount for “Gross income with exclusionsfor line 4a worksheet” on screen 3 of our Form 1116. This line iscomputed as this revised prorating fraction times the amount for line4a on screen 3 of our Form 1116, in accordance with the IRSWorksheet for Home Mortgage Interest – Line 4a (in the IRS Instruc-tions for Form 1116).

b Other interest expense. Enter the prorated share of other interesthere, including investment interest. TIP: If your gross foreign sourceincome (including income excluded on Forms 2555 and 2555-EZ)does not exceed $5,000, you are allowed to allocate all of this in-terest to the U.S. instead of any foreign country. To make this elec-tion, enter zero here.

Capital losses.Like capitalgains for line1, capitallosses aregenerally re-ported at a re-duced amount,unless youqualify for theexception de-scribed earlierin the para-graph Foreignqualified divi-dends andcapital gains.The amount ofreduction canbe complex ifyou have a complex Schedule D. But for most situations the incometo report is 42.86% of the full amount. The amount you enter herewill be multiplied by 0.4286 before being included in line 5, below,unless you qualify for the exception as indicated by a Yes answerfor “Qualify for adjustment exception” on screen 2 of Form 1116.If you are required to file Schedule D, you may have to enter a

FOREIGN SOURCE(screen2of2)FOREIGN SOURCE(screen2of2)FOREIGN SOURCE(screen2of2)FOREIGN SOURCE(screen2of2)4 Pro rata interest expense:4 Pro rata interest expense:4 Pro rata interest expense:4 Pro rata interest expense: a Home mortgage interest..... a Home mortgage interest..... a Home mortgage interest..... a Home mortgage interest.....▒ 0▒ 0▒ 0▒ 0 b Other interest expense..... 0 b Other interest expense..... 0 b Other interest expense..... 0 b Other interest expense..... 0 Capital losses............ 0 Capital losses............ 0 Capital losses............ 0 Capital losses............ 0 Other loss for country/cat 0 Other loss for country/cat 0 Other loss for country/cat 0 Other loss for country/cat 0 5 Loss from foreign sources.. 0 5 Loss from foreign sources.. 0 5 Loss from foreign sources.. 0 5 Loss from foreign sources.. 0 6 Add lines 2, 3g, 4a, 4b,& 5 6 Add lines 2, 3g, 4a, 4b,& 5 6 Add lines 2, 3g, 4a, 4b,& 5 6 Add lines 2, 3g, 4a, 4b,& 5▒ 0▒ 0▒ 0▒ 0II-TAXES PAID OR ACCRUEDII-TAXES PAID OR ACCRUEDII-TAXES PAID OR ACCRUEDII-TAXES PAID OR ACCRUED o Date paid or accrued...... o Date paid or accrued...... o Date paid or accrued...... o Date paid or accrued...... In foreign currency: In foreign currency: In foreign currency: In foreign currency: p Dividends................. 0 p Dividends................. 0 p Dividends................. 0 p Dividends................. 0 q Rents and royalties....... 0 q Rents and royalties....... 0 q Rents and royalties....... 0 q Rents and royalties....... 0 r Interest.................. 0 r Interest.................. 0 r Interest.................. 0 r Interest.................. 0 s Other foreign taxes....... 0 s Other foreign taxes....... 0 s Other foreign taxes....... 0 s Other foreign taxes....... 0 In U.S. dollars: In U.S. dollars: In U.S. dollars: In U.S. dollars: t Dividends................. 0 t Dividends................. 0 t Dividends................. 0 t Dividends................. 0 u Rents and royalties....... 0 u Rents and royalties....... 0 u Rents and royalties....... 0 u Rents and royalties....... 0 v Interest.................. 0 v Interest.................. 0 v Interest.................. 0 v Interest.................. 0 w Other foreign taxes....... 0 w Other foreign taxes....... 0 w Other foreign taxes....... 0 w Other foreign taxes....... 0 x Total foreign taxes....... x Total foreign taxes....... x Total foreign taxes....... x Total foreign taxes.......▒ 0▒ 0▒ 0▒ 0

Figure 2-18b. Foreign Source Worksheet, Screen 2


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modified amount here such that your entry times 0.4286 producesthe proper adjusted amount for line 5. See pages 7 through 12 ofthe IRS Instructions for Form 1116 for details

Other losses for the country or U.S. possession and category. Enterall other losses not reflected in lines 1 through 4b that apply to theidentified category and country.

5 Losses from foreign sources. (auto-calc) Computed as the “Otherlosses” plus either (a) the full amount of “Capital losses” if youqualify for the “adjustment exception” (described previously andshown at the top of screen 4 of Form 1116), or (b) 0.4286 times“Capital losses” if you do not. In spite of the vague IRS label for theline, this is the total of losses only for the specified country andcategory.

6 Add lines 2, 3g, 4a, 4b, and 5. (auto-calc) Computed as indicated, thisamount is subtracted from line 1 to arrive at the taxable income orloss for the specified country and category.

PART II, FOREIGN TAXES PAID OR ACCRUED. You should have already iden-tified on Form 1116 whether you account for taxes as paid or accrued, whichappears as lines (m) and (n) of Form 1116. All other entries for Form 1116,Part II, are provided here.

(o) Date paid or accrued. Generally enter the date in the standardmo/dy/year format. However, if the amount is reported to you on aForm 1099-INT or 1099-DIV in U.S. dollars, enter only “1099 tax”here and skip lines (p) through (s).

In foreign currency. If the tax is reported to you in foreign currency,you must enter the amount in line (p), (q), (r), or (s). You must thenconvert the amount to U.S. dollars and enter it in line (t), (u), (v), or(w). CAUTION: If you make any entry in this section you must explainyour conversion to U.S. dollars in a separate supporting statement ac-cessible from screen 5 of our Form 1116. Failure to do so will causean e-filed return to be rejected by the IRS.

(p) Dividends.(q) Rents and royalties.(r) Interest.(s) Other foreign taxes.

In U.S. dollars. This section is mandatory for all Forms 1116. You mustenter the foreign tax paid here in U.S. dollars. Only the amounts youreport here are used in figuring the credit for foreign taxes.

(t) Dividends.(u) Rents and royalties.(v) Interest.(w) Other foreign taxes.(x) Total foreign taxes. (auto-calc) Computed as the sum of lines (t)through (w), this is the amount of tax upon which your forign taxcredit is figured for this copy of Form 1116.

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Required statement for line 1b. If you answered Yes to line 1b on any of theworksheets for line 1a, you must provide detailed information to justify youranswer:

Is line 1b Yes for any worksheet? (auto-calc) Answered Yes if anyworksheet has a Yes answer for line 1b.

If Yes, itemize here for line 1b. See IRS instructions for line 1b (in Form1116, Part I) for details on what information you must supply in asupporting statement for this line.

Itemize statements for worksheet entries. Certain amounts you have enteredon our worksheets must be justified in the supporting statements you createhere. The statements are explanatory only, so no amounts are posted to anyother part of Form 1116. (Note that the IRS will not allow the e-file of a re-turn that reports amounts from more than 3 countries on any one Form1116. Moreover, they will not allow more than one Form 1116 for the samecategory. Therefore, if you have more than 3 countries for any one categoryyou will not be allowed to e-file the return. No such restrictions exist for pa-per returns.)

Allocable expenses for 2. You must explain how you determined ex-penses definitely related to the country and category for each work-sheet you prepare. For the on-screen labels, A, B, and C refer tocolumns in Part I of the printed Form 1116, so you should use theline for 2(A) for amounts entered on the first worksheet, the line for2(B) for amounts entered on the second worksheet, and the line for2(C) for amounts entered on the third and all subsequent work-sheet. CAUTION: Failure to explain here an entry on line 2 of anyworksheet will cause an e-filed return to be rejected by the IRS.

Currency conversion for lines (p) through (s). For any worksheet onwhich you made an entry in line (p), (q), (r), or (s), you must explainhow you converted the foreign currencies in lines (p) through (s) tothe U.S. currency in lines (t) through (w). For the on-screen labels,A, B, and C refer to rows in Part II of the printed Form 1116, soyou should use the line for (A) for amounts entered on the firstworksheet, the line for (B) for amounts entered on the secondworksheet, and the line for (C) for amounts entered on the third andall subsequent worksheet. CAUTION: Failure to explain a currencyconversion here when you have an entry on line (p), (q), (r), or (s)of any worksheet will cause an e-filed return to be rejected by theIRS.

If credit claim is due to filing an amended return or a foreign audit,itemize here and identify the additional taxes claimed. This state-ment is used to support any additional taxes you claim in lines (t)through (w) as a result of an amended return or a foreign audit. Youmust clearly identify the taxes to which these reasons apply.

PART III, FIGURING THE CREDIT. In this section you figure the credit for thiscopy of Form 1116.


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9 Amount from line 8. (auto-calc) Normally computed as indicated, theamount will be zero if for a Form 1116 for category g with a Form4972 election.

10 Carryback or carryforward (itemize). If you had a foreign tax thatyou could not claim because it was more than its limitation, you cancarryback the unused tax 2 years then carry if forward 10 years.You must make your entry for this line in a supporting statement forthis line showing your computation in detail. Failure to provide sup-port for an entry for this line will cause an e-filed return to be re-jected by the IRS. If for a Form 1116 for category g with a Form4972 election, an entry here will be ignored in the calculations andprintouts.

11 Add lines 9 and 10. (auto-calc) Computed as indicated.12 Reduction in foreign taxes (itemize). You may have to reduce the tax

shown for line 11 for a number of special situations, including taxon excluded or exempt income. See the IRS Instructions for Form1116 for specific examples. You must make your entry for this linein a supporting statement for this line explaining the reduction. Fail-ure to provide support for an entry for this line will cause an e-filedreturn to be rejected by the IRS. If for a Form 1116 for category gwith a Form 4972 election, an entry here will be ignored in the cal-culations and printouts.

13 Subtract line 12 from line 11. (auto-calc) Computed as indicated.14 Amount from line 7. (auto-calc) Normally computed as indicated, the

amount will be zero if for a Form 1116 for category g with a Form4972 election.

15 Adjustments to line 14 (itemize). You may have to adjust the taxshown on line 14 for a number of special situations, including allo-cation of losses and recapture of foreign losses. See the IRS In-structions for Form 1116 for specific examples. You must makeyour entry for this line in a supporting statement for this line ex-plaining the reduction. Failure to provide support for an entry forthis line will cause an e-filed return to be rejected by the IRS. If fora Form 1116 for category g with a Form 4972 election, an entryhere will be ignored in the calculations and printouts.

16 Combine lines 14 and 15. (auto-calc) Normally computed as indi-cated. For a Form 1116 for category g with a Form 4972 election,the amount you entered as the foreign source part of Form 4972lines 6 and 12 appears here.

17 Amount from Form 1040, line 41 (minus any amount on Form 8914,line 6). This IRS label for this line is misleading because the indicatedamount is only one component of the amount for line 17 if there is anyqualified dividend or capital gain income, and sometimes is not used atall. Instead, line 17 is normally computed using the IRS Worksheet forLine 17 (Worldwide Qualified Dividends and Capital Gains) found in theIRS 2006 Instructions for Form 1116:

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Form 1040, line 41. (auto-calc) Taken from Form 1040 as indicated.Special exemption from Form 8914, line 6. (auto-calc) Taken fromForm 8914, as indicated, this is the exemption for providing rent-free housing to victims of Hurricane Katrina. Total income for com-parison with foreign income is reduced by this amount, resulting ina potentially higher credit than might otherwise result.

Worldwide 28% gains. (auto-calc) Taken from line 32 of the ScheduleD Tax Worksheet.



Qualify for “adjustment exception.” (auto-calc) Taken from the previ-ous determination (shown at the top of screen 4 of our Form 1116).

Adjustment for line 17. (auto-calc) Computed as zero if the precedinganswer is No or this copy of Form 1116 is for category g with aForm 4972 election. Otherwise computed as the negative of 20%of the “Worldwide 28% gains” plus 28.57% of the “Worldwide25% gains” plus 57.14% of the “Worldwide 15% gains.”

17 Amount from Form 1040, line 41 (less Form 8914, line 6). (auto-calc)Normally computed as Form 1040, line 41, less Form 8914, line 6,plus the “Adjustment for line 17.” If for a Form 1116 for category gwith a Form 4972 election, taken as the total of lines 6 and 12 ofall Forms 4972 for the return.

18 Divide line 16 by line 17. (auto-calc) Computed as indicated (but nomore than 1) and shown as a decimal to 4 places.

19 Amount from Form 1040, line 44. (auto-calc) This IRS label for thisline is also misleading. Normally computed as Form 1040, line 44,less Form 1040, line 44b (tax on lump-sum distributions from Form4972). However, for a Form 1116 for category g with a Form 4972election, the tax from Form 4972 is added back to the computationso that the result is Form 1040, line 44 alone. And for a Form1116 for category h, the amount computed here is zero because notax credit is allowed for this category even though you must file theassociated Form 1116.

20 Multiply line 19 by line 18. (auto-calc) Computed as indicated.21 Smaller of line 13 or line 20. (auto-calc) Normally computed as indi-

cated. However, for a Form 1116 for category g with a Form 4972election, computed as the lesser of line 8 or line 20. This is thecredit for the category specified for this copy of Form 1116 alone.

PART IV, SUMMARY OF CREDITS FROM SEPARATE PARTS III. (Used ONLYfor copy 1 of Form 1116. For all other copies, all amounts in Part III will bezero.) In this section you combine the credit from all copies of Form 1116you have prepared and figure the amount to report on line 47 of Form 1040.CAUTION: This part of the form may be inaccurate until the final recalculation


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of the return. To see an accurate result NOW, press the Recalc Key (ctrl-B orshift-F8). (Note that if this is the only copy of Form 1116 created for the re-turn, lines 22 through 30 will be zero and line 21 will be used for line 31.)

22 Credit for taxes on passive income. (auto-calc) Taken as line 21 ofall Forms 1116 with category a specified.

23 Credit for taxes on high withholding tax interest. (auto-calc) Takenas line 21 of all Forms 1116 with category b specified.

24 Credit for taxes on financial services income. (auto-calc) Taken asline 21 of all Forms 1116 with category c specified.

25 Credit for taxes on shipping income. (auto-calc) Taken as line 21 ofall Forms 1116 with category d specified.

26 Credit for taxes on dividends from a DISC or former DISC and cer-tain distributions from a FSC or former FSC. (auto-calc) Taken asline 21 of all Forms 1116 with category e or f specified.

27 Credit for taxes on lump-sum distributions. (auto-calc) Taken as line21 of all Forms 1116 with category g specified.

28 Credit for taxes on certain income re-sourced by treaty. (auto-calc)Taken as line 21 of all Forms 1116 with category i specified.

29 Credit for taxes on general limitation income. (auto-calc) Taken asline 21 of all Forms 1116 with category j specified.

30 Add lines 22 through 29. (auto-calc) Computed as indicated.31 Smaller of line 19 or line 20. (auto-calc) Normally computed as indi-

cated. However, if this is the only copy of Form 1116 for the re-turn, taken as line 21.

32 Reduction of credit for international boycott operations. You mayhave to reduce your credit if you cooperated with an internationalboycott. See the IRS instructions and IRS Form 5713 for theamount to enter here. CAUTION: Any required reduction must beentered on copy 1 of Form 1116. An entry on any other copy ofForm 1116 is ignored in the calculations and printouts in accor-dance with IRS instructions.

33 FOREIGN TAX CREDIT. (auto-calc) Computed as line 31 less line 32,but no less than zero, this is the credit for Form 1040 from allForms 1116 combined.

The result on line 33 of Form 1116, copy 1, is posted to line 47 of Form1040.Extra line for personal memos. The supporting statement you create for thisline will not be printed as a part of the official return. This line is providedonly to allow you to make private notes or reminders.

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*Form 1310 / Refund Due a Deceased TaxpayerPurpose. Form 1310 is used to claim a refund on behalf of a deceased tax-payer, and is usually filed with the final return for the deceased taxpayer.However, you do not have to file Form 1310 with the return if

You are surviving spouse of decedent and are filing jointly with the de-cedent, or

You are personal representative of decedent’s estate and are attachinga court certificate showing your appointment as the executor oradministrator of the estate (or have it on file with the IRS).

Anyone else who files the return and claims the refund must file Form 1310.

Refund returns only. Form 1310 is relevant only for returns that show a re-fund on Form 1040 line 74a. It is accessible through the Road Map from theline below line 74a, and two copies are available – one for each spouse.

* Included in Premium Level software ONLY. This form is only built into thePremium Level version of Tax Preparer, fully integrated and automated likeother forms in the software. It is detailed in the separate Premium Level Sup-plement 2007.


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Form 2106 & 2106-EZ / Employee Business ExpensesWho is it for? This form is used to report expenses incurred as an employeeand reimbursements received for such expenses from your employer, and isFOR EMPLOYEES ONLY. While the worksheets and depreciation calculationsmay appear relevant to a business, and therefore applicable to Schedule C,they are designed by the IRS for employee expenses and reimbursementsalone and should NOT be used to support Schedule C. Form 2106 is accessi-ble through the Road Map at line 20 of Schedule A.

Use separate copies for separate employers. Five copies of Form 2106 arebuilt into the software for reporting expenses as an employee for each of fivedifferent employers, and each copy can be used by either spouse, but youmust identify the spouse for whom each form is completed. (The softwaresupports an unlimited number of cars on one Form 2106 through its sup-porting worksheets. Note that you can use different expense methods for dif-ferent cars as long as you do not use more than one car at the same time inthe business.)

Form 2106-EZ used in lieu of Form 2106 when eligible. Form 2106-EZ wasdesigned by the IRS to simplify the manual preparation of Form 2106. Youare qualified to use this short form only if you do NOT get reimbursed by youremployer for any expenses, you neither use nor are required to use the ActualExpenses Method for car expenses, and you have not claimed car deprecia-tion in the past. The software determines your eligibility for this short formand prints it in place of the long form when you qualify, as detailed at the endof these instructions.

GENERAL INFORMATION. You must identify for whom this form is com-pleted:

Copy number (1 through 5). (auto-calc) Automatically the copy youchose when you accessed the form.

Is spouse the employee (vs. you)? Your answer determines which nameand SSN to print on the schedule.

Occupation. Enter the occupation in which expenses were incurred, in25 characters or less.

PART I, EMPLOYEE BUSINESS EXPENSES AND REIMBURSEMENTS. This isthe main part of the form. Part II supports it with details on vehicle expenses.Part I follows a two-column form: column A for all expenses other than mealsand entertainment (which we label "A-Not M&E"), and column B for mealsand entertainment expenses (which we label "B-M&E Only").

STEP 1, Enter Your Expenses. Lines 1 through 4 relate only to column A (NotM&E) expenses; line 5 relates only to column B (M&E Only) expenses. For alllines you must enter only amounts attributable to business use:

Rural mail carrier allowance. Qualifying rural mail carriers can treat theentire qualified reimbursement for vehicle expense as their allowedexpense. Those who qualify should enter their equipment mainte-

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nance allowance here. No amounts from Part II of Form 2106 willbe used in this case. Your entry will be used for the vehicle expensein line 1 and will also be included in the total reimbursements at line7. Since these amounts cancel each other on the form, you shouldnot file Form 2106 unless there are other expenses to deduct.

1 Vehicle expenses from line 22 or line 29. (auto-calc) If you entered anamount on the preceding line, that amount appears here. Otherwisethis line is computed as the greater of line 22 or line 29 in Part II.

2 Parking fees, tolls, and local transportation. (Not M&E) You can in-clude here airplane expenses that didn't involve overnight travel, butnot commuting to and from work.

3 Travel expense while away from home, including lodging, airplane,car rental, etc. (Not M&E) Include expenses for temporary businessassignments for periods of one year or less, excluding meals and en-tertainment. For days that you do not claim meal expenses you canuse an optional method for computing incidental expenses at therate of $3 a day for 2006.

4 All other EXCEPT Meals & Entertainment: Other itemized. (Not M&E) Enter in a supporting statement for this

line all other business expenses not included in lines 1 through 3,except meals and entertainment, depreciation, and amortization. In-clude expenses for education (tuition and books), home office, tradepublications, business gifts, etc. See IRS Pub. 463 (Travel, Enter-tainment, Gift, and Car Expenses) and Pub. 529 (Miscellaneous De-ductions) for limitations, and Pub. 587 (Business Use of Your Home)for special instructions for home office expenses.

Non-vehicle depreciation (Form 4562). (Road Map line, supported byForm 4562.) The result on line 21 of the copy of Form 4562 at-tached to this copy of Form 2106 is posted to this line. Do NOTclaim car depreciation on this copy of Form 4562; car depreciationis claimed in Part II of Form 2106, and included in line 1, above.

Amortization (Form 4562). (Road Map line, supported by Form 4562.)The result on line 42 of the copy of Form 4562 that is attached tothis copy of Form 2106 is posted to this line.

4 Business expenses not in lines 1 through 3. (auto-calc) Computed asthe sum of the above three expense lines.

5 Meals and entertainment expenses. (M&E Only) Enter actual full ex-penses for allowable activities, including meals while away fromhome overnight and other business meals and entertainment. (Theywill be reduced by 50% later, or 25% for the DOT exception.) In-stead of using actual costs, you can figure away from home mealsat rates periodically set by the IRS for specific localities. The ratesrange from $39 a day in smaller localities to $69 a day for high-costcities like Los Angeles, San Francisco, Boston, and New York City.See IRS Pub. 463 for details. For the latest allowances, see

www.policyworks.gov/perdiem


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for domestic travel andwww.state.gov/m/a/als/prdm

for international travel.6 TOTAL EXPENSES. (auto-calc) Lines 1 through 4 are summed into 6A

(Not M&E), and line 5 is used for 6B (M&E Only).

STEP 2, Amounts Employer Gave You for Expenses in STEP 1. If your em-ployer reimbursed you for any of the above expenses, you must report sohere if not included in wages reported to you in box 1 of Form W-2:

for expenses in line 1 to 4:Rural mail carrier allowance. (auto-calc) Taken from your entryabove line 1, this is the amount reimbursed by the U.S. PostalService.

Part in W-2 box 13, code L. Include only amounts separately identifiedon Form W-2 and reported under code "L" in box 13 of W-2, andNOT amounts already reported as income in box 1 of W-2. Youmust enter here only the part related to expenses on lines 1 through4, and NOT for meals and entertainment. (NOTE: If an employer-provided vehicle is not reported at full annual lease value, see in-structions for line 25 of the Vehicle Expense Worksheet, detailedlater.)

Other employer-paid amounts for line 7A. Include other amounts notreported as income on Form 1040 that relate to expenses on lines 1through 4, and NOT for meals and entertainment.

7 Reimbursements Not in Form W-2 box 1. A-Not M&E. (auto-calc) Com-puted as the sum of the preceding three amounts.

Expenses in lines 1 through 4. (auto-calc) Computed as the sum oflines 1 through 4.

EXCESS IN 7A for Form 1040, line 7. (auto-calc lines) If line 7A ex-ceeds the total for lines 1 through 4, you have been overpaid andmust report the excess as income. This excess is automaticallyposted to line 7 of Form 1040 and identified as wages for the ap-propriate spouse.

for expenses in line 5:Part in W-2 box 13, code L. Include only amounts separately identifiedon Form W-2 and reported under code "L" in box 13 of W-2, andNOT amounts already reported as income in box 1 of W-2. Youmust enter here only the part related to expenses on line 5, ONLYfor meals and entertainment.

Other employer-paid amounts for line 7B. Include other amounts notreported as income on Form 1040 that relate to expenses on line 5for meals and entertainment.

7 Reimbursements Not in Form W-2 box 1. B-M&E only. (auto-calc)Computed as the sum of the preceding two amounts.

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STEP 3, Expenses to Deduct on Schedule A. The IRS title for this section ismisleading because deductions are not always reported on Schedule A, andincome can result in this section as well:

8 Subtract line 7 from line 6. A-Not M&E. (auto-calc) Computed as indi-cated separately for column A.

Subject to DOT hours of service limits? The allowance for meal ex-penses is now 75% of the actual expense instead of 50% for em-ployees subject to Department of Transportation (DOT) hours ofservice limits. This includes certain air transportation employees(pilots, crew, etc.), interstate bus and truck drivers, certain railroademployees (engineers, conductors, crew, etc.), and certain mer-chant marines.

8 Subtract line 7 from line 6. B-M&E Only. (auto-calc) Computed as indi-cated for column B.

9A Amount from line 8. A-Not M&E. (auto-calc) Computed as indicated.9B Amount on line 8 multiplied by 50%. B-M&E Only. (auto-calc line,

M&E Only) Computed as indicated for most employees, but using75% in place of 50% if you answered Yes to the DOT question atline 8.

10 Add amounts on line 9. (auto-calc) Computed as 9A plus 9B.

SPECIAL AMOUNTS IN LINE 10. Most taxpayers must claim the amount online 10 on line 20 of Schedule A, where it is subjected to a limitation basedon 2% of AGI. However, certain targeted groups are given more favorabletreatment. Disabled taxpayers are allowed to deduct the expenses fully onSchedule A, without the 2% AGI floor. Reservists, fee-basis government offi-cials, and qualified performing artists are not required to use Schedule A atall, and can deduct the expenses at Form 1040, line 24, as an adjustment toincome.

Armed Forces Reservists:Qualified expenses for travel more than 100 miles from home. If you

are a member of the Army Reserve, Naval Reserve, Marine CorpsReserve, Air Force Reserve, or Coast Guard Reserve, enter the partof line 10 that is attributable to the cited travel.

Fee-basis Government Officials:Expenses for services as an F.B.O. If you were a fee-basis state or local

government official who is compensated at least in part on a fee ba-sis, enter the part of line 10 that is attributable to that job.

Qualified Performing Artists):Performing-arts related expenses. Enter the part of line 10 that is at-

tributable to performing-arts-related expenses. The following entriesare used to determine whether or not you are qualified to report thisamount on Form 1040, line 24, instead of Schedule A.

Performing Artist gross income. Enter gross income from your activitiesas a performing artist.

Expenses over 10% of Performing Artist income? (auto-calc) Automati-cally Yes if “Performing-arts related expenses” exceeds 10% of


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"Performing Artist gross income." If the result is No, you do notqualify for the favored treatment.

Number of Performing Artist employers who paid you at least $200each. Unless you have at least two employers who paid you $200or more as a performing artist during the tax year, you do not qual-ify for the favored treatment.

AGI (before deduction) $16,000 or less? (auto-calc) Answered Yes onlyif the AGI on Form 1040, line 38, less any amount on Form 1040,line 24, used in figuring that AGI, is $16,000 or less. If the result isNO, you do not qualify for the favored treatment.

Disabled Individuals:Impairment-related work expense. If you have physical or mental dis-

ability that requires attendant care at your place of work, enter theimpairment-related work expenses included in line 10, including at-tendant care and certain other expenses that allow you to work.

POSTING TO FORM 1040 AND SCHEDULE A. Based on your entries in thepreceding section, the deduction on line 10 is posted to Form 1040 andSchedule A as follows:

Adjustment for Form 1040, line 24. (auto-calc) Computed as the qualifiedamounts entered above for reservists, fee-basis government offi-cials, and performing artists, but no more than the amount on line10. These targeted groups are allowed this adjustment in lieu of anitemized deduction on Schedule A.

Deduction for Schedule A, line 27. (auto-calc) Computed as the amountyou entered for disabled individuals, but no more than line 10 lessthe amount on the preceding line. This amount is claimed as anitemized deduction on Schedule A without any limitation involvingAGI.

Remainder for Schedule A, line 20. (auto-calc) Computed as line 10 lessthe preceding two amounts, this is the amount to be claimed as anitemized deduction on Schedule A, where only the excess of it (plusthe other amounts in the same section of Schedule A) over 2% ofAGI is deductible.

Extra line for personal memos. The supporting statement you create for thisline will not be printed as a part of the official return, but is provided for pri-vate notes or reminders for this or any other section of Form 2106.

PART II, VEHICLE EXPENSES. This part is used to determine the expensesclaimed for line 1 of Part I. Both the Standard Mileage Rate Method and theActual Expenses Method are supported and fully automated. The softwareensures that the most favorable method is used when allowable as long asyou supply all information in the Vehicle Expense Worksheets that supportthis part of the form, using a separate worksheet page for each separate ve-hicle, but if you qualify for Form 2106-EZ, you will have to make an entry forline 7 of Form 2106-EZ yourself if you claim car expenses.

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Section A-General Information. Lines 11 through 17 and 23 through 38 aresupported by the Vehicle Expense Worksheets, one for each vehicle. Lines 18through 21, however, apply to all vehicles as a whole, and are answered di-rectly on Form 2106:

11 Date vehicle was placed in service. (auto-calc) You MUST enter alldates on the Vehicle Expense Worksheets that support the next line,so you are not allowed to make an entry here. Only dates enteredon the worksheets (or a reference to the supporting statement) willappear on the official printout of Form 2106.

12 Total mileage vehicle was driven during 2006. (Supported by theVehicle Expense Worksheet, Figures 2-19a and 2-19b.) The totalmileage posted here from the worksheet includes both business andpersonal mileage.

13 Business miles included on line 12. (Supported by the Vehicle Ex-pense Worksheet, Figures 2-19a and 2-19b.) The business part ofthe mileage is posted here from the worksheet.

Standard mileage rate miles. (Supported by the Vehicle ExpenseWorksheet, Figures 2-19a and 2-19b.) This is the business mileagedriven during the tax year only for vehicles identified on the work-sheets as using the Standard Mileage Rate method.

14, 15. The entries for these lines appear only on the individual VehicleExpense Worksheets for each vehicle.

16 Commuting miles included on line 12. (Supported by the Vehicle Ex-pense Worksheet, Figures 2-19a and 2-19b.) This is the commutingmileage entered on line 16 of all worksheets.

17 Other personal miles. (auto-calc) Computed as line 12 less lines 13and 16.

18 Do you or spouse have another vehicle available for personal use?All taxpayers who claim vehicle expense deductions must answer.

19 Was your vehicle available for personal use during off duty hourspermitted? All must answer.

20 Do you have evidence to support your deduction? All must answer.21 If “Yes,” is the evidence written? You must answer if you answered

Yes to the preceding question.

Standard Mileage Rate vs. Actual Expenses. There are two alternative meth-ods for deducting vehicle expenses. The Standard Mileage Rate methodmakes it unnecessary to keep detailed expense records for the vehicle, al-lowing a deduction that is just your business mileage times a standard rateset by the IRS each year. You cannot deduct any other expenses for the carwhen you use this method, including depreciation, gasoline, insurance, etc.The Actual Expenses method, on the other hand, allows your deduction to bedetermined from out-of-pocket expenses plus depreciation. There are restric-tions on the use of each method, but if you qualify for either one for a par-ticular car, you can use the method that gives you the largest deduction, andthe software ensures this choice on our Vehicle Expense Worksheets, de-scribed later. Among the considerations in selecting the method are:


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• If you use more than one vehicle at the same time in the business, such asa fleet operation, you MUST use the Actual Expense method for ALL vehi-cles in the business. Note that if you alternate use of more than one vehi-cle, but never use them at the same exact time, you are not subject to thisrestriction.

• For a leased vehicle, you cannot use the Standard Mileage Rate method ifyou ever used the Actual Expense method for the vehicle after December31, 1997.

• For a vehicle you own, you cannot use the Standard Mileage Rate methodin any year unless you use it in the first year you placed it in business serv-ice.

• You cannot use the Standard Mileage Rate method for a vehicle you use forhire.

• If you previously used the Standard Mileage Rate method but want to usethe Actual Expense method this year, your depreciation deduction must bebased on straight-line depreciation. An accelerated method (ACRS orMACRS) is not allowed.

For additional information, see IRS Pub. 463.

Section B-Standard Mileage Rate. The standard rate is 44.5 cents per milefor business mileage driven anytime during year 2006.

22 Multiply line 13 by .445. (auto-calc) Computed as indicated for vehi-cles identified on the worksheets as using the Standard MileageRate method. This amount is included in line 1 along with the totalbelow for vehicles using the Actual Expenses method.

Section C-Actual Expenses. This entire section, lines 23 through 29, is sup-ported by the Vehicle Expense Worksheets, one for each vehicle.

23 through 26. The entries for these lines appear only on the individualVehicle Expense Worksheets.

Additional notes (itemize). Any additional details you choose to supplyin a supporting statement for this line will appear in the officialprintout as a supporting statement for line 27.

27 Multiply line 26 by % on 14. (Supported by the Vehicle ExpenseWorksheet, Figures 2-19a and 2-19b.) Taken from line 27 of allworksheets supporting this copy of Form 2106, this is the total ofactual expenses, exclusive of depreciation.

28 Depreciation from lines 38. (auto-calc) Taken from the result for Sec-tion D, below.

29 Add lines 27 and 28. (auto-calc) Computed as indicated, this is thetotal of actual expenses, including depreciation, for vehicles identi-fied on the worksheets as using the Actual Expenses method.

The sum of line 22 (mileage rate deduction) and line 29 (actual expenses de-duction) is posted to line 1 of Part I of Form 2106.

Section D-Depreciation of Vehicles. Depreciation is only relevant to the Ac-tual Expenses Method, and is shown individually for each vehicle on the Ve-hicle Expense Worksheets.

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RULES for SUVs. The “SUV loophole” was tightened for certain sport utilityvehicles (SUVs) acquired after October 22, 2004. Under prior law, you werenot subject to the usual restrictions on annual deductions for vehicles if theSUV was rated at 6,000 pounds gross vehicle weight or more. As a result,because of the increase in the section 179 ceiling to $100,000 for 2003, youcould generally deduct the entire cost of a heavy SUV in the first year if usedmostly for business! The American Jobs Creation Act of 2004 took a firststep at closing the loophole. For heavy SUVs placed in service after October22, 2004 but rated at no more than 14,000 pounds gross weight, the maxi-mum section 179 deduction is now $25,000. However, there is still no an-nual limit on other depreciation, so a large first-year deduction is still avail-able. (You should identify these vehicles as Vehicle Type 4 on our VehicleExpense Worksheet so that the proper limitations are applied.)

30 through 37. The entries for these lines appear only on the VehicleExpense Worksheets, described next.

38 Smaller of line 35 or line 37. (Supported by the Vehicle ExpenseWorksheet, Figures 2-19a and 2-19b.) The total from all worksheetsis posted here, then used in line 28, above.

Vehicle Expense Worksheet, Figures 2-19a and 2-19b. The Vehicle ExpenseWorksheet provides all of the detail required for Part II of the official Form2106. Whether you use the Actual Expenses Method or the Standard MileageRate Method, you MUST use the worksheet to report the detail, using a sepa-rate worksheet page for each separate vehicle. The worksheet is accessible atlines 12, 13, 16, 27, and 38.

Vehicle identification. Identify vehicle in 10 characters or less.11 Date vehicle placed in service – mm/dd/yy. The date entered here is

initially used as the date business use started as well, unless youchange the date below. It is also used in a special prorationing forline 14 when the date on the next line is after this date and afterJanuary 1 of the current tax year.

Date business use started – mm/dd/yy. If different from the abovedate, enter the date the vehicle placed in service for business use. Ifin the current tax year and later than the preceding date, this date isused to specially prorate the result for line 14 for those who starteda new job in which a car is required (when the old job did not re-quire one). TIP: If your business use started this year AFTER youput the car in service, but you have records to prove your nonbusi-ness mileage for the car BEFORE that time, you are not required touse the prorationing. If this is the case, you may be able to increaseyour deduction by entering 1/1/2006 here and reporting ALL mile-age for the year in line 12. If the car is newly purchased and imme-diately put into business use, as indicated by both dates being thesame, no prorationing will result. This date is also used as thestarting date for depreciation in lines 30 through 38.


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12 Total miles vehicle was driven during 2006. Include both personaland business mileage for the months starting at the beginning of thetax year or the immediately preceding date, whichever is later.

13 Business miles included on line 12. Enter the business part of the to-tal mileage here. Do NOT include commuting mileage.

14 Percent ofbusinessuse. (auto-calc) Nor-mally com-puted as theratio of line13 to line 12(expressedas a percent-age). How-ever, if thedate startedfor businessuse is in thecurrent taxyear, a spe-cial prora-tioning may be used.

15 Average daily round-trip commuting distance. Enter here the mile-age from home to the first business stop and from the last businessstop to home, averaged over the months of business use. (Used byIRS for auditing information only.)

16 Commuting miles included on line 12. Enter the part of total mileageattributable to commuting to and from work.

17 Other personal miles. (auto-calc) Computed as line 12 less lines 13and 16.

18 through 22. These lines appear on Form 2106 itself, not this work-sheet, because they apply to ALL vehicles.

Method: 1=Standard Rate, 2=Actual Expenses, 3=Best. Using the pre-viously described rules as a guidance (in the shaded section titled“Standard Mileage Rate vs. Actual Expenses”), enter 1 if you mustuse the Standard Mileage Rate method for this vehicle, 2 if youmust use the Actual Expense method for this vehicle, or 3 if youcan use the best method (the one with the highest deduction). Ifyou choose method 1, you do not have to complete lines 23through 28, which relate only to the Actual Expense method.

23 Gasoline, oil, repairs, vehicle insurance, etc. Enter all out-of-pocketexpenses here.

24a Vehicle rentals. Enter rental expenses here.

VEHICLE EXPENSE-Screen1of2VEHICLE EXPENSE-Screen1of2VEHICLE EXPENSE-Screen1of2VEHICLE EXPENSE-Screen1of2Vehicle identificVehicle identificVehicle identificVehicle identificaaaation....tion....tion....tion.... 11 Date placed in svc-mm/dd/yy 11 Date placed in svc-mm/dd/yy 11 Date placed in svc-mm/dd/yy 11 Date placed in svc-mm/dd/yy Business use start-mm/dd/yy Business use start-mm/dd/yy Business use start-mm/dd/yy Business use start-mm/dd/yy 12 Total miles driven in 2006 0 12 Total miles driven in 2006 0 12 Total miles driven in 2006 0 12 Total miles driven in 2006 0 13 Business miles on line 12. 0 13 Business miles on line 12. 0 13 Business miles on line 12. 0 13 Business miles on line 12. 0 14 Percent of business use... 14 Percent of business use... 14 Percent of business use... 14 Percent of business use...▒ 0▒ 0▒ 0▒ 0 15 Avg daily rnd-trip commutg 0 15 Avg daily rnd-trip commutg 0 15 Avg daily rnd-trip commutg 0 15 Avg daily rnd-trip commutg 0 16 Commuting miles on line 12 0 16 Commuting miles on line 12 0 16 Commuting miles on line 12 0 16 Commuting miles on line 12 0 17 Other personal miles...... 17 Other personal miles...... 17 Other personal miles...... 17 Other personal miles......▒ 0▒ 0▒ 0▒ 0 Mthd:1=StdRate,2=Actual,3=Best 1 Mthd:1=StdRate,2=Actual,3=Best 1 Mthd:1=StdRate,2=Actual,3=Best 1 Mthd:1=StdRate,2=Actual,3=Best 1 23 Gas,oil,repair,insurnc,etc 0 23 Gas,oil,repair,insurnc,etc 0 23 Gas,oil,repair,insurnc,etc 0 23 Gas,oil,repair,insurnc,etc 0 24a Vehicle ren 24a Vehicle ren 24a Vehicle ren 24a Vehicle renttttals........... 0als........... 0als........... 0als........... 0 24b Inclusion amount.......... 0 24b Inclusion amount.......... 0 24b Inclusion amount.......... 0 24b Inclusion amount.......... 0 24c Subtract 24b from 24a..... 0 24c Subtract 24b from 24a..... 0 24c Subtract 24b from 24a..... 0 24c Subtract 24b from 24a..... 0 25 Value employer-prov(W-2).. 0 25 Value employer-prov(W-2).. 0 25 Value employer-prov(W-2).. 0 25 Value employer-prov(W-2).. 0 26 Add lines 23, 24c,& 25.... 26 Add lines 23, 24c,& 25.... 26 Add lines 23, 24c,& 25.... 26 Add lines 23, 24c,& 25....▒ 0▒ 0▒ 0▒ 0 27 Multiply 26 by % on 14.... 27 Multiply 26 by % on 14.... 27 Multiply 26 by % on 14.... 27 Multiply 26 by % on 14....▒ 0▒ 0▒ 0▒ 0 28 Depreciation from line 38. 28 Depreciation from line 38. 28 Depreciation from line 38. 28 Depreciation from line 38.▒ 0▒ 0▒ 0▒ 0 22 or 29 Vehicle expns claimed 22 or 29 Vehicle expns claimed 22 or 29 Vehicle expns claimed 22 or 29 Vehicle expns claimed▒ 0▒ 0▒ 0▒ 0

Figure 2-19a. Vehicle Expense Worksheet, Screen 1

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24b Inclusion amount. You may have to reduce your rental deductionby an inclusion amount if the lease term began after June 18, 1984and the term of the lease was 30 days or more. The reduction gen-erally applies only to leases beginning after 1986 for equipmentwith an initial market value in excess of $12,800 if begun before1991, $13,400 if begun in 1991, $13,700 if begun in 1992,$14,300 if begun in 1993, $14,600 if begun in 1994, $15,500 ifbegun in 1995 or 1996, $15,800 if begun in 1997 or 1998,$15,500 if begun in 1999, 2000, 2001, or 2002, $18,000 if be-gun in 2003, $17,500 if begun in 2004, and $15,200 if begun in2005 or 2006. See IRS Pub. 463 (Travel, Entertainment, Gift, andCar Expenses) for details.

24c Subtract line 24b from line 24a. (auto-calc) Computed as indicated.25 Value of employer-provided vehicle (on W-2). Enter here the value of

an employer-provided vehicle only if included with wages in box 1of Form W-2 at full annual lease value. If not reported at full annuallease value, include the amount in line 7 of Form 2106 rather thanhere if claiming a deduction for vehicle expenses.

26 Add lines 23, 24c, and 25. (auto-calc) As indicated.27 Multiply line 26 by the percentage on line 14. (auto-calc) Computed

as indicated.28 Depreciation from line 38. (auto-calc) This amount is computed after

you complete lines 30 through 38, below.22 or 29 Vehicle expense claimed. (auto-calc) This is the claim that will

be reflected in the totals on Form 2106. This result is controlled byyour choice of method above line 23. If you chose method 1, thisresult is the expense that will be reflected in line 22 of Form 2106based on the Standard Mileage Rate method, which is line 13 times44.5 cents per mile for year 2006. If you chose method 2, this re-sult is the expense that will be reflected in line 29 of Form 2106based on the Actual Expense method, and is computed as line 27plus line 28. If you chose method 3, the result for either line 22 orline 29 is shown here, whichever is greater. (Note that when theStandard Mileage Rate is used, whether by your choice or the soft-ware’s optimization, calculated results for lines 27, 28, and 29 ap-pear as zero on the official printout of Form 2106 in order to miti-gate any confusion about which method is used for a particular ve-hicle. To further confusion you can zero all actual expense entriesfor this vehicle, since they are not needed in this case.)

Paging among screens. Press the Page Down Key (or >) to continue tolines 30 through 38 of this worksheet. (The Page Up Key, or <, willreturn you to lines 11 through 29.)

Screen 2 of Vehicle Expense Worksheet. Depreciation for the Actual ExpensesMethod is computed in lines 30 through 38. See Figure 2-19b.

Elect Out or ineligible for the special depreciation allowance? If youacquired a new (not used) car during 2006, you may qualify for a


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bonus first-year depreciation as high as 50% of the depreciable ba-sis, but subject to the limitations in Table 2-11. Unless you can an-swer Yes to this question, the software will automatically give youthe bonus depreciation for the current year if all of the followingconditions are met:* percent of business use is more than 50%,* business use start date is no later than 12/31/2006, and* business use start date is within the tax year of the return.If you do not answer Yes, the allowed deduction will be reflected inthe automatically calculated line 31, as detailed in our instructionsfor that line. CAUTION: If you elect not to make this claim eventhough you are eligible for it, the IRS instructs you to attach astatement to the return to that effect. You may use the line on Form2106 labeled “Additional notes (itemize)” for this purpose (betweenlines 26 and 27 of Form 2106, not this worksheet). Also note thatif you elect out you must do so for all property in the same classthroughout the return. (The class for cars is 5-year property.)

Elect 30% when eligible for 50%? You can choose to use the 30% bo-nus instead of 50%. However, you must make the same election forall property in the same class.

Vehicle type: 1=regular, 2=OEM electric, 3=truck, 4=big SUV. Thisentry is used to control the ceiling on depreciation for passenger ve-hicles, often called the “luxury car limitation,” which are shownlater in Table 2-11, and apply a limit on sec. 179 deductions for bigSUVs not subject to these limitations. For most vehicles, 1 is theappropriate entry. Enter 2 if the vehicle was produced by an origi-nal equipment manufacturer (OEM) and designed to run primarily onelectricity. The ceiling on depreciation for OEM electric vehiclesthat were placed in service after August 5, 1997 is approximatelytriple that for regular cars. Enter 3 if the vehicle is a passenger truckor van (including minivans and SUVs built on a truck chassis) ratedat 6,000 pounds gross vehicle weight or less. The ceiling on first-year depreciation is $300 higher for trucks and vans than it is forregular cars. NEW THIS YEAR: Enter 4 if the vehicle is an SUV (orother passenger vehicle) rated at more than 6,000 pounds grossvehicle but no more than 14,000 pounds. This class of vehicle isnot subject to the limitations in Table 2-11, but is subject to a re-duced maximum for sec. 179 deduction of $25,000. Enter 5 forvehicles not fitting into any of these categories, which are vehiclesexcepted from all ceilings. Excepted vehicles include ambulances,hearses, and taxicabs. (This was choice 4 last year, but includedvehicles that are either choice 4 or choice 5 this year.)

30 Cost or other basis. Enter the total cost (including sales tax paid af-ter 1986) BEFORE adjusting it for prior depreciation or reducing it toaccount for nonbusiness usage. However, reduce the basis by anydiesel fuel tax credit, electric vehicle credit or clean-fuel vehicle de-

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duction you claimed, and increase the basis by any recapture onForm 4797, line 35 that applies to this vehicle.

Section 179 deduction and PRIOR special allowance. If the vehicle isnew this year, enter the section 179 deduction to be taken. Yourentry may be reduced in accordance with Table 2-11. The reducedamount will also be reflected in line 31, below, and the depreciablebasis (line 32) will be reduced by the deduction taken. On the otherhand, if the vehicle was placed in service in a prior year, enter herethe section 179 deduction actually taken in the past plus any basisreduction required for a previously claimed special allowance or theInvestment Tax Credit (ITC) and any adjustment required for pastyears when you used the standard mileage method at 12 cents permile since 1994. For this case your entry will not be reduced andwill not be reflected in line 31. Instead, it will be used only to prop-erly compute the depreciable basis for line 32. Also include hereany special depreciation allowance taken in the past.

31 Section 179 andspecial allow-ance (2006).(auto-calc) Ifthe businessuse start datelies in the cur-rent tax yearand the busi-ness use per-centage on line14 exceeds50%, then thisline is com-puted as thepreceding sec.179 deductionplus the special

30% or 50% allowance (unless you elected out), subject to the limi-tations in Table 2-11. Otherwise this line is computed as zero. (Notethat the special allowance is figured on a reduced basis computedas line 30 times line 14 less the sec. 179 deduction taken. The al-lowance is then 30% or 50% of that reduced basis subject to thelimitations in Table 2-11.)

32 Multiply line 30 by line 14. (auto-calc) This is the basis for deprecia-tion. In spite of the label for this line, the line is computed as thecost (line 30) times the percentage of business use (line 14), less ei-ther line 31 (if business use started this year) or the entry above line31 (if business use did not start this year).

VEHICLE EXPENSE-Screen2of2VEHICLE EXPENSE-Screen2of2VEHICLE EXPENSE-Screen2of2VEHICLE EXPENSE-Screen2of2 Elect Out/inelig. spec. allow? No Elect Out/inelig. spec. allow? No Elect Out/inelig. spec. allow? No Elect Out/inelig. spec. allow? No Elect 30% when elig. for 50%.? No Elect 30% when elig. for 50%.? No Elect 30% when elig. for 50%.? No Elect 30% when elig. for 50%.? No 1=reg,2=elec,3=truck,4=bigSUV 1 1=reg,2=elec,3=truck,4=bigSUV 1 1=reg,2=elec,3=truck,4=bigSUV 1 1=reg,2=elec,3=truck,4=bigSUV 1 30 Cost or other b 30 Cost or other b 30 Cost or other b 30 Cost or other baaaasis....... 0sis....... 0sis....... 0sis....... 0 Sc.179exp.&PRIOR spec allow 0 Sc.179exp.&PRIOR spec allow 0 Sc.179exp.&PRIOR spec allow 0 Sc.179exp.&PRIOR spec allow 0 31 Sec179 & spec a 31 Sec179 & spec a 31 Sec179 & spec a 31 Sec179 & spec alllllow.(2006)low.(2006)low.(2006)low.(2006)▒ 0▒ 0▒ 0▒ 0 32 Multiply ln30 by ln 14.... 32 Multiply ln30 by ln 14.... 32 Multiply ln30 by ln 14.... 32 Multiply ln30 by ln 14....▒ 0▒ 0▒ 0▒ 0 Deprec'n in past years 0 Deprec'n in past years 0 Deprec'n in past years 0 Deprec'n in past years 0 Recovery p Recovery p Recovery p Recovery peeeeriod(years) 0riod(years) 0riod(years) 0riod(years) 0 Farm or elect 150% DB.? No Farm or elect 150% DB.? No Farm or elect 150% DB.? No Farm or elect 150% DB.? No MUST use mid-qtr convn? No MUST use mid-qtr convn? No MUST use mid-qtr convn? No MUST use mid-qtr convn? No 33 Method (DB,ACRS,orSL)..... 33 Method (DB,ACRS,orSL)..... 33 Method (DB,ACRS,orSL)..... 33 Method (DB,ACRS,orSL)..... Month sold (if this year). 0 Month sold (if this year). 0 Month sold (if this year). 0 Month sold (if this year). 0 Percentage this year...... 0 Percentage this year...... 0 Percentage this year...... 0 Percentage this year...... 0 34 Multiply 32 by % on 33.... 34 Multiply 32 by % on 33.... 34 Multiply 32 by % on 33.... 34 Multiply 32 by % on 33....▒ 0▒ 0▒ 0▒ 0 35 Add lines 31 and 34....... 35 Add lines 31 and 34....... 35 Add lines 31 and 34....... 35 Add lines 31 and 34.......▒ 0▒ 0▒ 0▒ 0 36 Limitation amount......... 36 Limitation amount......... 36 Limitation amount......... 36 Limitation amount.........▒ 0▒ 0▒ 0▒ 0 37 Multiply 36 by % on 14.... 37 Multiply 36 by % on 14.... 37 Multiply 36 by % on 14.... 37 Multiply 36 by % on 14....▒ 0▒ 0▒ 0▒ 0 38 Smaller of ln 35 or 37.... 38 Smaller of ln 35 or 37.... 38 Smaller of ln 35 or 37.... 38 Smaller of ln 35 or 37....▒ 0▒ 0▒ 0▒ 0

Figure 2-19b. Vehicle Expense Worksheet, Screen 2


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Depreciation in past years. You must include all past depreciationallowed, whether taken or not, including past sec. 179 expense andpast special allowance taken. In other words, except for years youused the Standard Mileage Rate, you have to compute past depre-ciation as if you had used the Actual Expense method for all theother years. This entry is used to determine any additional deprecia-tion you can deduct now because prior depreciation was reduced bythe limitations on luxury cars, which are shown in Table 2-11.

Recovery period (years). This entry is checked against the law andchanged to the closest legal period if it is improper.

Farm or elect 150% DB method? Since 1990, property used in afarming business cannot be depreciated at the 200% declining bal-ance rate. If the declining balance method is chosen, property usedin a farming business MUST be depreciated at a 150% rate instead.In addition, nonfarm property can be depreciated at 150% by elec-tion (in order to avoid the complications of the alternate minimumtax). In either case, answer Yes here to force 150% DB for classeswhere 200% DB would be used otherwise.

MUST use mid-quarter convention? Normally you must use the mid-quarter convention when more than 40% of the value of all propertyplaced in service in the same year is placed in service in the lastquarter of the year. You therefore cannot answer this questionproperly without considering ALL of the property (including otherproperty in addition to cars) you start depreciating this year on thetax return.

33 Method (DB, ACRS, or SL). The method is restricted for cars: if thevehicle is placed in service after June 18, 1984 and used 50% orless for business, the method should be SL, and the software en-sures this. The IRS prefers standard entries like MACRS, ACRS, andSL, but the software will accept any entry starting with MA, AC, orDB as a MACRS/ACRS type, and any entry starting with SL or S/ asan SL type. Everything else is taken as manual entry, for which youcan enter any percentage, below.

Month sold (if this year). Enter month from 1 to 12 to indicate a sale.Percentage this year. (auto-calc) This line normally shows the per-centage deduction resulting from the automatic calculations. But ifyou entered an unrecognized method above, you can make anymanual entry here yourself.

34 Multiply line 32 by the percentage on line 33. (auto-calc) Normallycomputed as indicated, this is the depreciation deduction beforeluxury car and business use limitations are applied. If the vehiclewas sold during the current year, the appropriate percentage is ap-plied based on year and month the vehicle was placed in service andmonth sold.

35 Add lines 31 and 34. (auto-calc) Computed as indicated.

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36 Limitation amount from table. (auto-calc) The limitations on depre-ciation plus section 179 deductions are shown in Table 2-11. If youentered 4 for the vehicle type, indicating that no limitation applies,zero will appear here and on line 38.

37 Multiply line 36 by the percentage on line 14. (auto-calc) Computedas indicated, this is the limitation that applies this year.

38 Smaller of line 35 or line 37. (auto-calc) Computed as indicated, thisis the total depreciation deduction allowed this year, including sec-tion 179 expense and any special first-year allowance. It is used inline 28, above, as a component of total actual expense in line 29.

For more details on the depreciation methods used, see the instructions inthis manual for the Listed Property Worksheet for Form 4562. Also see IRSInstructions for Form 2106. Since worksheet lines cannot be itemized, an ex-tra line is provided above line 27 of Form 2106 itself for your use to supplyadditional details in a supporting statement.

FORM 2106-EZ QUALIFICATION. This section lets you know whether theshort form (2106-EZ) will be printed for the official printout in place of thelong form (2106), and what the entries will be if it is.

Are you qualified for 2106-EZ? (auto-calc) You are disqualified if youget reimbursed by your employer for any expenses, or, if claimingvehicle expenses, you do not own the vehicle or you are not usingthe standard mileage rate to compute expenses or you are other-wise required to use the Actual Expenses Method. This answer isdetermined from the preceding entries on Form 2106 and its work-sheets.

Elect NOT to use Form 2106-EZ? If you prefer not to have the new shortform printed with the return, even when eligible for it, answer Yeshere.

Most of the remaining lines on the screen are automatic based on the entrieson the long form, but you must make an entry on lines 7 and 10, below.

7 When did you place vehicle in business service? (auto-calc if youcompleted Vehicle Expense Worksheet) If you completed the work-sheet that supports Part II of the long form (Form 2106), the date inservice for the first worksheet appears here. However, if you did notcomplete the worksheet, or you detached it, you can enter any datehere yourself.

8 through 11b Other information about your use of the vehicle. (auto-calc lines) The remaining lines are taken directly from your entriesand answers in Part II of Form 2106.

.


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Table 2-11. Limitations on Cars

DATE PLACED IN SERVICE DATE PLACED IN SERVICE DATE PLACED IN SERVICE DATE PLACED IN SERVICE TAX YEARTAX YEARTAX YEARTAX YEAR MAXIMUMMAXIMUMMAXIMUMMAXIMUM

6/19/84 through 12/31/84 all $6,000

1/1/85 through 4/2/85 all $6,200

4/3/85 through 12/31/86 all $4,800

1/1/87 through 12/31/90 after 3rd $1,475

1/1/91 through 12/31/92 after 3rd $1,575

1/1/93 through 12/31/94 after 3rd $1,675

1/1/95 through 12/31/96 after 3rd $1,775

1/1/97 through 12/31/97 after 3rd $1,775 (*)

1/1/98 through 12/31/98 after 3rd $1,775 (*)

1/1/99 through 12/31/99 after 3rd $1,775 (*)

1/1/00 through 12/31/00 after 3rd $1,775 (*)

1/1/01 through 9/10/01 after 3rd $1,775 (*)

9/11/01 through 5/5/03 after 3rd $1,775 (*)

5/6/03 through 12/31/03 after 3rd $1,775 (*)

1/1/04 through 12/31/04 3rd $2,850 (*)

" " " after 3rd $1,675 (*)

1/1/05 through 12/31/05 2nd $4,700 (*)

� � � 3rd $2,850 (*)

1/1/06 through 12/31/06 1st $2,960 (*)

" " " 2nd $4,800 (*)

(*) Increases to these limits apply to electric passenger automobiles and trucks and vans as follows:

For electric passenger automobiles after 8/5/1997: For electric passenger automobiles after 8/5/1997: For electric passenger automobiles after 8/5/1997: For electric passenger automobiles after 8/5/1997: All limits are approximately triple (within plus or minus $200) for OEM electric vehicles. See IRS tables for limits.

For trucks and vans after 12/31/02 (under 6,000 lb. gross): For trucks and vans after 12/31/02 (under 6,000 lb. gross): For trucks and vans after 12/31/02 (under 6,000 lb. gross): For trucks and vans after 12/31/02 (under 6,000 lb. gross): add $300 to 1st-year limit for 2006, $500 to 2nd-year limit for 2005 and $400 for 2006, $300 to 3rd-year limit for 2005, $200 to limits after 3rd year.

NOTE: Actual limitation is THE ABOVE AMOUNT MULTIPLIED BY THE BUSINESS USE PERCENTAGE. (After the recovery period has expired, the remaining depreciation not taken because of the above limitations can be deducted subject to these limitations each year until fully depreciated.)

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*Form 2120 / Multiple Support DeclarationPurpose. This form must be filed by those who claim dependents for whomthey did not provide more than 50% of their support. You must have pro-vided more than 10% of the support, no-one else can have provided morethan 50% of the support, and you must have signed statements from all oth-ers who provided more than 10% of the support relinquishing their claim toan exemption for the dependent in the current tax year.

Use a separate Form 2120 for each dependent. You must use each Form2120 for just one dependent. Five copies are provided by the software,which are accessible through the Road Map below line 6d of Form 1040.



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Form 2210 & 2210-F / Underpayment of Estimated TaxWhy a penalty? The penalty computed through Form 2210 is a nondeductiblecharge (at annual rates ranging from 7 to 8% for 2006) that the IRS imposeswhen prior withholding plus estimated tax payments fall substantially short ofthe tax liability for the year. This form is automatically generated when apenalty appears likely. You will have to access this form yourself, however,to provide additional information for a lower penalty. Form 2210 is accessiblethrough the Road Map at line 77 of Form 1040. (Note that this form assessesa penalty only through April 15, 2007. The IRS alone computes interest andpenalties after that time and sends a bill to the taxpayer. There is no IRSform for computing these post-April 15 interest and penalties.)

HINT: It may be advisable NOT to file Form 2210. After a long history of con-fusing and often inconsistent instructions, and frequent errors on the part oftaxpayers in completing the form, the IRS now encourages taxpayers to letthe IRS compute the penalty! Unless you need to supply more information tojustify a lower penalty, you can let the IRS figure the penalty for you. If youfile Form 2210 and compute the penalty yourself, you must pay the penaltywith the return; but if you let the IRS compute the penalty, you do NOT haveto pay the penalty until the IRS bills you. And, as long as you file your returnby April 15, 2007 and pay any tax due (other than the penalty), you will notbe charged interest on the unpaid penalty if you pay the amount billed within10 days of the billing date. In any case, we provide the form with its fullautomation so that taxpayers are not caught unaware of a penalty they mayowe.

More favorable Form 2210-F for farmers and fishermen built-in. If your grossincome from farming or fishing is at least two-thirds of your gross incomefrom all sources for 2005 or 2006, you qualify for the simpler Form 2210-F,which imposes less severe penalties than Form 2210. The penalty for thisform is computed based only on the number of days after January 15, 2007that all tax due is paid; there is NO penalty for late quarterly payments for pe-riods before January 15. Moreover, if you file Form 1040 and pay all tax dueby March 1, 2007, you do not owe ANY penalty.

Form 2210 is a complex 4-page form. This form is so long and involved that itis four printed pages long. It is split in the software into two interrelatedparts, each of which is independently accessible from the Forms Menu:

Form 2210, Main Form. The first three pages comprise the main form.The annual changes usually stem from the variations in the penaltyrates that apply, which can alter the look of page 3 depending onthe length of time a penalty remains constant. (For filing in 2007,the penalty rate is 7% from April 16 to June 30, 2006, and 8%from July 1, 2006 through April 15, 2007.)

Form 2210, Schedule AI. Page 4 comprises Schedule AI, Annualized In-come Installment Method. It is used to justify lower payments inearlier quarters based on lower income in those quarters.

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Schedule AI of Form 2210 is accessible through the Road Map in the middleof screen 1 of the main Form 2210.

DATE TO BE FILED AND PAID. This information is used in computing specialexceptions and reduced penalties for early filing and payment.

Date return filed. You must enter the date the return will be filed in themm/dd/yy format.

Tax due on Form 1040 (line 63 less line 72). (auto-calc) Taken from Form1040, as indicated.

$ NOT paid when return filed. If you will not be paying the entire taxdue when filing the return, enter the amount of underpayment here.

Tax paid when return filed. (auto-calc) Computed as the tax due lessthe above underpayment.

There are decided benefits for early filing when you pay tax with the return.Dates earlier than 1/15/2007 produce no extra benefit because the IRS doesnot pay interest for early payments. Conversely, dates later than 4/15/2007produce no extra penalty on this form because Form 2210 is NOT designedfor computing the penalty for late returns, only the penalty for insufficientwithholding or quarterly estimated tax payments. However, if you pay on orbefore 1/31/2007, any tax paid with the return will be considered as an addi-tional estimated tax payment made by 1/15/2007 for the purposes of thisform. And, if you qualify as a farmer or fisherman, below, dates on or before3/1/2007 will result in no penalty if you pay all tax due by that time. (Notethat if an amount is due on a Saturday, Sunday, or federal holiday, the IRSwill consider the payment timely if you pay on the next business day.)

AMOUNT OF WAIVER REQUESTED. All or part of the penalty may be eligiblefor a waiver under special circumstances delineated by the IRS. To claim awaiver you must itemize the below line and explain the reason. HINT: To re-quest a FULL waiver before knowing the penalty, enter an amount larger thanthe largest penalty you expect.

Waiver requested (itemize). You must explain your justification for awaiver in a supporting statement for this line, and enter the dollaramount to be waived. CAUTION: The circumstances under whichthe IRS will accept a waiver are very narrow. You should enter anamount here ONLY if your underpayments are a result of a new taxlaw or you suffered a casualty, disaster, retirement, or disablementduring the tax year that has been specifically allowed by the IRS asreasonable cause for a waiver. You may also have to attach officialdocumentation of the event.

ANNUALIZED INSTALLMENTS. (Not relevant if qualified for Form 2210-F,since the penalty for that form is based solely on the number of days late af-ter January 15, 2007.) You can skip this section if your income is receivedrelatively uniformly throughout the year, or you receive more income in thefirst half of the year than you do in the second half of the year. It will be toyour benefit to complete Schedule AI of Form 2210 (Annualized Income In-


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stallment Method), which supports these lines, only if you can show that youreceived more income in later quarters than in earlier quarters:

Annualized installments for 1st quarter, 2nd quarter, 3rd quarter, and4th quarter. (Road Map lines, supported by Form 2210 ScheduleAI.) The results on line 25(a), 25(b), 25(c), and 25(d) of ScheduleAI of Form 2210 appear on these four lines after you complete thissupporting schedule.

FEDERAL INCOME TAX WITHHELD. It is standard practice to assume thatwithholding from wages is equal in all four quarters, and the IRS always al-lows this. But it may be to your benefit to override the below automaticallycomputed amounts with the actual exact amounts if you have a penalty andyour wages in the first half of the year significantly exceed your wages in thesecond half of the year.

Tax withheld on Form 1040, line 64. (auto-calc) Taken from line 64 ofForm 1040.

Excess tax on Form 1040, line 67. (auto-calc) Taken from line 67 ofForm 1040, this is the excess social security and RRTA tax causedby more than one employer deducting these taxes.

Other tax withheld. Enter here all other applicable withholding, includ-ing any credit from Form 4469.

TOTAL federal income tax withheld. (auto-calc) The sum of the abovethree amounts, this result is used for line 10, below, in addition tothe following quarterly amounts.

Part withheld in (a)1st quarter, (b)2nd quarter, (c)3rd quarter, and(d)4th quarter. (auto-calc lines) The above total is divided equallyamong all four quarters and displayed here. If you can show thatyour actual payments were unequal, and these actual payments re-sult in a lower penalty, you should use the Override Key (describedin Chapter 7) to access and change these computed amounts, andexplain them in a supporting statement for this line.

Eligible for relief due to Hurricane Katrina. For qualified victims of HurricaneKatrina, the first three estimated tax payments for 2006 were not consideredlate if paid by October 16, 2006. As a result, if you claim relief by answeringYes to the below question, the computations on Form 2210 are modified toreflect the revised due date, and labels on the pre-printed IRS form will nolonger apply. However, the software clearly indicates the claim on the officialprintouts, and the revision to rates and dates, so that the IRS will understandthe lower penalties that result.

HURRICANE KATRINA? If you answer Yes, the due date for the 1st, 2nd,and 3rd quarter estimated tax payments (normally due April 17, June15, and September 15, 2006, respectively) is extended to October16, 2006, and a lower penalty results. See IRS 2006 Instructionsfor Form 2210 for detailed qualifications, including a list of countiesthat qualify (in Alabama, Louisiana, and Mississippi).

Note that the extension did not apply to victims of Hurricanes Rita or Wilma.

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FORM 2210-F QUALIFICATION (for farmers and fishermen). Qualifying farm-ers and fishermen benefit from a simpler calculation, a lower penalty, andsometimes even zero penalty, as noted previously. But qualification can bedifficult to determine if the taxpayer has nonfarm income as well. The IRSwill allow you to use the more favorable rules for farmers and fishermen ifyour gross income from farming and fishing is at least 2/3 of your annualgross income from all sources for EITHER 2005 or 2006. The software canhelp with the determination for 2006, but you must answer the question for2005 yourself:

2/3 of 2005 gross income is from farming and fishing? In order to an-swer this question, you must compute gross farm and nonfarm in-come in the same way as we detail for 2006 below.

The following lines determine the answer to the analogous question for 2006:Schedule F, line 11. (auto-calc) This is the gross income reported on

Schedule F for 2006.Farm gross on Schedule K-1s and Form 4835. (auto-calc) Computed

from entries on Schedule E, this is the sum of self-employmentgross on the Partnership and S Corps Worksheets for farm activities(in Part II of Schedule E) plus the gross farm rental income fromForm 4835, which appears above line 39 of Schedule E (in Part V).

Other farm gross on Schedule SE. (auto-calc) Taken from Schedule SE,this is the entry you made on Schedule SE for gross farm self-employment income not reported on Schedule E or F.

Other farm gross (Form 4797, etc.). Use this line to report all gross farmincome not included above. If it stems from Form 4797 or Sched-ule D, you will have to separately sum items sold for a profit anditems sold for a loss, and enter here only the gain from those itemssold for a profit.

2006 FARM Gross. (auto-calc) The sum of the above four lines.

Form 1040, line 22 less amounts from Schedules C, D, E, and F, andForm 4797. (auto-calc) Computed as Form 1040, line 22 less lines12, 13, 14, 17, and 18.

Nonfarm gross on Schedules C, K-1s, and SE. (auto-calc) Computed asthe sum of line 7 of Schedule C, self-employment gross on thePartnership and S Corps Worksheets for nonfarm activities (in Part IIof Schedule E), and the entry you made on Schedule SE, if any, forgross nonfarm self-employment income not reported on Schedule Eor F.

Nonfarm gross on Schedule E, Part I. (auto-calc) Computed as the sumof lines 3 and 4 of Schedule E.

Nonfarm gross on Schedule D, Form 4797, and others. Use this line toreport all gross nonfarm income not included above. If it stemsfrom Form 4797 or Schedule D, you will have to separately sumitems sold for a profit and items sold for a loss, and enter here onlythe gain from those items sold for a profit. You may also have to


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determine gross amounts in Parts III and IV of Schedule E. (Parts Iand II of Schedule E are handled automatically.)

2006 NONFARM Gross. (auto-calc) The sum of the above four lines.

2/3 of 2006 gross income is from farming and fishing. (auto-calc) An-swered Yes if the above 2006 FARM Gross divided by the sum of2006 FARM Gross and 2006 NONFARM Gross is at least 2/3.

QUALIFIED FOR FORM 2210-F. (auto-calc) Answered Yes if either oneof the “2/3 of gross” questions is answered Yes.

Filed and paid full tax due by 3/1/07. (auto-calc) Answered Yes if theentry for “Date return filed” is 3/1/07 or earlier AND “Tax paidwhen return filed” matches “Tax due on Form 1040.”

QUALIFY FOR ZERO PENALTY. (auto-calc) Answered Yes if both of thepreceding two questions are answered Yes.

If the last question is answered Yes, no penalty is due and you are not re-quired to file Form 2210 or 2210-F. If the last question is No but you arequalified for Form 2210-F, the remainder of the form is computed using themore favorable rules for Form 2210-F.

PART I, REQUIRED ANNUAL PAYMENT. The quarterly overpayment or under-payment is computed here:

Itemize to access Control Form. (Road Map to the Control Form.) Be-cause lines 2 and 8 depend critically on entries found only on theControl Form, this line is provided for easy access to that form.You may have to make an adjustment to line 2, or enter amountsfrom the prior-year return for line 8, on the Control Form.

1 2006 tax after credits. (auto-calc) Transferred automatically from line57 of Form 1040.

2 Other taxes (from Control Form). (auto-calc) Taken from the line "Taxfor 2210 line 2" on screen 3 of the Control Form, this is the sum oflines 58, 61, and 62 of Form 1040, less any mortgage subsidy in-cluded in line 63, plus the early distribution and ESA/QTP distribu-tion part of line 60 (as determined from Form 5329), plus excludedadvanced EIC payments excluded from line 62 (line 7 of ScheduleH), plus any adjustment you make on the Control Form. (Applicableadjustments include any change in tax as a shareholder in a qualify-ing electing fund, and tax on installment sales as a dealer in per-sonal property. Note also that if line 63 of Form 1040 includestaxes which do NOT qualify, you should make a correspondingnegative entry at "Other adjustment for 2210 line 2" on the ControlForm.)

Earned income credit. (auto-calc) Taken from line 66a of Form 1040.Additional child tax credit. (auto-calc) Taken from line 68 of Form1040 (form Form 8812).

Credit for Federal tax paid on fuels. (auto-calc) Taken from line 70bof Form 1040 (from Form 4136).

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Health coverage tax credit. (auto-calc) Taken from line 70c of Form1040 (from Form 8885).

3 Refundable credits. (auto-calc) Computed as the sum of the preced-ing 4 lines.

4 Current year tax. (auto-calc) Computed as the sum of lines 1 through3.

% required to avoid penalty. (auto-calc) Normally 90%, but 66-2/3%if qualified for Form 2210-F.

5 Multiply line 4 by above %. (auto-calc) Computed as indicated. TheIRS imposes penalties only for falling short of this portion of the taxliability on line 4.

6 Withholding taxes. (auto-calc) Taken from the "TOTAL federal incometax withheld" computed on screen 1 of Form 2210 (in the section“FEDERAL INCOME TAX WITHHELD”).

7 Subtract line 6 from line 4. (auto-calc) Computed as indicated. This isthe amount by which prior payments have fallen short of line 4. Ifline 7 is less than $1,000, no penalty is due, and the remainder ofthe form is automatically zero.

Adjusted tax paid in 2005 (from Control Form). (auto-calc) Taken fromentries on the second screen of the Control Form, computed in thesame way as line 4 of Form 2210, but for 2005.

FULL-year return filed in 2005 (from Control Form)? (auto-calc) Takenfrom your entry on the second screen of the Control Form. If youfiled no return for 2005 or filed a return for less than a full year, youcannot qualify for an exclusion based on your 2005 tax. CAUTION:You MUST enter the answer for this line on the Control Form or elsethis exception will not be considered.

8 Maximum required annual payment based on prior year’s tax. (auto-calc) If the answer to the above question is Yes, the above tax paidin 2005 is posted to this line for most taxpayers, and a zero resultmeans no tax was paid and hence no penalty can result. If the an-swer is No, however, line 8 is not only zero but is ignored in subse-quent calculations. Note that the amount the appears here may behigher than the 2005 tax if 2005 AGI exceeded $150,000($75,000 if married filing separately on the current-year return). Inthat case the amount is 110% of the prior-year tax.

9 REQUIRED ANNUAL PAYMENT. (auto-calc) Computed as the smallerof line 5 or line 8.

Is line 9 more than line 6? (auto-calc) If No, you do not owe a penalty.This means that the required annual payment is no more than with-holding taken from wages. But you may owe a penalty even whenthe sum of withholding and estimated tax payments exceeds the re-quired annual payment!


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PART II, REASONS FOR FILING. This section shows whether you might bene-fit from filing Form 2210 yourself, rather than letting the IRS compute thepenalty. The answers for reasons A through D are automatic based on yourentries on the first screen and the result on the completed Form 2210. There-fore the answers may not be correct until the final recalculation of the return.

A You request a waiver of your entire penalty. (auto-calc) AnsweredYes only if there is a penalty and the amount you entered in yoursupporting statement for a “Waiver requested (itemize)” is at leastas large as that penalty.

B You request a waiver of part of your penalty. (auto-calc) AnsweredYes only if there is a penalty and the amount you entered in yoursupporting statement for a “Waiver requested (itemize)” is less thanthat penalty.

C You use the annualized income installment method. (auto-calc) Thisquestion is automatically Yes only if you completed Schedule AI ofForm 2210 and it resulted in an entry on at least one of the lines onscreen 1 in the section “ANNUALIZED INSTALLMENTS.”

D You treat withholding from wages as paid when it was actually with-held instead of evenly on payment due dates. (auto-calc) This an-swer is Yes only if you overrode any of the quarterly amounts fortax withheld shown at the bottom of screen 1 of Form 2210 in thesection “FEDERAL INCOME TAX WITHHELD” and the resultingamounts in the four quarters are significantly unequal.

E You file(d) a joint return in 2005 or 2006, but not both, and line 8 issmaller than line 5. Answer Yes if applicable.

PAYMENT HISTORY. A summary of payments appears here for use in Form2210 or 2210-F.

Tax applied from prior year. (auto-calc) Taken from the first compo-nent on the Control Form for line 65 on Form 1040, this is theamount of refund on the 2005 return that is applied to estimatedtax for the 2006 tax year.

Other tax pre-paid in (a)1st quarter, (b)2nd quarter, (c)3rd quarter, and(d)4th quarter. (auto-calc lines) Taken from your entries on the Con-trol Form for this return.

Tax paid with this return. (auto-calc) Taken from the result for the line“Tax paid when return filed” on screen 1 of Form 2210, in the sec-tion “DATE TO BE FILED & PAID.” This amount can be less than thetax due.

Tax paid with this return by January 31, 2007. (auto-calc) Identical tothe above line if the date you entered for "Date return filed" is1/31/2007 or earlier, and zero otherwise.

Quarterly payments equal. (auto-calc) All payments for the four quar-ters, including the tax withheld in each quarter as shown at the bot-tom of screen 1 of Form 2210 in addition to the above entries, areadded quarter by quarter, and compared to each other. If they areessentially equal, a Yes appears here and you may qualify to use the

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Short Method of Form 2210 described below. (You cannot use theShort Method if the payments are not equal.)

FORM 2210-F. If qualified for Form 2210-F, lines 2 through 20, below, arecomputed, and Form 2210-F is printed with the return in place of Form 2210.Lines 2 through 15 are analogous to Form 2210, Part I, lines 1 through 9,with a little more calculation detail shown.

2 2006 tax after credits. (auto-calc) Taken from line 1 of Form 2210,Part I when Form 2210-F is used; otherwise zero.

3 Other taxes. (auto-calc) Taken from line 2 of Form 2210, Part I whenForm 2210-F is used; otherwise zero.

4 Add lines 2 and 3. (auto-calc) Computed as indicated.5, 6, 7, and 8. Not shown on the screen, these are the four refundable

credits that make up line 3 of Form 2210, Part I.9 Add lines 5, 6, 7, and 8. (auto-calc) Computed as indicated when Form

2210-F is used; otherwise zero.10 Current year tax. (auto-calc) Computed as line 4 less line 9.11 Multiply line 10 by 66-2/3%. (auto-calc) Computed as indicated.12 Withholding taxes. (auto-calc) Taken from line 6 of Form 2210, Part

I when Form 2210-F is used; otherwise zero.13 Subtract line 12 from line 10. (auto-calc) Computed as indicated. If

less than $1,000 you do not owe a penalty.14 Tax shown on your 2005 tax return. (auto-calc) Taken from line 8 of

Form 2210, Part I when Form 2210-F is used; otherwise zero.15 REQUIRED ANNUAL PAYMENT. (auto-calc) Taken from line 9 of

Form 2210, Part I when Form 2210-F is used; otherwise zero.16 Estimated tax payments and withholding. (auto-calc) Computed as

the “TOTAL federal tax withheld,” shown on screen 1 plus, fromthe preceding PAYMENT HISTORY, the “Tax applied from prioryear” plus the four quarterly payments (a, b, c, and d) plus theamount of “Tax paid with this return by 1/31/07.”

17 UNDERPAYMENT. (auto-calc) Computed as line 15 less line 16.There will be no penalty unless this result is greater than zero.

18 Date the amount on line 17 was paid (or 4/15/07 if earlier). (auto-calc) If “Tax paid when return filed” matches “Tax due on Form1040,” on screen 1, then “Date return filed” is used here. Other-wise, 4/15/07 is entered.

19 Number of days FROM 1/15/2007 to line 18. (auto-calc) Computed asindicated.

Tentative penalty. (auto-calc) Computed as line 17 times line 19times 0.04 divided by 365.

Amount WAIVED. (auto-calc) Taken from your entry in the supportingstatement for “Waiver requested (itemize)” on screen 1.

20 PENALTY. (auto-calc) Computed as the tentative penalty less thewaiver amount you entered, but no less than zero. If qualified forForm 2210-F, this amount is posted to line 77 of Form 1040.


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PART III, SHORT METHOD. The Short Method simplifies the calculation fortaxpayers who don’t qualify for the even simpler Form 2210-F. If quarterlypayments are equal and estimated tax was always paid on the due dates, orif the only payments made were from withholding from wages, you may beeligible for the Short Method. However, if you use the Annualized InstallmentMethod (so that line 1b is Yes), or you altered the wage withholding (so thatline 1c is Yes), you cannot use the Short Method. The software automaticallydetermines whether or not the Short Method applies based on your entries onthis form, and completes Part III for you if it does.

Annualized installment method used? (auto-calc) Taken from the an-swer to line 1b. If the answer is Yes, the Short Method will not beused.

Eligible for short method? (auto-calc) This entry will be Yes ONLY ifquarterly payments were equal (as determined by the earlier ques-tion) and the installment method is NOT used and you did NOTqualify for Form 2210-F (as determined on screen 1).

Elect NOT to use short method? Even though you are eligible to use theShort Method, it may be to your advantage to use the more exactRegular Method. Answer Yes here if you want to see the results ofthe Regular Method before filing the return.

If you are eligible for the Short Method and do not elect NOT to use it, thefollowing lines are completed and only pages 1 and 2 of Form 2210 areprinted with the official return. Otherwise, lines 10 through 17 remain blank.

10 Amount from line 9, Form 2210. (auto-calc) Computed as indicated.11 Amount from line 6, Form 2210. (auto-calc) Computed as indicated.12 Total estimated tax payments. (auto-calc) Computed as the sum of

all payments listed in the PAYMENT HISTORY section of this form.13 Add lines 11 and 12. (auto-calc) Computed as indicated.14 TOTAL UNDERPAYMENT FOR THE YEAR. (auto-calc) Computed as

line 10 less line 13. There will be no penalty unless this result isgreater than zero.

15 Multiply .05258 by line 14. (auto-calc) Normally computed as indi-cated. However, if you claimed relief due to Hurricane Katrina (onscreen 2), a rate of .03468 is used instead of .05258, and thischange is marked on the official printout.

16 If paid before 4/15/07, credit for early return. (auto-calc) Computedas .00022 times the amount on line 14 times the number of daysBEFORE 4/15/07 that the return is filed with the tax due paid.

Tentative penalty. (auto-calc) Computed as line 15 less line 16, butno less than zero.

Amount WAIVED. (auto-calc) Taken from your entry in the supportingstatement for “Waiver requested (itemize)” on screen 1.

17 PENALTY. (auto-calc) Computed as the tentative penalty less thewaiver amount you entered, but no less than zero. If the ShortMethod is used, this amount is posted to line 77 of Form 1040.

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PART IV, REGULAR METHOD. The rest of the form relates to the complexRegular Method, for those who either cannot use or elect not to use theShort Method. The underpayment is based solely on your prior entries unlessyou choose the installment method below:

One-fourth of line 9 (a)1st quarter, (b)2nd quarter, (c)3rd quarter, and(d)4th quarter. (auto-calc lines) The liability on line 9 is dividedequally among all four quarters.

18 Required installments (a)4/15/06, (b)6/15/06, (c)9/15/06, and(d)1/15/07. (auto-calc lines) All four quarters of line 18 will be one-fourth of line 9 unless you claimed a special exception.

19 Tax paid and withheld (a)1st quarter, (b)2nd quarter, (c)3rd quarter,and (d)4th quarter. (auto-calc lines) Composed of withholdingamounts appearing on screen 1 and other amounts appearing in the“PAYMENT HISTORY,” each quarter is computed independently. Allfour quarters include "Tax withheld" and "Other tax pre-paid" forthe corresponding quarter. But the first quarter result additionally in-cludes the tax applied from the prior year's return, and the fourthquarter includes the tax paid with the return by February 2nd.

Remainder of main Form 2210 is automatic. The rest of the main part of Form2210 is automatic, but it may not match the method you expect. The formhas confused taxpayers for years, partly because the IRS instructions changeeach year, are never quite precise enough, and are often self-contradictory.The IRS admits the problem in their official instructions for Form 2210 whichstates: "We realize that there are different ways to figure the correct penalty.You do not have to use the method prescribed by Form 2210 as long as youenter the correct penalty on the penalty line of your return." We follow a self-consistent method that results in the proper penalty, but may result in differ-ent intermediate results for number of days late and quarterly penalties.

Modified completion when relief due to Hurricane Katrina claimed. If youclaimed relief due to Hurrican Katrina (on screen 2), the Regular Method isgreatly modified because the first three payments are not considered late untilOctober 17, 2006. As a result, on the official printout of Form 2210, Part IV,the first two columns are left blank, the due date for the third column(9/15/06) is crossed out and replaced with the extended date (10/16/06),and all calculations are modified to start counting days late on October 17,2006.

Override is possible, but use it sparingly. If you made your estimated taxpayments early in any quarter, you may want to override the computed re-sults. In accordance with IRS regulations, overpayments from a prior periodare used to cover underpayments for subsequent periods, and subsequentquarterly payments are used to reduce prior underpayments before they areapplied to the tax liability for the current quarter. In our computation of dayswhen a required amount remains unpaid, we assume that the payments forsubsequent quarters are paid on the due date for that quarter. (This assump-tion is implicit in the IRS’s Short Method, so the penalty using the Regular


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Method matches that for the Short Method as long as you do not claim ex-ception 1b, 1c, or 1d.) As a result, the penalty is applied to the entire pay-ment period, even if the payment that covers the prior underpayment mayhave been made earlier. You may therefore want to use the Override Key tochange the number of days late if this assumption is inappropriate.

SUMMARY. The results from the Regular Method, are concluded here.Sum of penalty in all columns combined. (auto-calc) Computed as the

sum of all penalties for all four quarters.Amount WAIVED. (auto-calc) Taken from your entry in the supporting

statement for “Waiver requested (itemize)” on screen 1.33 PENALTY. Add amounts in lines 28, 30, and 32. (auto-calc) Computed

as the sum of all penalties less the above waiver, but no less thanzero.

Net penalty in ANY part. (auto-calc) The amount here is line 20 of Form2210-F if qualified for Form 2210-F, line 17 of Form 2210 if the ShortMethod is used, or line 33 of Form 2210 if the Regular Method is used, andis posted to line 77 of Form 1040.

Extra line for personal memos. The supporting statement you create for thisline will not be printed as a part of the official return. It is intended for privatenotes or reminders only.

SCHEDULE AI - Annualized Income Installment Method. Unless you qualifyfor Form 2210-F, it will be to your benefit to complete Schedule AI of Form2210 if you can show that you received more income in later months of theyear than in earlier months. You can then minimize your overall penalty, ofteneliminating the penalty altogether if your quarterly tax payments were in linewith your actual income for the quarters. (This schedule is accessible directlyfrom the Forms Menu, or through the Road Map at one of the four lines in themiddle of screen 1 of Form 2210.)

Part I, Annualized Income Installments. The basic approach for the install-ment method is to refigure income and deductions for each of three periodsstarting January 1st but ending before the end of the year, then compute taxfor each of these periods as if the amounts shown for that period continuedto the end of the year. In other words, if taxable income for the first period,1/1/06 through 3/31/06, was $10,000, the required tax for that periodwould be automatically figured on $40,000, since the full year is four timesas long as the specified period. (The full year is 2.4 times as long as the sec-ond period, 1/1/06-5/31/06, and 1.5 times as long as the third period. Thefourth period is a full year.) With this approach, the required tax for theshorter periods will be less than that for the longer periods if most of the in-come was earned in the later months of the year.

Amounts entered for each period? In order to prevent the use of the re-sults for this schedule before you supply the required information,this schedule is not recognized until you answer Yes to this ques-tion, to confirm that you are supplying the required information.

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Itemized deductions used. (auto-calc) Taken from Form 1040, anyitemized deductions will be ignored unless this answer is Yes.

The following data entry lines must be completed for the first, second, andthird installment periods. (All amounts for the fourth period come automati-cally from Form 1040.) HINT: If you have a question about any of the belowentries, you may want to page down to the screen for the fourth period tosee the corresponding amounts for the ENTIRE year. (Although some com-puted lines in the following sections are missing from the screen to conservememory and maximize speed, all necessary lines appear on official printouts.)

1 Enter AGI for period shown. Enter AGI for the period computed thesame way as line 38 of Form 1040.

Amounts from Schedule D for the period. Because of the current com-plexities of the capital gains tax, the computation of tax on Sched-ule AI is greatly complicated by the need for several numbers fromSchedule D. In order to properly complete these lines you mustprepare, in addition to the Schedule D for the return, a mockSchedule D for each of the first three periods in Schedule AI. Youmust then make entries in the 9 lines that follow line 1, above, foreach of the first three periods! (Entries for the last period are de-termined automatically from the Schedule D that is a part of this re-turn.)

3 Annualized income. (auto-calc) The amount on line 1 is multiplied bythe IRS-defined multipliers on line 2 in order to arrive at an equiva-lent annual amount. (The multipliers are 4, 2.4, 1.5, and 1 for thefour successive periods on this form.)

Full-year itemized deduction. (auto-calc) Taken as the total fromSchedule A before reduction by phaseout limitations, this amount isshown to help guide you in your entries for shorter periods.

4 Itemized deductions for the period. Enter the part of total itemizeddeductions that apply only to the period shown. Your entry is lim-ited to no more than the total itemized deductions for the year. (Noitemized deductions will appear on line 6 in spite of an entry here ifitemized deductions are not used on line 40 of Form 1040.)

Medical/casualty/investment-interest/gambling part. Enter the part ofthe full-year itemized deductions that is attributable to lines 4, 13,19, or the gambling part of line 27 of Schedule A. Your entry is lim-ited to no more than the full-year amount for these items. It is usedto limit the reduction in deductions for high-income returns whencomputing line 6 for each period.

Form 8615 tax for the period. If this return is for a child with investmentincome who uses Form 8615, you must compute the tax using amanually-prepared Form 8615 based on the taxable income appear-ing on line 11 of this part of Form 2210. (You can compute the taxfor the child with the aid of the software by preparing a separate re-turn using the annualized amounts for the period that appear above


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this line, along with the correspondingly annualized investment in-come. (The tax on line 12 is fully automatic for all other taxpayers.)

14 Other taxes for the period. Enter other taxes for the period that re-flect the same taxes as appear for the entire year on screen 8 ofthis form. The amount for the entire year is comprised of the “othertaxes” on line 2 of Form 2210 (which is computed on the ControlForm) plus the additional tax from Form 4972 on line 43b of Form1040 and the alternative minimum tax from Form 6251 on line 44of Form 1040 less the self-employment tax on line 58 of Form1040.

16 Credits allowed for the period. Enter credits for the period that arereported for the entire year on line 56 of Form 1040 and line 3 ofForm 2210.

All lines not described above are automatically computed for each period. Ifyou have self-employment income you MUST complete Part II of this form aswell. Once the form is complete, the results on line 25 for the four periodsare posted to the corresponding four lines on screen 1 of the main Form2210, and are used in the computation of line 18 of the main Form 2210.

Part II, Annualized Self-Employment Tax. If either spouse has self-employment income, you must supply separate information on the self-employment income and wages for each period and for each spouse so thatthe self-employment tax for each period is properly computed.

1st self-employment entries are spouse's (vs. you)? Although the IRShas provided only one copy of Form 2210, Schedule AI, Part II, youmust complete two copies of this part if both spouse's have self-employment income. The software provides the needed two copieson this one form, but if only one of the two spouses has self-employment income, you must ensure through your answer to thisquestion that only the first copy of this part is used. (If only you, orboth you and spouse, had self-employment income, you can leavethis entry at its original No answer.)

The two copies for this part each have their own set of data entry lines forthe following three items for each installment period. You need complete onlythe first set if only one spouse had self-employment income. For each item,the amount for the entire year as it appears on Form 1040 is displayed first.

Net self-employment (x.9235). The automatically computed amount forthe entire year (the fourth period) is based on the amounts appear-ing on Form 1040 for the designated spouse. Note that the amountis only 92.35% of the full self-employment income for the year, inaccordance with IRS rules. You must enter the appropriate amountsfor the other periods using the same 92.35% multiplier. CAUTION:In this and the remaining lines of Form 2210 the periods are shownin reverse order in order to provide for more logical data entry ofwages.

Wages subject to social security tax. The automatically computedamount for the entire year (the fourth period) is based on the W-2

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worksheets completed for the designated spouse. You must enterthe corresponding amount for the other periods. If the wages wereearned uniformly throughout the year, the entries for these three pe-riods would be 2/3 (.6667), 5/12 (.4167), and 1/4 (.25) of the full-year amount, respectively. You can use the built-in calculator de-scribed in Chapter 7 to apply these fractions to the full-yearamount. (The software ensures that your entry for the period1/1/06 through 8/31/06 is no less than the automatic total for theentire year, that your entry for the period 1/1/06 through 5/31/06 isno less than your entry for 1/1/06 through 8/31/06, and that yourentry for the period 1/1/06 through 3/31/06 is no less than your en-try for 1/1/06 through 5/31/06. Also note that the total wages forthe entire year will be set to zero if you have no self-employmentincome for the year, since Part II of Form 2210 need not be com-pleted in that case.)

Once these entries are properly completed, the remainder of the form is com-puted, and line 13 in Part I of Schedule AI is updated to reflect the results online 34 for each period. If two copies of Part II of Schedule AI are completed,one for each spouse, the sum of the two for each period is reflected in line13 for the corresponding period.


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*Form 2350 / Application for Extension of Time to FileU.S. Income Tax ReturnPurpose. In spite of the rather broad name of this form, this is a very special-ized kind of extension that is rarely appropriate. It is appropriate only for U.S.citizens and resident aliens living abroad who need extra time in order to meetresidency tests for the special tax treatment that is afforded them. The spe-cial treatment includes the foreign earned income exclusion, the foreignhousing exclusion, and the foreign housing deduction, all claimed throughForm 2555. If your request for an extension is approved, the IRS will gener-ally grant an extension to a date 30 days after you expect to meet either thebona fide residence test or the physical presence test (but see line 3, below,for an exception). If your request is denied, you must file your return on timereporting all income from both U.S. and foreign sources and pay tax on thatincome without benefit of the special tax treatment. (“On time” in this con-text means by the due date of your return, not including extensions. If yourtax home and residence are outside the U.S. and Puerto Rico on April 16,2007, your due date is June 15, 2007 instead of April 16, 2007.) If you latermeet one of the residency tests, you can file an amended return (Form1040X) to claim a refund, backed by a revised return that reflects a foreignearned income exclusion and/or foreign housing benefit. For more details, seeIRS Pub. 54 (Tax Guide for U.S. Citizens and Resident Aliens Abroad). Form2350 is accessible through the Road Map above line 69 of Form 1040.

* Included in Premium Level software ONLY. This form is only built into thePremium Level version of Tax Preparer, and is detailed in the separate Pre-mium Level Supplement 2007.

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Form 2441 / Child and Dependent Care ExpensesWho is it for? If you paid someone to care for your child or other qualifyingperson so that you could work or look for work during the tax year, you maybe able to reduce your taxes with this credit. The amount of credit dependson your expense, the amount of your earned income, and the number ofqualifying people. Form 2441 is accessible through the Road Map at line 48of Form 1040.

You may be considered an employer of the person who took care of yourchild. If you paid cash wages of $1,500 or more to any one householdworker during tax year 2006, or total cash wages of $1,000 or more in anycalendar quarter to all household workers combined, you may have to fileSchedule H with your return. See our instructions for Schedule H for details.

QUALIFICATIONS. Initial qualifications are determined here and special ad-justments to earned income are entered. CAUTION: You MUST answer thesequestions or else no credit will be computed.

Had care to work or seek work? To qualify for the credit you must havepaid someone to care for your child or other dependent so that youcould work or look for work. If married filing jointly, your spousemust also have worked or sought work.

Paid over half of home expenses? To qualify for the credit you (andspouse, if married filing jointly) must have paid over half the cost ofkeeping up your home. If married filing separately, you must meetthis test without your spouse.

Spouse apart last 6 months of the year? This entry is relevant only ifyou are married filing separately. (This answer is automatically Yesif you answered Yes to “MFS: Spouse lived APART ALL year?” be-low your entry for Filing Status on Form 1040.)

MFS, but single for Form 2441. (auto-calc) If married filing separatelyand all three of the preceding answers are Yes, a Yes appears hereand you qualify for the credit as a single taxpayer. Note that even ifyou don’t qualify for the credit you may still qualify for the exclu-sion of employer-paid benefits in Part III of Form 2441 if you couldanswer Yes to the first two questions.

Qualify for credit in Part II. (auto-calc) If not married filing separately,you qualify if your answers to the first two questions were Yes. Ifmarried filing separately, however, you qualify only if your answersfor all three questions is Yes.

Qualify for exclusion in Part III. (auto-calc) You qualify if your answersto the first two questions were Yes, irrespective of your filingstatus.

Nontaxable combat pay. The IRS now requires you to include nontaxablecombat pay in earned income when computing the credit in Part II of Form2441, but gives you the option to opt out of using it in determining excludedbenefits in Part III.


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Entry on Form 1040, page 1, screen 10. (auto-calc) Taken from our spe-cial section CERTAIN NONTAXABLE INCOME, which follows line 22of Form 1040, this is the amount reported in box 14 of Form W-2as code Q.

Spouse part of combat pay. The combat pay you enter on Form1040 is not identified by spouse. You must therefore enter thespouse’s part of the entry on Form 1040 because earned income isrequired separately for each spouse on Form 2441.

Opt out of election for Part III? You can elect not to include the combatpay in earned income for the purposes of Part III of this form (lines18 and 19), which may be to your benefit.

EARNED INCOME for Form 2441. You must have at least some earned incomein order to get a credit on this form and, if married filing jointly, the otherspouse must have income as well. Earned income as defined for this form isdetailed in the IRS instructions for Form 2441 and IRS Pub. 503 (Child andDependent Care Expenses). It includes all wages (and income treated aswages by the IRS, such as excess reimbursements from Forms 2106, 2441,and 3903) except taxable scholarships not reported to you on a Form W-2,and all self-employment income on line 3 of Schedule SE less any deductionon Form 1040 line 27 for that spouse. The software automatically computesthis version of earned income separately for each spouse. However, you mayhave to make an adjustment as detailed below.

YOUR special adjustment. You must enter here certain nontaxableearned income listed in IRS Pub. 503, including parsonage allow-ances, meals and lodging furnished for the convenience of the em-ployer, voluntary salary deferrals, and certain military allowancesand payments. If you were unable to work any months of the yearbecause you were a student or disabled, you may be considered tohave earned income of up to $250 per month ($500 if claiming atleast two children) for those months as long as the other spouseworked. See the IRS Instructions for Form 2441 for the complexdetails of this provision.

YOUR EARNED INCOME for Part II. (auto-calc) Computed as yourearned income based on Form 1040 and Schedule SE amounts plusthe preceding adjustment and your nontaxable combat pay.

YOUR EARNED INCOME for Part III. (auto-calc) Normally computedidentically to the preceding line, but reduced by your nontaxablecombat pay if you elected, above, to opt out of its use in Part III.

SPOUSE special adjustment. The same adjustment as describedabove for the main taxpayer apply for the spouse. However, if bothspouses were nonworking students or disableds in the samemonths, only one spouse is allowed the special $250 per monthadjustment.

SPOUSE’S EARNED INCOME for Part II. (auto-calc) Computed asspouse’s earned income based on Form 1040 and Schedule SE

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amounts plus the preceding adjustment and spouse’s nontaxablecombat pay.

SPOUSE’S EARNED INCOME for Part III. (auto-calc) Normally computedidentically to the preceding line, but reduced by spouse’s nontaxablecombat pay if you elected, above, to opt out of its use in Part III.

Employer-paid Benefits Received (for Part III). You should have enteredamounts paid by your employer on the W-2 Worksheets for line 7 of Form1040. These entries form the basis for the following lines, which are used inPart III of the form in determining amounts that are properly excluded fromincome:

YOUR W-2 box 10 (excluding box 1). (auto-calc, supported by W-2Worksheets for line 7a of Form 1040) This is the part of box 10 ofForm W-2 that is not included in box 1 of Form W-2, as computedon the W-2 Worksheets you completed for you. This is generally thelesser of $5,000 or the amount in box 10.

Part of above YOU forfeited (including carryover to 2007). If you didnot actually incur the entire amount reported to you in box 10 ofForm W-2 and not in box 1, and therefore did not receive the bene-fit, enter that amount here. (If allowed by the plan, you may be ableto carry forward to 2007 the amount not used in 2006, and use itin a defined grace period, rather than permanently forfeiting it.)

SPOUSE W-2 box 10 (excluding box 1). (auto-calc, supported by W-2Worksheets for line 7b of Form 1040) If married filing jointly, this isthe part of box 10 of Form W-2 that is not included in box 1 ofForm W-2, as computed on the W-2 Worksheets you completed forspouse (generally the lesser of $5,000 or the amount in box 10).Otherwise, this line is zero.

Part of above SPOUSE forfeited (including carryover to 2007). Ifspouse did not actually incur the entire amount reported to spousein box 10 of Form W-2 and not in box 1, and therefore did not re-ceive the benefit, enter that amount here. (If allowed by the plan,the spouse may be able to carry forward to 2007 the amount notused in 2006, and use it in a defined grace period, rather than per-manently forfeiting it.)

YOUR self-employment or partnership benefit received. Enter thebenefits your received from your own sole proprietorship or a part-nership in which you are a partner. You will not receive a Form W-2 for this amount.

Part of above YOU forfeited (including carryover to 2007). If you didnot actually incur the entire amount available to you, enter thatamount here.

SPOUSE self-employment or partnership benefit received. Enter thebenefits your spouse received from spouse’s own sole proprietor-ship or a partnership in which spouse is a partner. Spouse will notreceive a Form W-2 for this amount.


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Part of above SPOUSE forfeited (including carryover to 2007). Ifspouse did not actually incur the entire amount available, enter thatamount here.

TOTAL benefits for line 12. (auto-calc) Computed as the sum of allbenefits received, before any forfeitures. This result is used for line12 in Part III of this form.

Forfeited amounts carried over to 2007. If any of the amounts you in-cluded in the lines “Part of above … forfeited (including carryover to2007)” were for carryover to 2007, enter that carryover here. Youmust have already included this amount in your entries for “Part ofabove … forfeited (including carryover to 2007),” and your entryhere is limited to no more than the sum of those entries. This entryis not used in the current-year return, but will be used next yearwhen you translate this return into a return for tax year 2007.

Carryover from 2005 for line 13. If the employer’s plan allowed you tocarry forward any unused amount from 2005 to use during a graceperiod in 2006, enter that amount here. This entry is used for line13 in Part III of this form.

TOTAL forfeitures and carryovers for line 14. (auto-calc) Computed asthe sum of all amounts entered on previous lines identified as “Partof above … forfeited (including carryover to 2007).” This result isused for line 14 in Part III of this form.

NET BENEFITS for line 15. (auto-calc) Computed as “TOTAL benefits forline 12” plus “Carryover from 2005 for line 13” less “TOTAL forfei-tures and carryovers for line 14.” This result is used for line 15 inPart III of this form.

Self-employment or partnership part of amount for line 12. (auto-calc) Computed as the part of line 12 attributable to self-employ-ment or partnerships. This result is used for line 21 in Part III of thisform.

Net employee benefits in amount for line 12. (auto-calc) Computed asthe net benefits for line 12 less the preceding self-employ-ment/partnership part.

PART I, PERSONS OR ORGANIZATIONS WHO PROVIDED THE CARE. Allsupporting details on the expenses and the care providers must be suppliedhere:

1 Itemized qualified expense. (Supported by the Care Provider Work-sheet, Figure 2-20.) You MUST itemize this line and supply the in-formation requested, using a separate worksheet page for each careprovider. The amount appearing on this line when you return fromthe worksheets, detailed below, is the total actually paid in 2006,whether expense was incurred in 2006 or prior to 2006.

Extra line for additional statement. If you need to explain the claim,or any omissions on the worksheet, do so in a supporting statementfor this line. For example, if you do not enter each care provider's IDnumber on the worksheet, you must explain why here. You must

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show that you have clearly requested the information from the careprovider and that the care provider did not comply with the request.

1(d) Total paid in 2006. (auto-calc) The total amount on line 1 appearshere.

Part incurred and paid in 2006. (auto-calc) Taken from the corre-sponding worksheet line for qualified expenses.

Total incurred in 2006. (auto-calc) Taken from the correspondingworksheet line for qualified expenses.

Care Provider Work-sheet, Figure 2-20.You MUST use theseworksheets to reportin detail the expensespaid and the expensesincurred, in order forForm 2441 to beproperly automated.Moreover, if you donot provide all the in-formation requestedon the worksheet, theIRS may disallow thecredit. TIP: If you

don’t know the identifying information for the care provider, you can use aForm W-10 for the care provider to complete and return to you. (The form isavailable from the IRS web site for forms, which you can reach from our website at www.howardsoft.com\links.htm.) The worksheet relies on your carefuldistinction among expenses incurred and paid in different years:

a. Care provider's name. Enter abbreviated name of care provider in 15characters or less. If you need more room, use the address fields,below. Special instructions for employer-provided care: If your em-ployer provided the care at work or employed the provider directly,enter the employer’s name here, enter “See W-2” at line b, andleave the rest of the worksheet blank. (These special instructions donot apply if your employer paid a third party on your behalf.)

e-file name control for the above. This entry is mandatory for e-file butunnecessary for paper returns. You must enter a 4-character namecontrol. This is usually the first four characters of the businessname or, if an individual, the first four characters of that person’slast name. However, there are many special cases, so you shouldconsult our 5-page document Instructions for Entry of Name Con-trols for Businesses, which is available online on the E-FILE ALERTSpage of our “Check Web for Updates” site (accessible from the TaxPreparer Control Panel).

CARE PROVIDER WORKSHEETCARE PROVIDER WORKSHEETCARE PROVIDER WORKSHEETCARE PROVIDER WORKSHEET a. Care provider name a. Care provider name a. Care provider name a. Care provider name e-file name ctrl for above e-file name ctrl for above e-file name ctrl for above e-file name ctrl for above Is this spouse or d Is this spouse or d Is this spouse or d Is this spouse or deeeependnt? Nopendnt? Nopendnt? Nopendnt? No b. Address b. Address b. Address b. Address city, state, ZIP city, state, ZIP city, state, ZIP city, state, ZIP c. Identifying number: c. Identifying number: c. Identifying number: c. Identifying number: Type (S=SSN/ITIN,E=EIN) Type (S=SSN/ITIN,E=EIN) Type (S=SSN/ITIN,E=EIN) Type (S=SSN/ITIN,E=EIN) Number (SSS,ITIN,orEIN) Number (SSS,ITIN,orEIN) Number (SSS,ITIN,orEIN) Number (SSS,ITIN,orEIN) Total amt paid in 2006.... 0 Total amt paid in 2006.... 0 Total amt paid in 2006.... 0 Total amt paid in 2006.... 0 Part incurred pre-2006 0 Part incurred pre-2006 0 Part incurred pre-2006 0 Part incurred pre-2006 0 Net paid & incurred in2006 Net paid & incurred in2006 Net paid & incurred in2006 Net paid & incurred in2006▒ 0▒ 0▒ 0▒ 0 Add'l incurred in 2006 0 Add'l incurred in 2006 0 Add'l incurred in 2006 0 Add'l incurred in 2006 0 Total amt incurred in 2006 Total amt incurred in 2006 Total amt incurred in 2006 Total amt incurred in 2006▒ 0▒ 0▒ 0▒ 0 Expense qualifies for 2441 Expense qualifies for 2441 Expense qualifies for 2441 Expense qualifies for 2441▒ No▒ No▒ No▒ No d. Amount paid (in 2006) 0 d. Amount paid (in 2006) 0 d. Amount paid (in 2006) 0 d. Amount paid (in 2006) 0

Figure 2-20. Care Provider Worksheet


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Is this spouse or dependent? If the care provider is your spouse or de-pendent, you cannot claim expenses paid to that person. If you an-swer Yes here, no expenses you enter on this worksheet will becounted on Form 2441.

b. Address. Enter number and street in 25 characters or less.City, state, ZIP code. Enter city, state, and ZIP in 25 characters or less.c. Identifying number. The identifying number will usually be an SSN if

the care provider is an individual or an EIN (Employer IdentificationNumber) if a business or organization.

Type (S=SNN/ITIN, E=EIN Identifying number. Enter S or N. If youenter S, your 9-digit entry on the next line will be automaticallyformatted to the standard XXX-XX-XXXX format. (Certain alienswill have an or an ITIN, Individual Taxpayer Identification Number,instead of an SSN.)

Number (SNN, ITIN, or EIN). Enter the 9-digit identifying number,with or without the associated dashes. However, if the care pro-vider has no such number by reason of being a tax-exempt organiza-tion, enter TAX-EXEMPT here. If you make no entry here, no ex-penses you enter on this worksheet will be counted on Form 2441.

Total amount paid in 2006. Enter the dollar amount paid to the careprovider during 2006. The amount you enter must be the total ofqualifying expenses you ACTUALLY PAID during 2006, whether in-curred in 2006 or not, and NOT any expense paid in any other year.Do NOT enter here amounts for employer-provided benefits unlessthey were paid to you or paid to a third party, nor amounts for daysyou were off from work due to illness.

Part incurred before 2006. Enter the part of the above amount paid in2006 that was actually incurred before 2006. Your entry here canbe no more than the above amount paid in 2006.

Net paid and incurred in 2006. (auto-calc) Computed as the amountpaid in 2006 less the amount incurred before 2006.

Additional amount incurred in 2006. Enter any amount incurred in2006 but not paid in 2006. Do NOT enter here any amounts foremployer-provided benefits unless they were paid to you or paid toa third party. Also do NOT include amounts for days you were offfrom work due to illness, because those expenses do not qualify inthe IRS's mind! (Note that even though most babysitting servicesqualify, some other services do not. Check IRS Pub.503, Child andDependent Care Credit, if in doubt.)

Total amount incurred in 2006. (auto-calc) Computed as the net paidand incurred in 2006 (computed above) plus the additional amountincurred in 2006 (entered above).

Expense qualifies for Form 2441? (auto-calc) Answered Yes only if youanswered Answer No to the question below line a and made an en-try for the care provider’s IDN at line c.

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d. Amount paid (in 2006). (auto-calc) Normally taken as your entry for“Total amt paid in 2006,” but zero if the answer to the precedingquestion is No.

When you return from the worksheets, the various amounts from the work-sheets are posted to Form 2441.

PART II, CREDIT FOR CHILD AND DEPENDENT CARE EXPENSES. The creditis computed in this part using the expenses listed in line 1 and line 2 and theemployer payments listed in Part III.

2 Information about your qualifying persons. This is the new section ofForm 2441 where you must identify each person that qualifies youfor the credit.

Number of qualifying persons. (auto-calc, supported by the Qualify-ing Person Worksheet, Figure 2-21.) The total number of work-sheets for which you have an entry appears here.

Amount incurred and paid in 2006. (Supported by the Qualifying Per-son Worksheet, Figure 2-21.) You MUST itemize this line and sup-ply the information requested, using a separate worksheet page foreach qualifying person. The total expenses allocated in the work-sheets among the qualifying persons appears here.

CAUTION: Discrepancy with line 1 worksheet. (auto-calc) Computed asthe “Amount incurred and paid in 2006” under line 2 less the “Partincurred and paid in 2006” under line 1. If these two amountsdon’t match, a non-zero amount will appear here to alert you of theinconsistency. You must return to the worksheets in Part I and IIand resolve the difference before continuing. Otherwise the soft-ware will use the lesser of the two amounts in the remainder of theform.

3 Amount of qualified expense. (auto-calc) Normally computed as thelesser of “Part incurred and paid in 2006” under line 1 and “Amountincurred and paid in 2006” under line 2, but no more $3,000 ifthere is just one qualifying person, and no more than $6,000 ifthere are two or more qualifying persons. However, if there are de-ductible benefits on line 24 or excluded benefits on line 27 of thisform, the amount at line 33 is used here in place of the statedamount.


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Qualifying PersonWorksheet, Figure 2-21. You MUST usethese worksheets toreport in detail the ex-penses incurred andpaid in 2006 on behalfof each person caredfor, identifying eachby name and SSN.Dependent childrenunder age 13 and dis-abled dependents wholive with you generally

qualify. In addition, children of divorced or separated parents who lived apartfrom the claiming parent may still qualify under some circumstances. See IRSPub.503 (Child and Dependent Care Credit) for detailed requirements. If youdo not provide all the information requested on the worksheet, the IRS maydisallow the credit or may tax all employer-provided benefits.

a. Qualifying person’s name. Enter the first and last name of the childor dependent as follows:

First name. Enter the first name in 10 characters or less.Last name. Enter the last name in 15 characters or less.e-file name. (auto-calc) The name is displayed here in e-file format,with a < symbol to flag the last name and any suffix like Jr. Fur-thermore, suffixes like 3rd are changed to Roman numerals in accor-dance with IRS e-file specifications.

e-file name control. (auto-calc) The name control is displayed in ac-cordance with IRS e-file specifications. This is usually the first fourcharacters of the last name.

Lived with you over half of 2006? To qualify, the child or dependentmust have lived with you more than 6 months of the year. If youanswer No here, this person and the expenses you enter on thisworksheet will NOT be counted on Form 2441

b. Qualifying person’s SSN. You must enter a valid Social SecurityNumber (SSN), Individual Taxpayer Identification Number (ITIN) orAdoption Taxpayer Identification Number (ATIN) for the person withonly one exception: If the person was a child who was born anddied during the tax year, you can enter DIED if you attach a copy ofthe child’s birth certificate to the return. If you do not make a validentry here, this person and the expenses you enter on this work-sheet will NOT be counted on Form 2441.

Total amount incurred in 2006. Enter the amount incurred in 2006 forthe care of the person named above.

Part paid after year-end. Enter the amount incurred in 2006 but notactually paid until 2007.

QUALIFYING PERSON WORKSHTQUALIFYING PERSON WORKSHTQUALIFYING PERSON WORKSHTQUALIFYING PERSON WORKSHT a. Qualifying person's name: a. Qualifying person's name: a. Qualifying person's name: a. Qualifying person's name: First ..... First ..... First ..... First ..... Last ..... Last ..... Last ..... Last ..... e-file name e-file name e-file name e-file name e-file name control.. e-file name control.. e-file name control.. e-file name control.. Lived w/you over half 2006? No Lived w/you over half 2006? No Lived w/you over half 2006? No Lived w/you over half 2006? No b. Qualifying person's SSN b. Qualifying person's SSN b. Qualifying person's SSN b. Qualifying person's SSN Total incurred in 2006 0 Total incurred in 2006 0 Total incurred in 2006 0 Total incurred in 2006 0 Part part after yr-end 0 Part part after yr-end 0 Part part after yr-end 0 Part part after yr-end 0 Bal. Incurred & pd in 2006 Bal. Incurred & pd in 2006 Bal. Incurred & pd in 2006 Bal. Incurred & pd in 2006▒ 0▒ 0▒ 0▒ 0 Person counted........ Person counted........ Person counted........ Person counted........▒ No▒ No▒ No▒ No c. Qualifying e c. Qualifying e c. Qualifying e c. Qualifying exxxxpenses.......penses.......penses.......penses.......▒ 0▒ 0▒ 0▒ 0

Figure 2-21. Qualifying Person Worksheet

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Balance incurred and paid in 2006. (auto-calc) Computed as the totalamount incurred less the part paid after year-end.

Person counted. (auto-calc) Answered Yes only if you answered Yesto the question above line b, you made a valid entry for SSN at lineb, and you made an entry for “Total incurred in 2006.”

c. Qualifying expenses (incurred and paid in 2006). (auto-calc) Normallytaken from the “Balance incurred and paid in 2006” computedabove, but zero if this person is not counted. This amount is in-cluded in the total for line 2 when you return to Form 2441 fromthis worksheet.

CREDIT FOR 2006 AMOUNTS. Lines 4 through 9a are fully automatic basedon your prior entries:

4 Your EARNED INCOME. (auto-calc) Taken as your earned incomecomputed on the second screen of this form.

5 If MFJ (married filing jointly), spouse’s earned income. ALL OTHERS,amount from line 4. (auto-calc) Taken as line 4 if NOT married filingjointly or the answer for “MFS, but single for 2441” is Yes. If mar-ried filing jointly, taken as spouse’s earned income computed in thefirst screen of the form.

6 Smallest of lines 3, 4, and 5. (auto-calc) Computed as indicated. No-tice that the credit is limited to the earned income of the spousewho has the lesser income, if filing married filing jointly.

7 Amount from Form 1040, line 38. (auto-calc) Taken from line 38 ofForm 1040, adjusted by any changes in taxable amount in Part IIInot already reflected in that total.

8 Decimal amount that applies. (auto-calc) The decimal amount iscomputed based on the above adjusted gross income (AGI). Thedecimal amount ranges from .35 for incomes $15,000 and below to.20 for incomes above $43,000.

9a Multiply line 6 by line 8. (auto-calc) Computed as indicated.

Itemize Part I, line 1 & next 2 lines to claim 2005 expenses paid in 2006. Ex-penses for the prior tax year that you paid in the current tax year qualify forthe credit as well, but the decimal amount that applies may be different. Thisrecomputation of the applicable decimal amount ensures that there is no ad-vantage nor disadvantage to deferring or accelerating child and dependentcare expenses from one year to another.

Number of persons qualified in 2005. (Supported by the Prior-YearQualifying Person Worksheet, Figure 2-22) The total number ofworksheets for qualified persons appears here. You MUST itemizethis line and supply the information requested, including the SSNsfor the qualifying persons, using a separate worksheet page foreach. The name and SSN of each qualifying person will be printedon the official return at line 9, as required by the IRS.

Expenses incurred in 2005 and paid in 2005. (auto-calc, but youMUST itemize as explained here.) The total of line d of the preced-ing qualified worksheets appears here. SPECIAL PROCEDURE: If you


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used the preceding worksheet, you MUST also itemize this line thenreturn to Form 2441 (without making any entries). This unusualprocedure will cause the details of the computation of the credit for2005 amounts paid in 2006 to be printed in a supporting state-ment, in accordance with IRS reporting requirements.

Expenses incurred in 2005 and paid in 2006. (Supported by the Prior-Year Qualifying Person Worksheet, Figure 2-22) The total of line cof the preceding qualified worksheets appears here..

CAUTION: Discrepancy with line 1 worksheet. (auto-calc) Computed asthe amount on the preceding line less the total of “Part incurred pre-2006” for all qualifying worksheets for line 1. If these two amountsdon’t match, a non-zero amount appears here to alert you of the in-consistency. You must return to the worksheets to resolve the dis-crepancy before continuing.

YOUR 2005 earned income. Enter your earned income from the prior-year return computed in the same manner as the current year.

SPOUSE 2005 earned income. Enter spouse's earned income from theprior-year return computed in the same manner as the current year.

Filing status in 2005. Enter the filing status used for the purposes ofthis form in 2005. Unless the filing status entered is 2 (for marriedfiling jointly), the spouse's earned income will not be considered incomputing the credit for the 2005 amounts.

Carryover from 2005 to 2006. (auto-calc) First, the amount of 2005expenses within the 2005 limits is computed as the minimum of theappropriate earned income for 2005, the 2005 expenses paid in2005 and 2006 as shown above, and $3,000 (or $6,000 if two ormore persons qualified in 2005). Then the amount already claimedin 2005 is deducted. The result is the amount still eligible for credit.

AGI from 2005 Form 1040, line 37. Enter here the adjusted gross in-come on the PRIOR-year return.

Decimal amount that applies. (auto-calc) The applicable decimalamount is based on the above entry for prior-year AGI in the sameway as line 8 is based on the current-year AGI.

9b Qualified 2005 expenses paid in 2006 times the decimal that ap-plies. (auto-calc) Computed as the above carryover from 2005times the above decimal amount. If an amount appears here thecode "CPYE" and this amount is printed next to line 9, below. If youcreated a supporting statement for one of the above lines as sug-gested, a reference to the statement will also appear next to line 9,and all of the above lines that have a nonzero amount will be in-cluded in the supporting statement that is printed for the IRS.

9 Sum of amounts on lines 9a and 9b. (auto-calc) Computed as indi-cated, this is the tentative credit before limitation. (This line is la-beled on the IRS from like our line 9a, since the calculations for line9b represent a special provision not handled on the form.)

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10 Form 1040, line 46 less line 47. (auto-calc) Taken from Form 1040 asindicated, this is the tax balance to which this credit can be applied.

Credit limited by above tax balance? (auto-calc) Answered Yes ifthe sum of amounts on 9a and 9b exceeds the preceding tax bal-ance.

11 CREDIT FOR ALLOWED EXPENSES. (auto-calc) Computed as thesmaller of line 9 or line 10. (This result will be zero if you are ineli-gible for the credit.)

The result on line 11 is posted to line 48 of Form 1040.

Prior-Year QualifyingPerson Worksheet,Figure 2-22. Thisworksheet is similar tothe one that supportsline 2 of Form 2441(Figure 2-21), but itrelates to amounts in-curred in 2005 ratherthan 2006. If you donot provide all the in-formation requested

on the worksheet, the IRS may disallow the credit or may tax all employer-provided benefits. (CAUTION: This worksheet is NOT translated from theprior return. You MUST enter any required information anew.)

a. Qualifying person’s name (First and Last). Enter the first and lastname of the qualified person. The entries are limited to 10 charac-ters for the first name and 15 characters for the last name in accor-dance with IRS processing limitations.

Lived with you over half of 2005? To qualify, the child or dependentmust have lived with you more than 6 months of the year. If youanswer No here, this person and the expenses you enter on thisworksheet will NOT be counted on Form 2441

b. Qualifying person’s SSN. You must enter a valid social security num-ber for the person with only one exception: If the person was achild who was born and died during the tax year, you can enterDIED if you attach a copy of the child’s birth certificate to the re-turn. If you do not make a valid entry here, this person and the ex-penses you enter on this worksheet will NOT be counted on Form2441.

Total incurred in 2005. Enter the amount incurred in 2005 for the careof the person named above.

Part paid in 2006. Enter the part of the above amount not actually paiduntil 2006.

Part paid in 2005. (auto-calc) Computed as the “Total incurred in 2005”less the “Part paid in 2006.”

PRIOR-YR QUALIFYING PERSONPRIOR-YR QUALIFYING PERSONPRIOR-YR QUALIFYING PERSONPRIOR-YR QUALIFYING PERSON a. Qualifying person's name: a. Qualifying person's name: a. Qualifying person's name: a. Qualifying person's name: First ..... First ..... First ..... First ..... Last ..... Last ..... Last ..... Last ..... Lived w/you over half 2005? No Lived w/you over half 2005? No Lived w/you over half 2005? No Lived w/you over half 2005? No b. Qualifying person's SSN b. Qualifying person's SSN b. Qualifying person's SSN b. Qualifying person's SSN Total incurred in 2005 0 Total incurred in 2005 0 Total incurred in 2005 0 Total incurred in 2005 0 Part paid in 2006 0 Part paid in 2006 0 Part paid in 2006 0 Part paid in 2006 0 Part paid in 2005 Part paid in 2005 Part paid in 2005 Part paid in 2005▒ 0▒ 0▒ 0▒ 0 Person counted........ Person counted........ Person counted........ Person counted........▒ No▒ No▒ No▒ No c. Incurred 2005, pd 2006.... c. Incurred 2005, pd 2006.... c. Incurred 2005, pd 2006.... c. Incurred 2005, pd 2006....▒ 0▒ 0▒ 0▒ 0 d. Incurred & pd in 2005.... d. Incurred & pd in 2005.... d. Incurred & pd in 2005.... d. Incurred & pd in 2005....▒ 0▒ 0▒ 0▒ 0

Figure 2-22. Prior-Year Qualifying Person Worksheet


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Person counted. (auto-calc) Answered Yes only if you answered Yes tothe question above line b, you made a valid entry for SSN at line b,and you made an entry for “Total incurred in 2005.”

c. Incurred in 2005, paid in 2006. (auto-calc) Taken as the “Part paid in2006” if the person is counted. Otherwise zero.

d. Incurred and paid in 2005. (auto-calc) Taken as the “Part paid in2005” if the person is counted. Otherwise zero.

PART III, EMPLOYER-PROVIDED DEPENDENT CARE BENEFITS. Taxablepayments from the employer are reported here. Up to $5,000 of the pay-ments is nontaxable as long as neither the expenses on line 3 nor the earnedincome on line 6 is less.

12 DEPENDENT CARE BENEFITS received. (auto-calc) Taken from“TOTAL benefits for line 12” on screen 3 of this form.

13 Amount carried over from 2005 and used in 2006 during the graceperiod. (auto-calc) Taken from “Carryover from 2005 for line 13”on screen 3 of this form.

14 Amount forfeited, if any. (auto-calc) Taken from “TOTAL foreituresand carryovers for line 14” on screen 3 of this form.

15 Combine linnes 12 through 14. (auto-calc) Computed as line 12 plusline 13 less line 14.

16 QUALIFIED EXPENSES incurred in 2006. (auto-calc) If line 15 has anamount, taken from “Total incurred in 2006” shown below line 1.

17 SMALLER of line 15 or 16. (auto-calc) As indicated.18 Your EARNED INCOME. (auto-calc) When Part III is used, taken as

your earned income for Part III computed on the second screen ofthis form less any part stemming from line 28 of this form. Other-wise zero.

19 If MFJ, spouse’s earned income. ALL others, amount from line 18.(auto-calc) If Part III is used, then if married filing jointly, or if mar-ried filing separately and the answer to “MFS, but single for 2441”is No, taken as spouse’s earned income for Part III computed on thesecond screen of this form less any part stemming from line 28 ofthis form. Otherwise, taken as line 18 if Part III is used and zero ifnot.

20 Smallest of line 17, 18, or 19. (auto-calc) Computed as indicated.21 Amount on 12 received from your sole proprietorship or partnership.

(auto-calc) Taken from “Self-employment and partnership part ofline 12” on screen 3 of this form.

22 Subtract line 21 from line 15. (auto-calc) Computed as indicated.23 $5,000 ($2,500 if married filing separately and required to enter

spouse’s earned income on line 19). (auto-calc) Computed as indi-cated.

24 DEDUCTIBLE BENEFITS. (auto-calc) Computed as the smallest ofline 20, 21, or 23, this is the amount you can deduct from the soleproprietor or partnership income on your return. CAUTION: Youmust enter this deduction on Schedule C, E, or F, whichever is ap-

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plicable. This allowed deduction is not posted anywhere auto-matically.

25 Smaller of line 20 or 23. (auto-calc) Computed as indicated.26 Amount from line 24. (auto-calc) Computed as indicated.27 EXCLUDED BENEFITS. (auto-calc) Computed as line 25 less line 26,

this is the amount of benefits excluded from taxation.28 TAXABLE BENEFITS. (auto-calc) Computed as line 22 less line 27,

this is the taxable amount to be reflected in line 7 of Form 1040.Spouse’s part of line 28. (auto-calc) Spouse's portion of line 28 pro-rated to spouse's portion of line 15 less self-employment and part-nership part. Your and spouse’s parts are separately identified toensure that earned income used in other parts of the return is prop-erly allocated to the proper spouse.

Expenses after benefits. The balance of eligible expenses after taking em-ployer contributions into account is computed here:

29 $3,000 ($6,000 if two or more qualifying). (auto-calc) Computed as$6,000 if the number of persons claimed at line 2 is two or more,$3,000 if the number is one, and zero otherwise.

30 Add lines 24 and 27. (auto-calc) Computed as indicated.31 Subtract line 30 from line 29. (auto-calc) Computed as indicated.32 Line 2, column (c) excluding amount on line 30 above. (auto-calc)

Computed as the amount incurred and paid in 2006 as identifiedbelow lines 1 and 2, less deductible benefits on line 24 and ex-cluded benefits on line 27.

33 SMALLER of line 31 or 32. (auto-calc) Computed as indicated, this re-sult is used for line 3 when Part III is used.



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*Form 2555 & 2555-EZ / Foreign Earned IncomePurpose. This form is used by U.S. citizens (or U.S. resident aliens) livingabroad to claim an exclusion for a limited portion of income earned abroadand to claim an exclusion for employer-paid foreign housing included in in-come. Form 2555 is accessible through the Road Map above lines 21 and 36of Form 1040, and two copies are available, one for each spouse.


*Form 2848 / Power of Attorney and Declaration of Rep-resentativePurpose. This form is used to authorize a qualifying individual to representyou before the IRS. To qualify, that individual must be eligible to practice be-fore the IRS. Unlike other forms in the software, you do not file Form 2848as a part of the taxpayer’s return. Instead, you must send the form to one ofthe special locations listed in the IRS instructions or, if completed for a spe-cific use, to the office handling the specific matter. (Because it is a stand-alone form that is not filed with a return, it is accessible only from the FormsMenu, not the Road Map.)


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Form 3468 / Investment CreditEnergy credits revive Form 3468. Before last year, few taxpayers could takeadvantage of the investment credit because the regular 10% investment taxcredit was repealed by the Tax Reform Act, retroactively to January 1, 1986.Nevertheless, a credit was still available for selected specialty property likerehabilitated old buildings, certified historic structures, and certain solar andgeothermal equipment for generating energy. However, a number of energycredits are now available as a result of energy bills in 2005. Form 3468 is ac-cessible through the Road Map at line 1a of Form 3800.

No longer a stand-alone form. Starting tax year 2006, Form 3468 can nolonger be reported directly on Form 1040. You must claim the credit at line1a of Form 3800 even if this is the only credit you have to report on Form3800. As a result, the section for applying a tax limitation to the credit isgone, and the limitation is now applied on Form 3800.

1 Rehabilitation credit. This credit applies only to certain older buildings.See the IRS instructions for Form 3468 for qualifications and detailed report-ing requirements (to be entered in supporting statements). Thanks to the GulfOpportunity Zone Act of 2005, multiple credit rates now apply. You mustseparately enter expenditures for qualifying Gulf Opportunity Zone (GO Zone)property in the following lines so that higher credit rates are applied -- 30%higher than the normal rates. (GO Zone property does not include property inthe Rita and Wilma disaster areas. Only expeditures in the Katrina disasterarea qualify for an increased credit, and must be incurred after August 27,2005 and before January 1, 2009. See IRS Pub. 4492 for definitions of GOZone, Rita GO Zone, and Wilma GO Zone, which makes it clear that the nameGO Zone by itself applies only to the Katrina disaster area.)

a Electing under sec. 47(d)(5). You can elect to take your qualified re-habilitation expenditures into account for the tax year in which ac-tually paid (or, for self-rehabilitated property, when capitalized), in-stead of when the building is placed in service. You must answerYes here to take the election, but note that the election applies toall later tax years as well, and is not revocable without IRS consent.See IRS section 47(d) for more details.

b Date on which the 24-month or 60-month measuring period begins.Enter the beginning date for the 24-month qualifying period withinwhich the rehabilitation expenses or adjusted basis exceed $5,000.A 60-month period is allowed if a written architectural plan andspecifications are completed before the rehabilitation begins. Thequalifying period is extended by 12 months (to 36 or 72 months)for property in the GO Zone, Rita GO Zone, and Wilma GO Zone ifplaced in service and rehabilitation started, but not completed, be-fore the the hurricane (as defined by dates in the IRS instructions).

… and ends. Enter the ending date for the qualifying period here.


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c Adjusted basis of building at beginning date Enter the adjusted basison the indicated date, or, if later, the first day of the holding period.

d Qualified rehabilitation expenditures incurred in the period on line1b. Enter the amount incurred during the qualifying period.

Pre-1936 buildings:e Pre-1936 buildings in the Gulf Opportunity Zone. For buildings placed

in service before 1936 and located in the GO Zone, enter qualifiedexpenditures here. Do not include certified historic structures, evenif in service before 1936, because they qualify for a higher credit atline 1g, below. (This line does not apply to the Rita GO Zone northe Wilma GO Zone.)

x 13% (.13). (auto-calc) Computed as 13% of the preceding entry,this is the credit for pre-1936 buildings in the GO Zone.

f Other pre-1936 buildings. For buildings placed in service before 1936and not located in the GO Zone, enter qualified expenditures here.Do not include certified historic structures, even if in service before1936, because they qualify for a higher credit at line 1h, below.(Include expenditures in the Rita GO Zone and the Wilma GO Zoneon this line.)

x 10% (.10) for 1a. (auto-calc) Computed as 10% of the preceding en-try, this is the normal credit for pre-1936 buildings.

Certified historic buildings:Certification on file? Answer Yes if you have received certification of

completed rehabilitation work for a certified historic structure. Youmust apply for this certification with the National Park Service(NPS), which will assign a project number once approved. (See IRSinstructions for requirements to be considered a certified historicstructure and circumstances under which you can claim the creditbefore receiving certification.)

g Certified historic structures in the Gulf Opportunity Zone. For certi-fied historic buildings located in the GO Zone, enter qualified expen-ditures here. (This line does not apply to the Rita GO Zone nor theWilma GO Zone.)

x 26% (.26). (auto-calc) Computed as 26% of the preceding entry,this is the credit for certified historic structures in the GO Zone.

h Other certified historic structures. For certified historic buildings notlocated in the GO Zone, enter qualified expenditures here. (Includeexpenditures in the Rita GO Zone and the Wilma GO Zone on thisline.)

x 20% (.20). (auto-calc) Computed as 20% of the preceding entry,this is the normal credit for certified historic structures.

i NPS project number or pass-through entity’s EIN. If the credit is froma pass-through entity (partnership, S corporation, etc.), enter theEIN of the entity. Otherwise, enter the project number assigned bythe National Park Service (NPS) on this line and the date appovedon the next line.

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j Date NPS approved Request for Certification of Completed Work. En-ter the date of final certification of completed work received fromthe Secretary of the Interior. If not received by the time this tax re-turn is filed, see the IRS Instructions for Form 3468 for the evi-dence to attach to the return.

From Schedule K-1 (Form 1065-B), box 9:k Rehabilitation credit from an electing large partnership. Enter the

amount in box 9 of Schedule K-1 (Form 1065-B) that you receivedfrom an electing large partnership. (Form 1065-B is used in place ofForm 1065 when a partnership elects it because of the simplifiedreporting allowed.)

2 Energy credit for periods ending after December 31, 2005. See the IRS In-structions for Form 3468 for details on each of these credits.

a Basis of property using geothermal energy placed in service duringthe tax year. See IRS instructions for the definition of this property,which is new for tax year 2006.

x 10% (.10)2a. (auto-calc) Computed as 10% of the above entry.b Basis of property using solar illumination or solar energy placed in

service during the tax year. See IRS instructions for the definition ofthis property, which is new for tax year 2006.

x 30% (.30) 2b. (auto-calc) Computed as 30% of the above entry.

Qualified fuel cell property:c Basis of property installed during the tax year. See IRS instructions

for the definition of fuel cell property, which is new for tax year2006.

x 30% (.30) 2c. (auto-calc) Computed as 30% of the above entry.d Kilowatt capacity of property in c above. The fuel cell power plant

must generate at least 0.5 kilowatt of electricity.x $1,000 2d. (auto-calc) Computed as 1,000 times the above entry.e Lesser of line 2c or 2d. (auto-calc) Computed as indicated.

Qualified microturbine property:f Basis of property installed during the tax year. See IRS instructions

for the definition of microturbine property, which is new for tax year2006.

x 10% (.10) 2f. (auto-calc) Computed as 10% of the above entry.g Kilowatt capacity of property in f above. The microturbine power

plant must generate less than 2,000 kilowatt of electricity.x $200 2g. (auto-calc) Computed as 200 times the above entry.h Lesser of line 2f or 2g. (auto-calc) Computed as indicated.

Totals for line 2:i Total. Add lines 2a, 2b, 2e, and 2h. (auto-calc) Computed as indicated.

3 Qualifying advanced coal project credit. See the IRS Instructions for Form3468 for details on what qualifies for this credit.


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a Basis of qualified investment in integrated gasification combined cy-cle property placed in service during the tax year. See IRS instruc-tions for the definition of this category, which first went into effecton August 9, 2005.

x 20% (.20) 3a. (auto-calc) Computed as 20% of the above entry.b Basis of qualified investment in property other than in a above

placed in service during the tax year. See IRS instructions for thedefinition of this category, which first went into effect on August 9,2005.

x 15% (.15) 3b. (auto-calc) Computed as 15% of the above entry.c Total. Add lines 3a and 3b. (auto-calc) Computed as indicated.

4 Qualifying gasification project credit. See the IRS Instructions for Form3468 for details on what qualifies for this credit.

Basis of qualified investment in qualifying gasification project prop-erty placed in service during the tax year. See IRS instructions forthe definition of this category, which first went into effect onAugust 9, 2005.

x 20% (.20) 5. (auto-calc) Computed as 20% of the above entry.

5 Credit from cooperatives. Cooperative organizations defined under IRS sec-tion 1381(a) must allocate to patrons of the cooperative any investmentcredit not used by the cooperative because of tax liability limitations. Patronsmust enter their allocated share of the unused credit here.

Transition property. (CAUTION: Rarely allowed. Use only if relevant IRS sec-tion applies.) Under the conditions of the Tax Reform Act of 1986, the onlytransition property eligible is property with a 20-year class life and placed inservice before January 1, 1992, provided it was constructed or acquired un-der a binding contract by Dec. 31, 1985, under construction with 5% of costcommitted by Dec. 31, 1985, or an equipped building or plant facility withconstruction begun and 50% of cost committed by Dec. 31, 1985, plus cer-tain other specific projects. To claim a credit here you must enter the relevantIRS section number and explain your computation of the credit in a support-ing statement for the line you use below.

Regular credit (reduced 35%). Certain property specified in IRS sec-tions 204(a)(8), 204(a)(12), and 204(c)(4) of the Tax Reform Act of1986 is still eligible for investment credit under section 49 as in ef-fect November 4, 1990. However, the credit must normally be re-duced by 35% under the rules of section 49. For most property theregular credit was 10%, so the allowed credit is now 6.5%. Youmust explain your computation of the credit in a supporting state-ment for this line, entering only the reduced credit you claim in theamount column of the support. See the IRS instructions for Form3468. (The software keeps track of this portion of the credit in or-der to properly handle any carryover of unused credit to other years,because the IRS requires that you carry over the full credit before itsreduction by 35% and then reduce it by 35% each year it is used.)

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Other credit or adjustment. Certain projects specified in IRS sections251(d)(3) and 251(d)(4) of the Tax Reform Act of 1986 are still eli-gible for investment credit under section 251(d)(5). This includes a10% credit for certain 30-year-old buildings, a 13% credit for cer-tain 40-year-old buildings, and a 25% credit for certain certified his-toric structures. Unlike the regular credit, this credit is NOT reducedby 35%. You must explain your computation of the credit in a sup-porting statement for this line, entering only the credit you claim inthe amount column of the support. If you are claiming credit for acertified historic structure, you must also include the project numberfrom the National Park Service (NPS), or, if from a pass-through en-tity (partnership, S corporation, estate, or trust), the identifyingnumber of the pass-through entity.

Other credit or adjustment. (auto-calc) Computed as the sum of theabove two amounts. This amount will be included in the total forline 6, and the support for the preceding two lines will be cross-referenced on the dotted line for line 6 of the official form.

6 Add lines 1e through 1h, 1k, 2i, 3c, 4, and 5. (auto-calc) Computed as indi-cated plus the preceding “Other credit or adjustment,” and posted to Form3800, line 1a.



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Form 3800 / General Business CreditPurpose. Form 3800 consolidates certain business credits onto one form inorder to integrate the limitations on those credits. Many of the credits ex-pired at the end of 2005, but most were retroactively reinstated by the De-cember tax bill. You must use Form 3800 to claim any of the credits listed inline 1 or to claim any carryback or carryforward of any of these or other gen-eral business credits. Form 3800 is accessible through the Road Map at line55a of Form 1040.

NEW: Form 3800 now manditory. You must now use Form 3800 wheneveryou have any of the credits listed in any part of line 1. You can no longer de-duct any of these credits on Form 1040 without Form 3800. (Formerly, youcould deduct a credit directly on Form 1040 without Form 3800 if it was theonly credit for Form 3800.) You must also use Form 3800 to claim any car-ryback or carryforward of any of these credits (or other general businesscredits that appeared on Form 3800 for any other year).

Rules for carryforwards and carrybacks. The rules for carryback and carry-forward of unused credits allow you to carryback unused credits only 1 year,to the prior-year return. After using the carryback, you can carry forward anyremaining credits for 20 years. However, if there has been a change in themarital status since the year of the credit, you may need to refigure the creditas detailed in the IRS instructions for Form 3800.

PART I, CURRENT YEAR CREDIT. Applicable credits are summed in this sec-tion, but may be limited in Part II.

1a Investment credit (Form 3468). (Road Map line, supported by Form3468.) Taken from line 6 of Form 3468.

Reduced ITC in line 1a. (Road Map line, supported by Form 3468.) Af-ter you complete Form 3468, the total appears here for those cred-its for transition property that you had to reduce by 35% under thetransitional rules. This entry is used in the carryover computationsthat follow line 19.

Unless you use the Premium Level software, you must enter the remainingcredits manually because the corresponding forms are not built into Economyand Standard Level software. Note that you no longer have to file the formsthat support lines 1e, 1l, or 1n if the only credits on those forms are frompass-through entities (partnerships, etc.) and you report the entity’s EIN onthe line.

1b Work opportunity credit (Form 5884). (If Premium Level, supportedby Form 5884.) The result in Part I of Form 5884 is reported here.

1c Welfare-to-work credit (Form 8861). (If Premium Level, supported byForm 8861.) This credit is based on wages paid to qualified indi-viduals on welfare.

1d Increasing research credit (Form 6765). (If Premium Level, supportedby Form 6765.) The result on Form 6765 is reported here. Note thatyou must have taxable income from the activity to which the re-

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search relates in order to claim any credit for the current year, asenforced following line 18.

1e Low-income housing credit (Form 8586). (If Premium Level, supportedby Form 8586.) The result on Form 8586 is reported here.

EIN for line 1e if claiming this credit from a pass-through entity. Enterthe entity’s EIN if all credit on Form 8586 stems from this entity.(You are no longer required to file Form 8586 with the return if theonly credit reported on this form is from this pass-through entity.)

1f Enhanced oil recovery credit. Enter here the credit passed throughto you from partnerships or S corporations. The credit expired at theend of 2005, but you are allowed to claim credit from a pass-through entity with a fiscal year that started in 2005.

1g Disabled access credit (Form 8826). Enter here the result from Part Iof Form 8826.

1h Renewable electricity production credit (Form 8835). Enter the resultfrom Part I of Form 8835.

1i Indian employment credit (Form 8845). Enter here the result fromPart I of Form 8845.

1j Credit for employer social security and Medicare taxes paid on cer-tain employee tips (Form 8846). (If Premium Level, supported byForm 8846.) The result on Form 8846 is reported here. Form 8846is used to claim credit for social security and Medicare taxes paid orincurred on customary tips received by employees (excluding tipsthat are applied to meet minimum wage standards).

1k Orphan drug credit (Form 8820). Enter the result in Part I of Form8820.

1l New markets credit (Form 8874). Enter here the result from Part I ofForm 8874.

EIN for line 1l if claiming this credit from a pass-through entity. Enterthe entity’s EIN if all credit on Form 8874 stems from this entity.(You are no longer required to file Form 8874 with the return if theonly credit reported on this form is from this pass-through entity.)

1m Small employer pension plan startup costs (Form 8881). Enter herethe result from Form 8881.

1n Employer-provided child care facilities and services (Form 8882).Enter here the result from Form 8882.

EIN for line 1n if claiming this credit from a pass-through entity. Enterthe entity’s EIN if all credit on Form 8882 stems from this entity.(You are no longer required to file Form 8882 with the return if theonly credit reported on this form is from this pass-through entity.)

1o Qualified railroad track maintenance credit (Form 8900). Enter herethe result from Form 8900.

1p Biodiesel fuels credit (Form 8864). Enter here the result from Form8864.

1q Low sulfur diesel fuel production credit (Form 8896). Enter here theresult from Form 8896.


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1r Distilled spirits credit (Form 8906). Enter here the result from Form8906.

1s Nonconventional source fuel credit (Form 8907). Enter here the resultfrom Form 8907.

1t Energy efficient home credit (Form 8908). Enter here the result fromForm 8908.

1u Energy efficient appliance credit (Form 8909). Enter here the resultfrom Form 8909.

1v Alternative motor vehicle credit (Form 8910). Enter here only theamount on line 10 of Form 8910, which is the business credit partof the form.

1w Alternative fuel vehicle refueling property credit (Form 8911). Enterhere only the amount on line 9 of Form 8911, which is the businesscredit part of the form.

1x Credit for contributions to selected community development corpo-rations (Form 8847). Enter here the result from Part I of Form 8847.

1y Mine rescue team training credit (Form 8923). Enter here the resultfrom Form 8923.

1z General credits from an electing large partnership. Enter theamount shown in line 7 of any Schedule K-1 (Form 1065-B) you re-ceive from an electing large partnership. (Form 1065-B is used inplace of Form 1065 when a partnership elects it because of thesimplified reporting allowed.)

1aa Credits from employers affected by Hurricane Katrina, Rita, orWilma (Form 5884-A). Enter here the result from Form 5884-A.

2 Add lines 1a through 1aa. (auto-calc) Computed as indicated, this isthe sum of current-year credits before applying any limitations.

3 Passive activity credits included on line 2. Credits associated withpassive activities must be reported on Form 8582-CR (not built intothe software), where they are limited in accordance with the pas-sive loss limitations. The credits included above must be reportedhere and on Form 8582-CR. The allowable part of those credits areadded back at line 5.

4 Subtract line 3 from line 2. (auto-calc) Computed as indicated.5 Passive activity credits allowed for 2006. The part of the credits

shown on line 3 that are allowed to be used in the current tax yearis reported here, based on the results of Form 8582-CR.

Caution: itemize entries for next two carryforward entries:Carryforward of reducible ITC. Enter the FULL amount of carryfor-ward to 2006 of regular investment tax credit (ITC) here, and ex-plain in a supporting statement for this line.

ITC reduction. (auto-calc) Only 65% of the carryforward of ITC canbe used, so a 35% reduction appears here.

Carryforward of other business credit. Enter carryforward to 2006of all other general business credits here, including WIN, jobs, alco-hol fuel, research, ESOP, and low-income housing credit carryovers,

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and ITC carryovers not subject to reduction. Explain all entries in asupporting statement for this line. See IRS instructions for detailson what information to supply.

6 Carryforward of general business credit to 2006. (auto-calc) Com-puted as the sum of carryforwards less computed ITC reduction.

7 Carryback of general business credit from 2007. This line is relevantonly when you amend the return in a later year and have a carry-back from the Form 3800 for tax year 2007. Accordingly, the soft-ware will not allow an entry here unless Form 1040X (Amended In-come Tax Return) has been created.

8 CURRENT YEAR CREDIT. (auto-calc) Computed as the sum of lines 4through 7.

PART II, CREDIT LIMITATION BASED ON AMOUNT OF TAX. The credit maybe applied to the first $25,000 of your adjusted tax liability plus 75% of thetax liability in excess of $25,000:

9 Regular tax before credits. (auto-calc) Taken as Form 1040, line 44.10 Alternative minimum tax. (auto-calc) Taken as Form 6251, line 35.11 Add lines 9 and 10. (auto-calc) Computed as indicated.12a Foreign tax credit. (auto-calc) Taken from Form 1040, line 47.12b Credits from Form 1040, lines 48 through 54. (auto-calc) Taken

from Form 1040, as indicated.12c Qualified electric vehicle credit (Form 8834, line 20). (auto-calc)

Taken from the special Form 8834 line at line 55c of Form 1040.12d Non-business alternative motor vehicle credit (Form 8910, line 18).

(auto-calc) Taken from the special Form 8910 line at line 55c ofForm 1040, this is the personal credit part of the form.

12e Non-business alternative fuel vehicle refueling property credit(Form 8911, line 19). (auto-calc) Taken from the special Form 8911 lineat line 55c of Form 1040, this is the personal credit part of the form.

Other eligible credits for line 12f. This line is for any other credits notlisted above that can be used to reduce regular tax before businesscredits. These credits should have been included in line 56 of Form1040, but not all credits in that line can be used here.

12f Add lines 12a through 12e. (auto-calc) As indicated plus the aboveextra credit, this is the total of credits that reduce the regular taxbefore business credits.

13 NET INCOME TAX. (auto-calc) Computed as line 11 less line 12f.14 NET REGULAR TAX. (auto-calc) Computed as line 9 less line 12f, but

no less than zero.Spouse has investment credit too? This answer is used only if married

filing separately, ensuring the proper limitations at line 15.Your % in a controlled group. The limitations are prorated among

members of a controlled group, so a member of a section 38(c)(3)controlled group must enter his or her percent of ownership here.

15 25% of the excess of line 14 over $25,000,. (auto-calc) Computed asindicated for most taxpayers. However, the $25,000 figure is re-


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duced to $12,500 if married filing separately and you answered Yesto the above question. The $25,000 is also multiplied by the pre-ceding percentage if a nonzero percentage is entered.

16 Tentative minimum tax. (auto-calc) Taken from Form 6251, line 33.17 Greater of line 15 or line 16. (auto-calc) Computed as indicated.18 Subtract line 17 from line 13. (auto-calc) Computed as indicated, but

no less than zero, this is the credit limitation before applying thespecial rules for the research credit.

Taxable income attributable to the Form 6765 claim on line 1d. Enterhere the taxable income attributable only to the business for whichthe increasing research credit is claimed on line 1d (e.g., line 31 ofthe copy of Schedule C for that business). The software uses thisentry to limit research credits to the tax attributable to the businessfrom which they stem, as required by law. However, if there ismore than one business for which you are claiming the credit, youmay have to override the computed adjustment to line 8, below,based on a separate computation for each separate business enter-prise, as described in the IRS instructions for line 19.

Taxable income on Form 1040 line 43. (auto-calc) Taken from Form1040 as indicated, this is the Taxable Income on Form 1040.

Adjustment to line 8 for sec. 41(g). (auto-calc) This negative adjust-ment is computed using the preceding two lines in accordance withspecial limitations detailed in IRS instructions for line 19. However,if different research credits stem from different businesses, you mayneed to override this line as noted above.

Line 8 after limitation for sec. 41(g). (auto-calc) Computed as line 8plus the above adjustment.

19 CREDIT ALLOWED FOR THE CURRENT YEAR. (auto-calc) Computedas the lesser of the preceding modified line 8 or line 18.

Carryover of reducible ITC. (auto-calc) Computed as the proratedportion of the modified line 8 less line 19 that is regular credit fortransition property, and increased by the ratio 1/0.65 so that the35% reduction is eliminated. (This carryover is reduced by 35%once again when it is applied in another year.)

Other carryover. (auto-calc) Computed as the prorated portion of themodified line 8 less line 19 that is not reducible credit for transitionproperty.

The credit on line 19 is posted to line 55a of Form 1040.


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Form 3903 / Moving ExpensesWho is it for? If you moved your residence because of a change in the loca-tion of your job, you may be able to deduct the cost of the move. The movecan be to a location in the United States or, if a U.S. citizen or resident alien,a location outside the United States. You must generally meet two tests toqualify for a deduction -- a Distance Test and a Time Test – as detailed later.See IRS Pub. 521 (Moving Expenses) for more information.

Use separate form for separate moves. Three copies of Form 3903 are builtinto the software, for up to 3 separate moves you make during the tax year.Form 3903 is accessible through the Road Map at line 26 of Form 1040.

QUALIFICATION. The first part of the form is used to determine whether youqualify to deduct moving expenses.

Copy number (1 through 3). (auto-calc) Automatically the number you se-lected from the menu when you accessed the form.

Distance Test Worksheet. The distance from your old residence to your newwork place must be at least 50 miles more than the distance from your oldresidence to your old work place.

1 Miles from your OLD HOME to your NEW WORKplace.2 Miles from your OLD HOME to your OLD WORKplace.3 Subtract line 2 from line 1. (auto-calc) Computed as indicated.Will you satisfy the DISTANCE TEST? (auto-calc) Answered Yes if the

result on line 3 is 50 or more.

Time test. As an employee you must work full-time for at least 39 weeks ofthe 12 months following your move. If self-employed you must also work full-time for at least 78 weeks during the 24 months following your move.

Will you satisfy the TIME TEST? You can answer Yes even if you havenot yet met the time test, but you have not yet failed the test andstill expect to meet it. If you answer No, you must satisfy one ofthe following exceptions in order to claim a credit.

Exceptions to the Time Test. You do not have to satisfy the time test ifyou can answer Yes to one of the following questions. Job ends because of your disability? Transferred for your employer’s benefit? Laid off? Discharged (for reasons other than willful misconduct)? Meet requirements for retirees or survivors living outside the U.S.? Filing this form for a decedent?If you answer Yes to any of the above, the Time Test is waived.

Permanent military change of station? If you are a member of the armedforces and the move was due to a permanent change of station, answer Yesso that BOTH the Time Test and the Distance Test are waived.

QUALIFY FOR MOVING EXPENSE DEDUCTION? (auto-calc) Answered Yes ifyou qualify based on your above entries.


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EXPENSES INCURRED IN 2006. The remainder of the form is used to reportthe qualified expenses, all of which are deductible as an adjustment to in-come on Form 1040.

1 Transportation and storage for household goods and personal effects. En-ter your transportation expenses in moving household goods and personal ef-fects. Include the cost of packing, crating, moving, storing in transit, and in-suring your household goods for up to a 30-day period before delivery to yournew home. Enter here and on line 2 only amounts you actually paid, includingamounts reimbursed by your employer.

2 Travel and lodging (NOT meals). This line is for the cost of moving people.Enter only amounts you actually paid, including amounts reimbursed by youremployer.

Transportation (excluding use of your own car). Enter the cost oftransportation from your old home to your new home, excluding carexpenses, which are entered below. Enter only amounts you actu-ally paid, including amounts reimbursed by your employer.

Actual expense for your own car. You can deduct the actual gas and oilcosts of using your car for the transportation, or an amount basedon a standard mileage rate of 18 cents per mile, whichever isgreater. Enter the actual costs here and the mileage in the next line,and the software will determine the more favorable deduction.

Miles traveled with your own car. Enter total miles traveled from yourold home to your new home.

Allowed car deduction. (auto-calc) Computed as the greater of anallowance at 18 cents per mile, or the actual expense enteredabove.

Parking fees and tolls. Whichever method of car expense deductionyou use, you can additionally deduct parking fees and tolls here.

Lodging. Enter the cost of lodging required while traveling from yourold home to your new home. You can include only one trip per fam-ily member, but you may include the costs for the day you arrive.

Other travel expenses. Enter all other travel expenses here, except formeal expenses, which are subject to special limitations. CAUTION:Expenses for meals are NOT allowable expenses for this form.

2 Travel and lodging (NOT including meals). (auto-calc) Computed as thesum of transportation expenses, allowed car expenses, parking fees and tolls,lodging, and other travel expenses above.


For payments NOT in Form W-2 box 1: These lines are for amounts paid byyour employer but not included in W-2 box 1 and therefore not included intaxable income at line 7 of Form 1040.

Amount paid by YOUR employer. Enter the amount your employerpaid for the expenses included in lines 1 and 2 but not included asincome in box 1 of Form W-2. The amount should be identified inbox 13 of your 2006 Form W-2 as code P.

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Amount paid by SPOUSE employer. Enter the amount spouse’s em-ployer paid for the expenses included in lines 1 and 2 but not in-cluded as income in box 1 of Form W-2. The amount should beidentified in box 13 of spouse’s 2006 Form W-2 as code P.

4 Employer-paid amounts NOT in box 1 of W-2. (auto-calc) Taken asyour entry for amount paid by YOUR employer plus, if married filingjointly, the amount paid by spouse’s employer.

5 Is line 3 more than line 4? (auto-calc) If Yes, the allowed moving expensededuction is computed on the next line. Otherwise, no deduction is allowed.

MOVING EXPENSE DEDUCTION. (auto-calc) If the answer to line 5 isYes, computed as line 3 less line 4, but no less than zero; other-wise, zero. This result is posted to line 26 of Form 1040.

Excess payment for Form 1040, line 7. (auto-calc) Computed as theamount, if any, by which line 4 exceeds line 3. This amount is re-flected in line 7 of Form 1040 as wage income and flagged to theIRS at that line on the official printout with the number “3903.”

Spouse part of above excess. (auto-calc) If married filing jointly, thepreceding excess is prorated in proportion to the spouse’s contribu-tion to line 4 in order to determine the part of the excess that isconsidered as wage income for spouse. This result is important inproperly computing earned income for forms that need earned in-come computed separately for you and spouse, such as Form 2441.



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*Form 4136 / Credit for Federal Tax Paid on FuelsPurpose. This form is used to claim a refundable credit for taxes paid on fuelused (or sold) for certain nontaxable purposes. Nontaxable uses include useon a farm (for farming purposes), off-highway business use, export, for aboat used for commercial fishing, etc. Form 4136 is accessible through theRoad Map at line 70b of Form 1040.


*Form 4137 / Social Security and Medicare Tax on Unre-ported Tip IncomePurpose. This form is used to figure the social security and Medicare tax youowe on tips not reported to your employer, and therefore not already taxed,including any allocated tips shown on any Form W-2 you receive. You are re-quired to file Form 4137 if you received tips of $20 or more in any month inthe tax year and did not report all of those tips to your employer. Form 4137is accessible through the Road Map at line 59 of Form 1040, and two copiesare available, one for each spouse.


*Form 4255 / Recapture of Investment CreditPurpose. This form is used to figure the additional tax due to the recapture ofa Investment Tax Credit (ITC) previously claimed via Form 3468. Recapturearises if you, within 5 years of the date placed in service, you dispose of theproperty, change its use to a nonqualified use, returned leased property, re-duce ownership or business use below acceptable limits, etc. Form 4255 isaccessible through the Road Map at the ICR line above line 63 Form 1040.


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Form 4562 / Depreciation and AmortizationHow to use it. Form 4562 is used to report depreciation and amortization de-ductions in support of expenses on several IRS forms. Twenty copies ofForm 4562 are provided: one for each separate copy of each supported form,as required by the IRS, plus two extras copies. They are accessible throughthe Road Map at the lines they support, as follows:

• Copy 1 supports Schedule A through line 22 for both depreciationand amortization.

• Copies 2-6 support copies 1-5 of Schedule C through line 13 for de-preciation and line 46 for amortization.

• Copy 7 supports Part I of Schedule E (Rental Real Estate ONLY)through line 20a for depreciation only. (Amortization is not relevanthere.)

• Copies 8-12 support copies 1-5 of Schedule F through line 16 fordepreciation and line 34b for amortization.

• Copies 13-17 support copies 1-5 of Form 2106 through line 4 forboth depreciation and amortization (excluding car depreciation,which is reported on a separate worksheet on Form 2106).

• Copy 18 supports Form 4835 through line 12 for depreciation andline 30b for amortization.

• Copy 19-20 are unattached copies not accessible through the RoadMap. They are provided for forms not built into the software or forspecial summarizing purposes, and are accessible only when youaccess Form 4562 from the Forms Menu.:

The laws for depreciation are complex, and have changed several times overthe last two decades. If you have questions about the computations per-formed by the software, we refer you to IRS Pubs. 534 (Depreciating Prop-erty Placed in Service Before 1987) and 946 (How to Depreciate Property).

TAX PLANNING HINT: The IRS design for this form is strongly tied to the taxyear. The labels that appear on the printed form and screen refer to specificyears, such as 2006 for lines 17, Section B (line 19), and Section C (line 20).But when you enter a later tax year on the Control Form (for tax planning),the predefined labels no longer apply, and lines 17, 19, and 20 now apply tothe new tax year rather than 2006. CAUTION: When you use our "translate"feature, all amounts and worksheets are shifted to the proper lines automati-cally as long as the tax year entry on the prior return is the prior year (2005).But if the entry were the current tax year (2006), the software would assumethat you had already reentered the data on the proper lines with the later yearin mind, so no shifts would be performed.


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Identity. The copy of Form 4562 is identified here:This copy supports: (auto-calc) The form or schedule supported by this

copy appears here. (The Form 4562 copy number appears besidethe first item on the menu for this form.)

Business or activity. Describe the activity to which this copy relates in25 characters or less, using a description consistent with the oneused on the supported schedule.

PART I, ELECTION TO EXPENSE CERTAIN TANGIBLE PROPERTY (SECTION179). IRS Code Section 179 provides for a full deduction of the cost of someproperty (in place of normal depreciation) for property that meets ALL of thefollowing requirements:

Acquired by purchase. Must have been purchased for use in a trade orbusiness.

Current. Must be placed in service during the current tax year.Active business. Must be used at least 50% of the time in the active

conduct of a trade or business (but no section 179 deduction is al-lowed for investment property, so you should claim none for thecopy of Form 4562 that supports Part I of Schedule E).

Tangible. Must be tangible depreciable property.Section 38. Must qualify as Section 38 property (that is, it would have

met the requirements for the investment tax credit had the creditnot been repealed.)

Three important limitations apply to these deductions:A The aggregate of all section 179 deductions, including any from any

Schedule K-1 you receive, on the return cannot exceed $108,000($54,000 if married filing separately). (This limitation is raised by asmuch as $35,000 for qualified zone property of an empowermentzone business, qualified renewal property of a renewal communitybusiness, and New York Liberty Zone property. It is raised by asmuch as $100,000 for GO Zone property as defined in the Gulf Op-portunity Zone Act of 2005.)

B When the total cost for all section 179 property together exceeds$430,000, the $108,000 limit is reduced dollar-for-dollar, so thatNO deduction is allowed when total cost exceeds $538,000. (Formarried filing separately, the $215,000 limit is reduced at costsabove $215,000, reducing to zero at $268,000. Only half the costof the property is used in the computation for qualifiedempowerment zone property, qualified renewal property, or NewYork Liberty Zone property. For GO Zone property, the $430,000threshold is raised by as much as $600,000.)

C Section 179 deductions cannot exceed the aggregate taxable incomefrom all trades or businesses that the taxpayer and/or spouse ac-tively conducts, including wages. Therefore, if you have no wagesand only one business and it operates at a loss, you are not allowed

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ANY section 179 deduction. Any amount not deducted this yearbecause of this rule can be carried over to 2007 returns. (Note thatincome that qualifies for this limitation includes section 1231 gainsor losses and interest from working capital of a trade or business.See IRS Pub. 946 for details.)

Notice in the above paragraphs that there are three kinds of property eligiblefor special treatment in applying the limitations:

Qualified zone property. This is property of an enterprise zone busi-ness, which is designated by the government for special treatment.If a sec. 179 deduction is claimed for any such property LimitationA is raised by the lesser of $35,000 or the cost of the qualifiedproperty. Furthermore, only half of the cost of such property isused when applying Limitation B. See IRS Sections 1397C and1397D for the IRS definitions of qualified zone property and enter-prise zone business.

Qualified renewal property. This is property of a renewal communitybusiness, which is designated by the government for special treat-ment. If a sec. 179 deduction is claimed for any such property Limi-tation A is raised by the lesser of $35,000 or the cost of the quali-fied property. Furthermore, only half of the cost of such property isused when applying Limitation B. See IRS Sections 1400G and1400J(b) for the IRS definitions of qualified renewal property andrenewal zone business. The special tax benefits for this kind ofproperty apply ONLY to property acquired after December 31,2002. (The software provides no separate lines for this property soyou should use lines designated for “qualified zone property” tobenefit from favorable treatment to which you are entitled.)

New York Liberty Zone property. This is property in the New York Lib-erty Zone for which special treatment is provided in the new tax bill,as noted in Chapter 1. If a sec. 179 deduction is claimed for anysuch property Limitation A is raised by the lesser of $35,000 or thecost of the qualified property. Furthermore, only half of the cost ofsuch property is used when applying Limitation B. See IRS Sections1400L for the IRS definition of New York Liberty Zone property.

Gulf Opportunity Zone property. This is property (often called GO Zoneproperty by the IRS) in the Katrina disaster area acquired afterAugust 27, 2005 as defined in the Gulf Opportunity Zone Act of2005. If a sec. 179 deduction is claimed for any such property Limi-tation A is raised by the lesser of $100,000 or the cost of the quali-fied property. Limitation B is raised by the lesser of $600,000 or thecost of the qualified property. See IRS Pub. 4492 (Information forTaxpayers Affected by Hurricanes Katrina, Rita, and Wilma) for anoverview, or IRS Section 1400N(e)(2) for technical details.

The limitations are applied in the following lines for deductions on this copyof Form 4562 ONLY, but you may be subject to further limitations if there aresection 179 deductions elsewhere on the return. The limitations technically


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apply to the aggregate of all property throughout the return. You may there-fore need to summarize all section 179 deductions for the entire return on anunattached copy of Form 4562 (copy 19 or 20), in order to determine theappropriate limitations, then reduce the deductions accordingly on the indi-vidual Forms 4562.

MFS: Spouse's cost of New York Liberty Zone property. If the filingstatus is married filing separately you must enter the total cost ofNew York Liberty Zone property expensed on the spouse's Form4562. This amount is reflected in line 1, below, and half of it is re-flected in line 2.

MFS: Spouse's cost of GO Zone property. If the filing status is marriedfiling separately you must enter the total cost of Gulf OpportunityZone property expensed on the spouse's Form 4562. This amount isreflected in line 1, 2, and 3, below.

MFS: Spouse's cost of qualified zone property. If the filing status ismarried filing separately you must enter the total cost of qualifiedzone property expensed on the spouse's Form 4562. This amount isreflected in line 1, below, and half of it is reflected in line 2. (Alsoinclude the spouse’s cost of any qualified renewal property, whichcarries the same tax benefits as qualified zone property.)

MFS: Spouse's cost of other Section 179 property. If the filing status ismarried filing separately you must enter the total cost of all section179 property expensed on the spouse's Form 4562 excluding quali-fied zone property, qualified renewal property, and New York LibertyZone property already enter in the preceding lines. This amount isreflected in line 2, below.

New York Liberty Zone cost on line 6 worksheets. (auto-calc; supportedby the Section 179 Worksheet, Figure 2-23.) The cost of propertyidentified on the worksheets as “N. Y. Liberty Zone property” isshown here for use in the limitation at line 1 and the cost at line 2.

Gulf Opportunity Zone cost on line 6 worksheets. (auto-calc; supportedby the Section 179 Worksheet, Figure 2-23.) The cost of propertyidentified on the worksheets as “Gulf Opportunity Zone property” isshown here for use in the limitations at lines 1 and 3, and the costat line 2.

Qualified Zone and Renewal cost on line 6 worksheets. (auto-calc; sup-ported by the Section 179 Worksheet, Figure 2-23.) The cost ofproperty identified on the worksheets as “Qualified empowermentzone/Renewal community property” is shown here for use in thelimitation at line 1 and the cost at line 2.

1 Maximum dollar limitation. (auto-calc) Normally $108,000 for 2006,this limitation will be higher if you identified any property as quali-fied zone property in the preceding lines, the worksheet for line 6,or the worksheets for line 26 (described later). (In order to accom-modate a new e-file specification, the amount that appears here will

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be zero until you claim a section 179 deduction at line 6, 12, or26(i), when using release 2007.01g or later.)

2 Total cost of sec 179 property placed during the tax year. (auto-calc)Computed as the total cost of assets for which you claim section179 deductions at lines 6 (taken from your entries on the Section179 Worksheets) and 7 (taken from your entries on the Listed Prop-erty Worksheets for line 26(i), which is posted to line 7), less halfthe cost of qualified zone/renewal community or N.Y. Liberty Zoneproperty included in these totals, plus, if married filing separately,half the spouse's qualified zone property plus all of the spouse'sother Section 179 property.

3 Threshold cost before reduction in limitation. (auto-calc) Automati-cally $430,000, but may be higher if any GO Zone property applies.(In order to accommodate a new e-file specification, the amountthat appears here will be zero until you claim a section 179 deduc-tion at line 6, 12, or 26(i), when using release 2007.01g or later.)

4 Reduction in limitation. (auto-calc) The excess cost for Limitation B iscomputed here as the total cost in line 2 less the threshold in line 3,but no less than zero. HINT: If an entry appears here, reconsideryour section 179 claims, because you can avoid Limitation B byclaiming the deduction only for less costly items.

MFS: $ deviation from 50/50 rule. (For MFS filing status ONLY.) Thedollar limitation is line 1 less line 4, but married taxpayers filingseparately must split this amount between themselves. A 50/50split is normal, but the IRS allows you to make a different split aslong as the two of you deduct no more than the dollar limitation onboth of your returns combined. This line is therefore provided to al-ter the split by allowing you to enter a dollar adjustment to the50/50 split ranging from line 1 less line 4 to line 4 less line 1.

5 Dollar limitation for the tax year. (auto-calc) Computed as line 1 lessline 4, plus the preceding deviation if married filing separately, butno less than zero. (In order to accommodate a new e-file specifica-tion, the amount that appears here will be zero until you claim asection 179 deduction at line 6, 12, or 26(i), when using release2007.01g or later.)

6 Other than listed property. (Supported by the Section 179 Work-sheet, Figure 2-23.) The claim for property placed in service in thecurrent tax year is detailed here for all except listed property. Work-sheet details follow the details for line 13, below. REMINDER: Listedproperty MUST be detailed in Part V using the Listed PropertyWorksheet, not here. Listed property includes cars, computers, andother property that could be partially used for entertainment, recrea-tion, or amusement.

7 Listed property - amount from line 29. (auto-calc) Taken as the totalsection 179 expense deduction in Part V, and therefore not com-plete until you complete Part V.


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8 Total elected section 179 cost. (auto-calc) Computed as line 6 plus line7.

9 Tentative deduction. (auto-calc) Computed as the lesser of line 5 orline 8. Limitations A and B, described previously, are enforced here.

10 Carryover of disallowed deduction from 2005. Enter here anyamount of section 179 deduction disallowed in 2005 because of thelimitation of the deduction to taxable business income. This amountis shown on line 13 of the prior-year return, and does not includelimitations caused by the $105,000 limitation that year or the limi-tation resulting when total costs exceed $420,000.

Adjustment to taxable income limitation. In applying Limitation C, de-scribed previously, the software takes into account all wages andself-employment income throughout the return, but does not prorateit among separate Forms 4562. As a result, if you have more thanone Form 4562 with Sec. 179 deductions, you will have to make anegative entry here to reduce the limitation on line 11 by theamount allocated to other Forms 4562. You will also have to makean adjustment here if you have any section 1231 gains or lossesfrom any trade or business (reported in Part I or III of Form 4797).

11 Taxable income limitation. (auto-calc) Limitation C is applied here.(In order to accommodate a new e-file specification, the amountthat appears here will be zero until you claim a section 179 deduc-tion at line 6, 12, or 26(i), when using release 2007.01g or later.)

12 Section 179 expense deduction. (auto-calc) Computed as the lesserof line 11 or the sum of lines 9 and 10. Limitation C is enforcedhere.

13 Carryover of disallowed deduction to 2007. (auto-calc) Computed asline 9 plus line 10 less line 12, this is the amount disallowed due tothe taxable income limitation on line 11, and will be used for line 10on next year's Form 4562.

The Section 179 Work-sheet, Figure 2-23. Usethis worksheet for allbut listed property.The special 30% or50% allowance isNOT claimed on thisworksheet but ratheron the MACRS/ACRSWorksheets for lines19 and 20, and theListed Property Work-sheets for line 26.CAUTION: Use the

Listed Property Worksheet in Part V, not this worksheet, for automobiles andother listed property.

SECTION 179 WORKSHEETSECTION 179 WORKSHEETSECTION 179 WORKSHEETSECTION 179 WORKSHEET Tax year on Form 1040. Tax year on Form 1040. Tax year on Form 1040. Tax year on Form 1040.▒ 2006▒ 2006▒ 2006▒ 2006 a. Description of property : a. Description of property : a. Description of property : a. Description of property :

Date placed in service.. Date placed in service.. Date placed in service.. Date placed in service.. b. Cost.................... 0 b. Cost.................... 0 b. Cost.................... 0 b. Cost.................... 0 Expense deduc'n from K-1 0 Expense deduc'n from K-1 0 Expense deduc'n from K-1 0 Expense deduc'n from K-1 0 N. Y. Liberty Zone pro N. Y. Liberty Zone pro N. Y. Liberty Zone pro N. Y. Liberty Zone propppperty? Noerty? Noerty? Noerty? No Gulf Opportunity Zone prop.? No Gulf Opportunity Zone prop.? No Gulf Opportunity Zone prop.? No Gulf Opportunity Zone prop.? No Qlfd.emp.zone/renewal pro Qlfd.emp.zone/renewal pro Qlfd.emp.zone/renewal pro Qlfd.emp.zone/renewal propppp.? No.? No.? No.? No Amt. 179 elect NOT to claim 0 Amt. 179 elect NOT to claim 0 Amt. 179 elect NOT to claim 0 Amt. 179 elect NOT to claim 0 c. Elected cost.............. c. Elected cost.............. c. Elected cost.............. c. Elected cost..............▒ 0▒ 0▒ 0▒ 0 Balance for deprn & spec allow Balance for deprn & spec allow Balance for deprn & spec allow Balance for deprn & spec allow▒ 0▒ 0▒ 0▒ 0CAUTION: Use above bal. asCAUTION: Use above bal. asCAUTION: Use above bal. asCAUTION: Use above bal. asCost in w/s�s in II & III.Cost in w/s�s in II & III.Cost in w/s�s in II & III.Cost in w/s�s in II & III.

Figure 2-23. Section 179 Worksheet

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Tax year on Form 1040. (auto-calc) Taken from your entry on the Con-trol Form for tax year. A deduction is allowed only for propertyplaced in service in the year displayed here.

a. Description of property. Enter the class and brief description of theproperty (such as 7-year/desk) in 30 characters or less. CAUTION:Investment property does NOT qualify, including rental real estate.

Date placed in service. Enter the date in the standard mm/dd/yyformat. CAUTION: The date must be in the current tax year, above,for a deduction to be allowed.

b. Cost. Enter the TOTAL cost of the item for property you own, butleave this line blank for property reported to you on a Schedule K-1(and therefore owned or leased by a partnership, not you).

Expense deduction from Schedule K-1. If the elected section 179amount is reported to you on a Schedule K-1 (from a partnership),and the cost of the item is not available, enter the elected amounthere. A deduction will appear at line c even though line b is zero.

New York Liberty Zone property? Answer Yes only if the propertyqualifies as New York Liberty Zone property, defined previously. AYes answer leads to an increase in the limit on line 1 of Form 4562(by the cost of all qualified zone properties combined, or $35,000,whichever is less), and only half of the cost of the property is usedin line 2.

Gulf Opportunity Zone property? Answer Yes only if the property quali-fies as GO Zone property, defined previously. A Yes answer leads toan increase in the limit on line 1 of Form 4562 (by the cost of allSec. 179 GO zone properties combined, or $100,000, whichever isless) and line 3 (by the cost of all Sec. 179 GO zone propertiescombined, or $6000,000, whichever is less).

Qualified Empowerment Zone/Renewal Community property? AnswerYes only if the property qualifies as qualified empowerment zoneproperty or qualified renewal property, defined previously. A Yesanswer leads to an increase in the limit on line 1 of Form 4562 (bythe cost of all qualified zone properties combined, or $35,000,whichever is less), and only half of the cost of the property is usedin line 2.

Amount of sec. 179 deduction you elect NOT to claim. Enter the partof the cost on line b (or expense deduction from Schedule K-1) tobe depreciated rather than expensed as section 179 property.

c. Elected cost. (auto-calc) This line is computed as the cost (or Sched-ule K-1 amount) less the above amount not to be deducted. How-ever, the result is automatically limited to no more than $108,000for 2006 (plus the cost or $35,000, whichever is less, if qualifiedempowerment zone property, qualified renewal property, or NewYork Liberty Zone property; plus the cost or $100,000, whicheveris less, if GO Zone property), but further limitations may apply asnoted above.


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Balance for depreciation and special allowance. (auto-calc) Computedas the cost on line b less the sec. 179 deduction on line c, this isthe reduced basis that must be used when computing depreciationand any special allowance.

When you exit the worksheet, lines b and c are separately summed for allworksheets and posted to Form 4562.

CAUTION: You MUST use built-in worksheets to claim the 30% and 50% spe-cial allowances. The special first-year depreciation allowance is reported on2 lines of the IRS Form 4562 (lines 14 and 25), but you should not enteramounts on these lines yourself because the software automatically deter-mines the proper amounts based on your entries on applicable worksheets.Note that the special allowance applies to only special property defined in re-cent tax laws, and expired in 2004 for most property:• Line 14 computed from the MACRS/ACRS Worksheets for lines 19 and 20.

This worksheet includes several lines to support the special allowance andenforce the rules for determining the remaining basis for depreciation. If youare eligible for the special allowance but choose to elect out of it, you mustdo so for all other property in the same class as well and attach a statementto your retain that identifies that class. The software therefore contains ascreen devoted to identifying the classes for which you make the electionand automatically generates a the required supporting statement for theIRS. The worksheets on lines 19 and 20 then use your answers on thisscreen to determine whether or not to allow the special allowance for theclass on each worksheet.

• Line 25 supported by the Listed Property Worksheet. This worksheet in-cludes lines that support the special allowance and enforce the special rulesfor limitations on cars. Whether you itemize line 25, line 26(h), or line 26(i),you access the same set of worksheets (for more than 50% business use).However, if you itemize line 27(h) you access a different set of worksheets(for business use of 50% or less). For the latter set of worksheets the newlines for the special allowance are still visible on the screen, but are forcedto zero because the allowance is not available for property used no morethan 50% for business. Answers you give on the screen described abovefor electing out of the special allowance are NOT used in this worksheet.You make the election on the worksheet itself. Nevertheless, you must an-swer the questions on the election screen consistently with this worksheetso that the proper supporting statement is produced for the IRS.

PART II, SPECIAL DEPRECIATION ALLOWANCE AND OTHER DEPRECIA-TION. This section is a catchall for depreciation that is neither MACRS depre-ciation (which is claimed in Part III) nor depreciation for listed property (whichis claimed in Part V). This section includes the total for the special 30% or50% depreciation allowance for property reported in Parts II and III of Form4562 as well as the depreciation of property not eligible for MACRS deprecia-tion, including property placed in service before 1987 and property depreci-ated under sec. 168(f)(1). CAUTION: If you are electing out of the special

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allowance for any class of property, or elect 30% when 50% is available, besure to identify the class in the screens that follows line 16. Note that theprovisions for 30% and 50% special allowances expired on December 31,2004, and are therefore not allowed for most property placed in service onJanuary 2, 2005 or later. (See IRS instructions for exceptions.)

Special depreciation allowance in Part II worksheets. (auto-calc) Anamount will appear here if you claim the special allowance in one ofthe worksheets for lines 15 and 16.

Special depreciation allowance in Part III worksheets. (auto-calc) Anamount will appear here if you claim the special allowance in one ofthe worksheets for lines 19a through 19i or 20a through 20c.

14 Special depreciation allowance for qualfied New York Liberty orGulf Opportunity Zone property (other than listed property) placedin service suring the tax year. (auto-calc) Computed as the sum ofthe preceding two lines, this is the total special allowance claimedfor 2006 for all property other than Listed Property.

15 Property Subject to Section 168(f)(1) election. (Supported by Sec.168(f)(1) Election Worksheet, Figure 2-25.) Use the worksheets forthis line for property you elect to depreciate by the units-of-production method or any other method not based on a term ofyears.

ACRS depreciation. (Supported by the MACRS/ACRS Worksheet,Figure 2-24.) Use this line for property, other than listed property,previously depreciated by the regular or optional ACRS methods.The date placed in service must be from 1981 through 1986, withonly rare exceptions, and the worksheets prevent its normal use forother dates. Note that the former ACRS classes are not the same asthe current MACRS classes. For any given property, you must usethe same class you used on your prior tax return, not the onesnoted at line 19a through 19i. See details for line a of theMACRS/ACRS Worksheet for instructions on entering the properclassification. (The IRS does not require that the supporting detailfor this line be filed with the return, but rather that you keep the de-tails in your own records. You can therefore invoke the Detach Sup-port key described in Chapter 7 to suppress the printing of theworksheets for this line.)

Other depreciation. (Supported by Depreciation Worksheet, Figure 2-26.) Use this line for property placed in service BEFORE January 1,1981, and certain other property that cannot be depreciated byACRS methods. (The IRS does not require that the supporting detailfor this line be filed with the return, but rather that you keep the de-tails in your own records. You can therefore invoke the Detach Sup-port key described in Chapter 7 to suppress the printing of theworksheets for this line.)

16 Other depreciation (including ACRS). (auto-calc) Computed as thesum of the above two lines.


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Note that "transitional property," which is depreciated by ACRS rules eventhough placed in service in 1987, must be reported on the MACRS/ACRSWorksheet using the Manual Method, because the built-in date checkingblocks the use of the automatic methods for this special case.Two elections atill apply for the Special Depreciation Allowance. Althoughthe special allowance expired at the end of 2004 for most property, it stillapplies to selected property. For most qualifying property you must claim the50% deduction unless you (a) elect out of it for all property in the sameclass, or (b) elect to use a 30% amount instead of 50% for all property in thesame class. We therefore provide Election Screens to ensure that you makethe same claim for all qualifying property in the same class.

How our Election Screens work. All elections regarding the special first-yeardepreciation allowance require that you make the same election for all quali-fying property in the same class. The software helps ensure this by givingyou two screens on which to choose your elections. When you identify,through your answers to the questions on these Election Screens, the classesfor which you want to make an election, two things will happen in the soft-ware:(1) Your election will control the allowances claimed on worksheets for lines

19a through 20c for the identified classes, forcing the allowance to be0%, 30%, or 50% depending on your answers and the specific lines youitemize.

(2) The official printout of Form 4562 will cross-reference a supportingstatement (even though you didn’t create one), and that automatically-generated supporting statement will identify the classes for which youmade an election.

It is therefore important that you answer the questions on our special ElectionScreens in order to fully automate the election process. CAUTION: In order tofully comply with the law, be sure to make the SAME elections on ALL Forms4562 you prepare.

CAUTION: Elected property requires a depreciation adjustment on Form6251. Another incentive for NOT electing out of the special allowance is aprovision of the law the involves the alternative minimum tax (AMT). The lawprovides that you do NOT have to make a depreciation adjustment on Form6251 for qualifying property for which you claim the special allowance. As aresult, if you are subject to the AMT you may want to think twice aboutelecting out of the special allowance when you are qualified for it.

Elect 30% instead of 50% Special Depreciation Allowance. The special first-year 50% depreciation allowance is automatically claimed for new eligibleproperty placed in service in 2006 unless you specifically elect 30% insteadof 50% here, or elect out of it in the next screen:

ELECT 30% for 3-year class? A Yes answer will cause the special al-lowance to be computed at a 30% rate instead of a 50% rate forqualifying property on worksheets that support line 19a.

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ELECT 30% for 5-year class? A Yes answer will cause the special al-lowance to be computed at a 30% rate instead of a 50% rate forqualifying property on worksheets that support line 19b.

ELECT 30% for 7-year class? A Yes answer will cause the special al-lowance to be computed at a 30% rate instead of a 50% rate forqualifying property on worksheets that support line 19c.

ELECT 30% for 10-year class? A Yes answer will cause the special al-lowance to be computed at a 30% rate instead of a 50% rate forqualifying property on worksheets that support line 19d.

ELECT 30% for 15-year class? A Yes answer will cause the special al-lowance to be computed at a 30% rate instead of a 50% rate forqualifying property on worksheets that support line 19e.

ELECT 30% for 20-year class? A Yes answer will cause the special al-lowance to be computed at a 30% rate instead of a 50% rate forqualifying property on worksheets that support line 19f.

ELECT 30% for 25-year class? A Yes answer will cause the special al-lowance to be computed at a 30% rate instead of a 50% rate forqualifying property on worksheets that support line 19g.

ELECT 30% for Class Life ADS? A Yes answer will cause the special al-lowance to be computed at a 30% rate instead of a 50% rate forqualifying property on worksheets that support line 20a.

ELECT 30% for 12-year ADS? A Yes answer will cause the special al-lowance to be computed at a 30% rate instead of a 50% rate forqualifying property on worksheets that support line 20b.

ELECT 30% for other (itemize)? Answer Yes here to identify any classnot listed above, and describe the class in a supporting statementfor this line. A Yes answer for this line does NOT affect the specialallowance on any worksheets automatically, but your support willbe printed with the return for the IRS.

Note that there are no election questions for certain classes of property: resi-dential rental property (line 19h), nonresidential real property (line 19I), 40-year property (line 20c), and 50-year property (above line 22). That’s be-cause those classes of property are rarely eligible for the special allowance.Therefore, with the exception of Liberty Zone or GO Zone property that isnonresidential real or residential rental property, the software will not com-pute a special allowance for these classes of property even though you makeno election for them.

Election Out of 30% and 50% Depreciation Allowance. The special first-yeardepreciation allowance is automatically claimed for new eligible propertyplaced in service in 2006 unless you specifically elect out of it, as follows:

ELECT OUT for 3-year class? A Yes answer will prevent the special al-lowance from being computed for qualifying property on worksheetsthat support line 19a.

ELECT OUT for 5-year class? A Yes answer will prevent the special al-lowance from being computed for qualifying property on worksheetsthat support line 19b.


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ELECT OUT for 7-year class? A Yes answer will prevent the special al-lowance from being computed for qualifying property on worksheetsthat support line 19c.

ELECT OUT for 10-year class? A Yes answer will prevent the specialallowance from being computed for qualifying property on work-sheets that support line 19d.

ELECT OUT for 15-year class? A Yes answer will prevent the specialallowance from being computed for qualifying property on work-sheets that support line 19e.

ELECT OUT for 20-year class? A Yes answer will prevent the specialallowance from being computed for qualifying property on work-sheets that support line 19f.

ELECT OUT for 25-year class? A Yes answer will prevent the specialallowance from being computed for qualifying property on work-sheets that support line 19g.

ELECT OUT for Class Life ADS? A Yes answer will prevent the specialallowance from being computed for qualifying property on work-sheets that support line 20a.

ELECT OUT for 12-year ADS? A Yes answer will prevent the special al-lowance from being computed for qualifying property on worksheetsthat support line 20b.

ELECT OUT for other (itemize)? Answer Yes here to identify any classnot listed above, and describe the class in a supporting statementfor this line. A Yes answer for this line does NOT affect the specialallowance on any worksheets automatically, but your support willbe printed with the return for the IRS.

Once again there are no election questions for certain classes of property be-cause those classes are not eligible for the special allowance.

PART III, MACRS DEPRECIATION. Depreciation deductions for most propertyplaced in service since 1987 are claimed here, but NOT deductions for listedproperty. (Listed property is reported in Part V, and includes cars, computers,and other property that could be partially used for entertainment, recreation,or amusement.) Line 17 is used for property placed in service before the cur-rent tax year, and lines 19 and 20 are used for property placed in serviceduring the current tax year. The IRS always requires the supporting details fornewly acquired property, so the details for lines 19 and 20 must always beprinted, but you can omit the printing of details for line 17 (by using the De-tach Support key described in Chapter 7 of the User’s Guide).

Section A. The IRS has no title for this section because it now contains twototally unrelated items! The first line is used for reporting MACRS deprecia-tion for property placed in service before the tax year of the return, and wasformerly grouped with other old property (lines 19 and 20). The second lineis used to make the General Asset Account Election.

17 MACRS deductions for assets placed in service before 2006. (Sup-ported by the MACRS/ACRS Worksheet, Figure 2-24.) The work-

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sheets that support this line are the same type as those that supportlines 19 and 20. However, the date placed in service must beBEFORE the current tax year (but not before 1987, since MACRSwas introduced in 1987). When you complete worksheets for thisline, you MUST enter the class on line a, using the abbreviationsgiven in the instructions for the worksheet, below, in order to effectthe proper automatic calculations. For the worksheets that supportthis line the date placed in service must precede the current tax year(as entered on the Control Form) but be no earlier than 1987 or elseno deduction will result.

18 Making the election under section 168(i)(4) to group any assetsplaced in service during the tax year into one or more general as-set accounts? If so, you must answer Yes here, and an X will ap-pear in the box provided on the official Form 4562.

Section B – Assets Placed in Service During 2006 Using the General Depre-ciation System. (Supported by the MACRS/ACRS Worksheet, Figure 2-24.)This line is separated by class into nine separate lines, each of which is sup-ported by an independent set of MACRS/ACRS Worksheets, detailed later.Each set provides automatic calculations for the class identified by the line.Deductions for both regular MACRS and the straight-line election under theGeneral Depreciation System (GDS) are provided. The regular MACRS deduc-tion is based on the traditional declining balance (DB) method with automaticswitchover to straight-line when the latter results in a bigger deduction, usinga half-year convention. For this line, the recovery period is always the sameas the class label, even for the straight-line election. (This GDS straight-lineelection is covered by IRS sec. 168(b)(5), and differs from the ADS methoddescribed for line 20 in which the recovery period is generally NOT the sameas the class label. If you elect the straight-line method, you must use thatmethod for ALL worksheets that support the same line.) For worksheets thatsupport these lines the date placed in service must be within the tax year en-tered on the Control Form; otherwise no deduction will result. Furthermore,the class is forced to correspond to the label for the line being supported.

Special rules for property acquired in a like-kind exchange or involuntaryconversion. Special rules must be followed for all property acquired afterFebruary 27, 2004 by like-kind exchange or involuntary conversion, unlessyou elected out of these rules in writing. Under these rules you must depreci-ate the carryover basis of the property over the remaining recovery period ofthe property. Under the prior rules you could use any reasonable consistentmethod of figuring depreciation. See IRS Instructions for Form 4562 for de-tails.

19a 3-year property. Includes race horses more than 2 years old, otherhorses more than 12 years old, and qualified rent-to-own propertyunder sec. 168(i)(14). (ADR class life of 4 years or less. DB methodbased on 200% DB over 3 years, or 2 years for Qualified IndianReservation Property.)


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19b 5-year property. Includes other horses, qualified technologicalequipment (such as computers), certain office equipment (typewrit-ers, calculators, copiers, and duplicating equipment), research andexperimentation property, and semi-conductor manufacturingequipment. It also includes carpeting, furniture, appliances, andother property that is associated with rental real estate. This classincludes qualified New York Liberty Zone leasehold improvementproperty placed in service after September 10, 2001, but you canelect (in writing) to use the class for qualified leasehold improve-ment property (19e). CAUTION: All cars and most personal com-puters fall into this class life, but are generally depreciated in Part V,not here, as listed property. (ADR class life more than 4 but lessthan 10 years. DB method based on 200% DB over 5 years, or 3years for Qualified Indian Reservation Property.)

19c 7-year property. Includes office furniture and fixtures, officeequipment not classified as 5-year property, railroad track, and otherproperty with no assigned ADR class life. The class now also in-cludes a motorsports entertainment complex. (ADR class life 10 ormore but less the 16 years. DB method based on 200% DB over 7years, or 4 years for Qualified Indian Reservation Property.) HINT:Use this line for property that has no IRS-designated class life.

19d 10-year property. Includes water transportation equipment, single-purpose agricultural/horticultural structures, trees and vines bearingfruit or nuts. (ADR class life 16 or more but less the 20 years. DBmethod based on 200% DB over 10 years, or 6 years for QualifiedIndian Reservation Property.)

19e 15-year property. Includes municipal wastewater treatment plants,and telephone distribution plants. The class now also includes quali-fied leasehold improvement property, qualified restaurant property,and initial land clearing and grading for gas utility property. (ADRclass life 20 or more but less the 25 years. DB method based on150% DB over 15 years, or 9 years for Qualified Indian ReservationProperty.)

19f 20-year property. Includes multi-purpose farm buildings and munici-pal sewers that are not 25-year property. The class now also in-cludes initial land clearing and grading for electric utility transmis-sion and distribution plants. (ADR class life 25 or more years, ex-cept for most real property. DB method based on 150% DB over 20years, or 12 years for Qualified Indian Reservation Property.)

19g 25-year property. For water utility property, this class was createdfor qualifying property placed in service after June 12, 1996.(Based on straight-line depreciation over 25 years.)

19h Residential rental property (27.5-year, mid-month, S/L only). In-cludes buildings in which at least 80% of the rent is from dwellingunits, but excludes most hotels and motels. Also includes escalators

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and elevators. (Based on straight-line depreciation over 27.5 yearsusing a mid-month convention.)

19i Nonresidential real property (mid-month, S/L only). Real property,other than residential rental property, with ADR class life of at least27.5 years. (Based on straight-line depreciation using a mid-monthconvention over a 39-year period, or 22 years for Qualified IndianReservation Property.)

Special allowance in section B for line 14. (auto-calc) Computed as thesum of all the current-year special allowance amounts figured on theworksheets for line 19a through 19i. (Property reported at line 19hor 19I is not eligible for the special allowance except for LibertyZone or GO Zone property.) This result is included in the total at line14 for all special allowance claims in Parts II and III of Form 4562.

Worksheet ERROR – View worksheets if Yes. (auto-calc) An error will beindicated here if there is a special allowance in the preceding totalfor a class of property for which you elected out of the special al-lowance (on the previously-described Election Screen). This errorcan arise only if you changed an answer on the Election Screen af-ter you prepared the worksheets for that class. To correct the error,merely view all worksheets for elected classes and the worksheetswill be automatically recomputed using your new election answers.

50-year property. Although the IRS Form 4562 still does not provide a sepa-rate line for it, there is a special class for improvements related to railroadtracks. Contrary to all other new property, the IRS instructs you to note anydeduction for this property at line 22, not here, so we provide a line for thisproperty above line 22 rather than here.

Section C -- Assets Placed in Service During 2006 Tax Year Using the Alter-native Depreciation System. (Supported by the MACRS/ACRS Worksheet,Figure 2-24.) A separate kind of straight-line depreciation has been coined bythe IRS as the Alternative Depreciation System (ADS), covered by IRS sec.168(g). For this type of depreciation, you must use an IRS-prescribed period,typically the class life of the property, rather than the life in the class label, asthe recovery period. CAUTION: You are REQUIRED to use this method ratherthan MACRS for some property: any tangible property used mostly outsidethe U. S., any tax-exempt use property, any tax-exempt bond financed prop-erty, and any imported property covered by an Executive Order of the Presi-dent of the United States. This line is separated by type into three separatelines, each of which is supported by an independent set of MACRS/ACRSWorksheets, detailed later. Each set provides automatic calculations for thetype identified by the line. For worksheets that support these lines the dateplaced in service must be within the tax year entered on the Control Form;otherwise no deduction will result. Furthermore, except for line 20a the classis forced to correspond to the label for the line being supported.

20a Class life type (S/L only). Use this line for property that has an IRS-defined class life, except for real property. When you use the work-


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sheet accessed here you must enter as the recovery period the ac-tual class life, such as 16 through 20 for 10-year property.

20b 12-year (12-year, S/L only). Use this line for property that has noclass life. Such property is assumed to be "7-year property" with aclass life, and hence recovery period, of 12 years.

20c 40-year (40-year, mid-month, S/L only). Use this line only for resi-dential rental and nonresidential real property that would be de-ducted on line 19h or 19i if the alternate system were not used. A40-year recovery period is assumed in this case, using the mid-month convention when determining the straight-line deduction.

Special allowance in section C for line 14. (auto-calc) Computed as thesum of all the current-year special allowance amounts figured on theworksheets for line 20a and 20b. (Property reported at line 20c isnot eligible for the special allowance.) This result is included in thetotal at line 14 for all special allowance claims in Parts II and III ofForm 4562.

Worksheet ERROR – View worksheets if Yes. (auto-calc) An error will beindicated here if there is a special allowance in the preceding totalfor a class of property for which you elected out of the special al-lowance (on the previously-described Election Screen). This errorcan arise only if you changed an answer on the Election Screen af-ter you prepared the worksheets for that class. To correct the error,merely view all worksheets for elected classes and the worksheetswill be automatically recomputed using your new election answers.

Note that you must use the same method for all property in the same classplaced in service in 2006.

PART IV, SUMMARY. All depreciation deductions are summed here:21 Listed property - amount from line 28. (auto-calc) Taken as the total

section 179 expense deduction in Part V, and therefore not com-plete until you complete Part V. CAUTION: Depreciation for auto-mobiles and other listed property must ALWAYS be detailed in PartV.

50-year property (railroad track). (Supported by the MACRS/ACRSWorksheet, Figure 2-24.) Although the IRS Form 4562 does notprovide a line for it, there is a class for improvements related to aroadbed or right-of-way for railroad track that qualifies as a railroadgrading or tunnel bore under IRS section 168(e)(4). This class hasexisted since 1992, yet the IRS does not provide separate lines forit. Since the IRS instructions call for its deduction at line 22, how-ever, worksheet access is provided here for property placed inservice in 1992 or later. The worksheet you access at this line isfully automated, just like all other classes of property. Note that thisclass of property is not eligible for the special 30% allowance.

22 Total. Add lines 12, 14 through 17, 19 and 20 in column (g), and line21. (auto-calc) Computed as indicated plus the above amount for50-year property, this is the total posted to the supported form for

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which you accessed this copy of Form 4562. (Note that this totalexcludes line 12 for partnership Form 1065 returns because part-nerships must pass section 179 deductions on to its partners.)

23 For assets shown above and placed in service in current year, por-tion of basis attributable to Section 263A costs. This line is for IRSauditing only and does not affect any calculations. If you are subjectto the uniform capitalization rules of section 263A, you must enter,for all property placed in service in the current tax year, the increasein basis from costs that are required to be capitalized.

Details for worksheets that support Parts II, III, and IV. Line-by-line details forthe worksheets that support lines 14 through 22 are provided in the next fewpages. These include the MACRS/ACRS Worksheets for lines 16, 17, 19, and20, the Section 168 Worksheet for line 15, and the Depreciation Worksheetfor line 16, detailed here in that order.

MACRS/ACRS Work-sheets, Figure 2-24.Lines 16, 17, 19athrough 19I, 20athrough 20c, and 22are each supported byseparate MACRS/ACRSWorksheets:

a. Classificationand descrip-tion. Enter theclassificationand a brief de-scription in this15-characterspace. As re-quired by theIRS, the firsttwo charactersyou enter

MUST reflect the classification: by number, such as 3-, 5-, 7-, 10,15, and 20, or by letter, such as LI, PU, RR, or NR, as detailed here.For post-1986 real property you should use 27.5 for residentialrental, and 31.5 or 39 for nonresidential real. For most pre-1987real property, use 15 if placed in service before March 16, 1984, 18if placed in service after March 15, 1984 but before May 9, 1985,and 19 if placed in service after May 8, 1985 but before January 1,1987, but use LI for low-income housing and PU for public utilities.If placed in service after 1987, use RR for residential rental, use NRfor nonresidential real, and CL for class life type property (for whichyou enter the class life as the recovery period entry). Even though

MACRS/ACRS WORKSHEETMACRS/ACRS WORKSHEETMACRS/ACRS WORKSHEETMACRS/ACRS WORKSHEET a. Classificatn & d a. Classificatn & d a. Classificatn & d a. Classificatn & deeeescriptionscriptionscriptionscription Indian Reservation property..? No Indian Reservation property..? No Indian Reservation property..? No Indian Reservation property..? No b. Date placd mm/dd/yy....... b. Date placd mm/dd/yy....... b. Date placd mm/dd/yy....... b. Date placd mm/dd/yy....... Date acquired(for next three) Date acquired(for next three) Date acquired(for next three) Date acquired(for next three) Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Other qlfd. for special allow? No Other qlfd. for special allow? No Other qlfd. for special allow? No Other qlfd. for special allow? No Cost less 179,ITC,prior allow 0 Cost less 179,ITC,prior allow 0 Cost less 179,ITC,prior allow 0 Cost less 179,ITC,prior allow 0 Eligible for spec�l allowance Eligible for spec�l allowance Eligible for spec�l allowance Eligible for spec�l allowance▒ No▒ No▒ No▒ No Elect 30% spec allow(vs. 50%) Elect 30% spec allow(vs. 50%) Elect 30% spec allow(vs. 50%) Elect 30% spec allow(vs. 50%)▒ No▒ No▒ No▒ No Elected OUT for THIS class... Elected OUT for THIS class... Elected OUT for THIS class... Elected OUT for THIS class...▒ No▒ No▒ No▒ No Special allowance for line 14 Special allowance for line 14 Special allowance for line 14 Special allowance for line 14▒ 0▒ 0▒ 0▒ 0 c. Deprec'n basis............ 0 c. Deprec'n basis............ 0 c. Deprec'n basis............ 0 c. Deprec'n basis............ 0 d. Recov.Period.............. 0 d. Recov.Period.............. 0 d. Recov.Period.............. 0 d. Recov.Period.............. 0 Farm or elect 150% DB.? No Farm or elect 150% DB.? No Farm or elect 150% DB.? No Farm or elect 150% DB.? No MUST use mid-qtr convn? No MUST use mid-qtr convn? No MUST use mid-qtr convn? No MUST use mid-qtr convn? No e. Convention used.......... e. Convention used.......... e. Convention used.......... e. Convention used.......... f. Method (DB,SL,etc)........ f. Method (DB,SL,etc)........ f. Method (DB,SL,etc)........ f. Method (DB,SL,etc)........ Month sold(if this yr) 0 Month sold(if this yr) 0 Month sold(if this yr) 0 Month sold(if this yr) 0 Percentage this year.. 0 Percentage this year.. 0 Percentage this year.. 0 Percentage this year.. 0 g. Deprec'n deduction........ g. Deprec'n deduction........ g. Deprec'n deduction........ g. Deprec'n deduction........▒ 0▒ 0▒ 0▒ 0

Figure 2-24. MACRS/ACRS Worksheet


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the software ensures the proper calculation for lines 15 and 16 inspite of your entry here, you MUST follow these rules so that thetranslated return for NEXT year has all the information required afterthe worksheet gets shifted by translation to line 17.

Indian Reservation Property? If the property qualifies, you may an-swer Yes here and the allowed recovery periods used in computingline g are shortened for most classifications, resulting in a higherdeduction over a shorter period of time.

b. Date placed in service (month, day, and year). This entry is very im-portant because many of the built-in schedules change on very spe-cific dates. In spite of the IRS label for this line as requiring only themonth and year, you should enter the date using the mm/dd/yyformat so that the changes in IRS rules over the years are all prop-erly handled. There are several instances over the last two decadeswhere allowed depreciation methods, conventions, and limitationshave changed in the middle of a month, so your entry for day (inaddition to month and year) is often important. Note that the soft-ware will reformat your entry in the mm/dd/yy format if you enter adate using more than 8 characters (such as mm/dd/yyyy) in order toensure that the dates print within the narrow space provided on theIRS form. (CAUTION: A date that is inconsistent with the line fromwhich you itemized to access the worksheet results in a zero deduc-tion. For example, if you accessed the worksheet at line 19 or 20,the date must be in the same tax year as entered on the ControlForm, displayed above. If you accessed the worksheet at line 16 or17, the date must precede the tax year entered on the ControlForm. Illegal dates are often indicated by the word INVALID at themethod line).

Date acquired (for next three). This entry is used only for checkingqualification for to claim the special “bonus” depreciation allowancefor the following three special types of property. The rules for datesas they apply to the special allowance are quite involved, so youshould refer to the IRS instructions for line 14 of Form 4562 for de-tails.

Qualified Liberty Zone property? Answer Yes if New York LibertyZone property. The special depreciation allowance may be allowed ifacquired after September 10, 2001 and before 2007 (2010 for non-residential real and residential rental property).

Qualified Gulf Opportunity Zone property? Answer Yes if GO Zoneproperty. The special depreciation allowance may be allowed if ac-quired after August 27, 2005 and before 2008 (2011 for somenonresidential real and residential rental property).

Other qualified for special allowance? Answer Yes only if qualifiedfor one of the few remaining qualified property: (a) long productionperiod property and certain noncommercial aircraft only if in a GOZone (Katrina, Rita, or Wilma), acquired before January 1, 2005,

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and placed in service before 2007, and (b) qualified cellulosic boi-mass ethanol plant property acquired after December 20, 2006.

Cost (business/investment part) AFTER reducing it by any sec. 179,ITC, special credits, and PRIOR special allowance claimed for theproperty. Note that the reduction for credits is not always the fullamount of the credit, as in the case for the investment tax credit(ITC). (The required reduction for ITC is half of any pre-1986 creditunless you chose to take the reduced credit at that time.) However,deductions for sec. 179 and prior special allowance are used at fullvalue. If this is the first year the property was placed in service, thecost after reduction for sec. 179 deduction will be shown at thebottom of any Sec. 179 Worksheet completed for the property inPart I, line 6.

Eligible for special allowance? (auto-calc) Answered Yes if one ofthe questions for qualified property is answered Yes, above, and eli-gible dates are entered for both date placed in service and date ac-quired.

Elect 30% special allowance (vs. 50%)? (auto-calc) The answer willbe Yes only if you identified this class for 30% allowance instead of50% allowance on the third Election Screen on Form 4562.

Elected OUT for THIS class? (auto-calc) The answer will be Yes onlyif you identified this class for election out of the special allowanceon the first or third Election Screen (depending on the date in serv-ice).

Special allowance for line 14. (auto-calc) Computed as 0%, 30%, or50% of the adjusted cost entered above depending on the preced-ing answers and the two date entries.

c. Basis for depreciation. (auto-calc) Computed as the adjusted cost en-tered above less the preceding special allowance for line 14. This isthe basis to be used for this and all future years.

d. Recovery period. Enter the period if it is not the same as the classifi-cation you entered on line a. The software restricts this entry to le-gal periods. For regular MACRS and ACRS methods the class andrecovery period are the same. For straight-line methods see Table 2-12 for the allowed periods.

Farm or elect 150% DB method? Since 1990, property used in afarming business cannot be depreciated at the 200% declining bal-ance rate that is normally available for 3-year, 5-year, 7-year, and10-year property. If the declining balance method is chosen, prop-erty used in a farming business MUST be depreciated at a 150%rate instead. In addition, nonfarm property can be depreciated at150% by election (in order to avoid the complications of the alter-nate minimum tax). In either case, answer Yes here to force 150%DB for classes where 200% DB would be used otherwise.

MUST use mid-quarter convention? (For post-1986 property only.) Ifmore than 40% of your new property for a class was placed in


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service in the last quarter of a tax year, you normally must answerYes for all property of the same class for that tax year. A Yes an-swer causes the software to use the mid-quarter convention ratherthan the half-year convention when figuring MACRS depreciation.(Under the normal rule you must answer this question the same wayfor all property of the same class placed in service in the sameyear.)

e. Convention used. (auto-calc line when you enter DB, MA, PRE, AC,or SL as the method.) This line shows the convention used in thecalculations, using IRS-defined abbreviations: HY (for half-year), MQ(for mid-quarter), FM (for full month), and MM (for mid-month).

f. Method (DB, SL, etc.). Three basic methods are built-in: MACRS (DB orMA), the regular prescribed ACRS (PRE or AC), and the straight-lineelection (SL or S/L). The software recognizes these methods fromthe first two characters of your entry: DB, MA, PRE, or AC forMACRS or ACRS (depending on the date), and SL or S/L forstraight-line election, ADS, or optional straight-line depending on therecovery period and date. Any other entry, including any entry witha leading space, permits you to manually enter ANY percentage for"Percentage this year," below. CAUTION: When you elect SL fornew property in a particular class you must use that same methodfor ALL new property in that same class.

Month sold (if this year). If sold or retired during the tax year, enterthe month sold or retired from 1 to 12. The deduction is determinedautomatically based on the law. REMINDER: A zero deduction willresult for pre-1987 property other than real property under theACRS rules that no deduction is allowed in the year of sale.

Percentage this year. (auto-calc line when you enter DB, MA, PRE,AC, or SL as the method.) If you don't enter a bona fide method,the Manual Method is assumed and you can enter the percentagehere yourself. Otherwise the IRS percentage is displayed here totwo decimal places, even though it is retained to three decimalplaces in the calculations when so required by the IRS. CAUTION:Do not use the Manual Method unless you have an unusual excep-tion, such as transition property, because the software has numer-ous lesser-known subtleties of the law built in, handling all thechanges of the past decade.

g. Depreciation deduction. (auto-calc) Computed as the basis on line ctimes the above percentage. Note that the special 30% deprecia-tion allowance is NOT included in this total. The special allowanceis separately handled, and the total from all worksheets is includedin line 14 of Form 4562 instead.

We cannot overly stress the fact that the regulations are complex and con-stantly changing. We have built into the software much more tax law infor-mation than can be detailed here. We therefore suggest you consult the latestversion of IRS Pub. 946 if you have questions.

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Table 2-12. Straight-Line Recovery Periods

Sec. 168(f)(1) ElectionWorksheet, Figure 2-25. For this worksheetyou must determinethe percentage forthe deduction your-self based on themethod you use:

a. Description.Enter thedescriptionin 25 char-acters orless.

b. Date placedin service.Enter thedate first placed in service in the standard mm/dd/yy format.

Date acquired (for next three). This entry is used only for checkingqualification for to claim the special “bonus” depreciation allowancefor the following three special types of property. The rules for date-sas they apply to the special allowance are quite involved, so youshould refer to the IRS Instructions for line 14 of Form 4562 for de-tails.

Qualified Liberty Zone property? Answer Yes if New York LibertyZone property. The special depreciation allowance may be allowed if

CLASS LINE 19 LINE 20 LINE 17 LINE 163-year 3 2.5 or more 3 or more 3, 5, or 125-year 5 5 or more 5 or more 5, 12, or 257-year 7 7 or more 7 or more n.a.10-year 10 10 or more 10 or more 10, 25, or 3512-year n.a. 12 12 or more n.a.15-year 15 15 or more 15 or more 15, 35, or 45PU, LI n.a. n.a. n.a. 15, 35, or 4520-year 20 20 or more 20 or more n.a.25-year 25 25 or more 25 or more n.a.RR, NR 27.5,31.5* 40 27.5,31.5*,40 15,18,19,35,4550-year ** 50 n.a. 50 or more n.a.NOTES: For lines 19a through 19i, and 20a through 20c, classes are restricted to the class label for the line. Shorter recovery periods are used for Qualified Indian Reservation Property, as noted in the instructions for lines 19a through 19i. * Nonresidential real property uses 39 rather than 31.5 if placed in service after May 12, 1993. ** 50-year property that is reported above line 22 has 50 automatically entered as the class.

SEC 168(f)(1) WORKSHEETSEC 168(f)(1) WORKSHEETSEC 168(f)(1) WORKSHEETSEC 168(f)(1) WORKSHEET a. Description..... a. Description..... a. Description..... a. Description..... b. Date in ser b. Date in ser b. Date in ser b. Date in servvvvice...........ice...........ice...........ice........... Date acquired(for next three) Date acquired(for next three) Date acquired(for next three) Date acquired(for next three) Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Other qlfd. for special allow? No Other qlfd. for special allow? No Other qlfd. for special allow? No Other qlfd. for special allow? No Cost (business/invest) AFTER Cost (business/invest) AFTER Cost (business/invest) AFTER Cost (business/invest) AFTER reducing by sec 179,ITC,spec reducing by sec 179,ITC,spec reducing by sec 179,ITC,spec reducing by sec 179,ITC,spec creds & PRIOR spec allowance 0 creds & PRIOR spec allowance 0 creds & PRIOR spec allowance 0 creds & PRIOR spec allowance 0 Eligible for spec�l allowance Eligible for spec�l allowance Eligible for spec�l allowance Eligible for spec�l allowance▒ No▒ No▒ No▒ No Elect 30% spec allow(vs. 50%)? No Elect 30% spec allow(vs. 50%)? No Elect 30% spec allow(vs. 50%)? No Elect 30% spec allow(vs. 50%)? No Elect OUT of allow(or inelig)? No Elect OUT of allow(or inelig)? No Elect OUT of allow(or inelig)? No Elect OUT of allow(or inelig)? No Special allowance for line 14 Special allowance for line 14 Special allowance for line 14 Special allowance for line 14▒ 0▒ 0▒ 0▒ 0 c. Deprec'n basis............ c. Deprec'n basis............ c. Deprec'n basis............ c. Deprec'n basis............▒ 0▒ 0▒ 0▒ 0 f. Method used f. Method used f. Method used f. Method used Percentage this year...... 0 Percentage this year...... 0 Percentage this year...... 0 Percentage this year...... 0 g. Deduction this yr. ....... g. Deduction this yr. ....... g. Deduction this yr. ....... g. Deduction this yr. .......▒ 0▒ 0▒ 0▒ 0

Figure 2-25. Sec. 168(f)(1) Worksheet


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acquired after September 10, 2001 and before 2007 (2010 for non-residential real and residential rental property).


Other qualified for special allowance? Answer Yes only if qualifiedfor one of the few remaining qualified property: (a) long productionperiod property and certain noncommercial aircraft only if in a GOZone (Katrina, Rita, or Wilma) and placed in service before 2007,and (b) qualified cellulosic boimass ethanol plant property acquiredafter December 20, 2006.

Cost (business/investment part) AFTER reducing it by any sec. 179,ITC, special credits, and PRIOR special allowance claimed for theproperty. Note that the reduction for credits is not always the fullamount of the credit, as in the case for the investment tax credit(ITC). However, deductions for sec. 179 and prior special allowanceare used at full value. If this is the first year the property was placedin service, the cost after reduction for sec. 179 deduction will beshown at the bottom of any Sec. 179 Worksheet completed for theproperty in Part I, line 6.

Elect 30% special allowance (vs. 50%)? Answer Yes only if you elect30% allowance instead of 50% allowance for all property in thisclass.

Elected OUT for THIS class (or ineligible)? (auto-calc) Answer Yesonly if you elect out of the special allowance for all property in thisclass or the property is ineligible for any special allowance.

Special allowance for line 14. (auto-calc) Computed as 0%, 30%, or50% of the adjusted cost entered above depending on the preced-ing answers and the date in service.

c. Basis for depreciation. (auto-calc) Computed as the adjusted cost en-tered above less the preceding special allowance for line 14. This isthe basis to be used for this and all future years.

f. Method used. Describe method in 25 characters or less.Percentage this year. Enter percent of line c to be deducted as de-preciation for this year.

g. Deduction this year. (auto-calc) Computed as line c times the abovepercentage.

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Depreciation Work-sheet, Figure 2-26. Younormally use this work-sheet to claim deprecia-tion on all older (pre-1981) property, but forautomobiles and otherlisted property youmust use the ListedProperty Worksheet ac-cessed in Part V ofForm 4562, not thisworksheet. Rules arebuilt-in for all themethods popularly usedbefore 1981, includingall declining balancemethods, sum-of-the-years'-digits, andstraight line.

a. Description.Describe the property in 25 characters or less.

b. Date acquired. Enter date in the standard mm/dd/yy format.Qualified Liberty Zone property? Answer Yes if New York LibertyZone property. The special depreciation allowance may be allowed ifacquired after September 10, 2001 and before 2007 (2010 for non-residential real and residential rental property).



Depreciation starting date. If the date in line b is not the properstarting date for the depreciation convention you use, enter theproper date here in the standard mm/dd/yy format. Remaining life iscomputed from this entry so that you can implement any conven-tion, including mid-month and mid-quarter conventions. CAUTION:Only dates before 1981 are normally valid here, by IRS rules.

Cost (business/investment part) AFTER reducing it by any sec. 179,ITC, special credits, and PRIOR special allowance claimed for theproperty. Enter the cost or other allowable basis after reduction for

DEPRECIATION WORKSHEETDEPRECIATION WORKSHEETDEPRECIATION WORKSHEETDEPRECIATION WORKSHEET a. Description a. Description a. Description a. Description b. Date a b. Date a b. Date a b. Date accccquired(mm/dd/yy)quired(mm/dd/yy)quired(mm/dd/yy)quired(mm/dd/yy) Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Other qlfd. for special allow? No Other qlfd. for special allow? No Other qlfd. for special allow? No Other qlfd. for special allow? No Deprec'n starting date.. Deprec'n starting date.. Deprec'n starting date.. Deprec'n starting date.. Cost (less adj & prior allow) 0 Cost (less adj & prior allow) 0 Cost (less adj & prior allow) 0 Cost (less adj & prior allow) 0 Elect 1=0%,2=30%(vs.50) allow? No Elect 1=0%,2=30%(vs.50) allow? No Elect 1=0%,2=30%(vs.50) allow? No Elect 1=0%,2=30%(vs.50) allow? No Special allowance for line 14 Special allowance for line 14 Special allowance for line 14 Special allowance for line 14▒ 0▒ 0▒ 0▒ 0 c. Deprec'n basis............ c. Deprec'n basis............ c. Deprec'n basis............ c. Deprec'n basis............▒ 0▒ 0▒ 0▒ 0 d. Deprn in past yrs allowble 0 d. Deprn in past yrs allowble 0 d. Deprn in past yrs allowble 0 d. Deprn in past yrs allowble 0 Remaining balance..... Remaining balance..... Remaining balance..... Remaining balance.....▒ 0▒ 0▒ 0▒ 0 e. Method of d e. Method of d e. Method of d e. Method of deeeepr'n(SL/DB/SY)pr'n(SL/DB/SY)pr'n(SL/DB/SY)pr'n(SL/DB/SY) f. Life of property (yrs.) 0 f. Life of property (yrs.) 0 f. Life of property (yrs.) 0 f. Life of property (yrs.) 0 If SL, rmng bal method? No If SL, rmng bal method? No If SL, rmng bal method? No If SL, rmng bal method? No If DB, DB percentage.. 0 If DB, DB percentage.. 0 If DB, DB percentage.. 0 If DB, DB percentage.. 0 If DB,auto-swtch to SL? No If DB,auto-swtch to SL? No If DB,auto-swtch to SL? No If DB,auto-swtch to SL? No If manual,enter amount 0 If manual,enter amount 0 If manual,enter amount 0 If manual,enter amount 0 If sold, % of full yr. 0 If sold, % of full yr. 0 If sold, % of full yr. 0 If sold, % of full yr. 0 % of full year calc'd. % of full year calc'd. % of full year calc'd. % of full year calc'd.▒ 0▒ 0▒ 0▒ 0 g. Deprec'n this yr. ........ g. Deprec'n this yr. ........ g. Deprec'n this yr. ........ g. Deprec'n this yr. ........▒ 0▒ 0▒ 0▒ 0

Figure 2-26. Depreciation Worksheet


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certain credits or past special allowance. You may have to reducethe entry by the salvage value for some types of property.

Elect 1=0%, 2=30%, (vs. 50%) allowance? Enter the election forwhich you qualify, if any, remembering that you must make thesame election for all qualifying property of the same class.

Special allowance for line 14. (auto-calc) Computed as 0%, 30%, or50% of the adjusted cost entered above depending on the preced-ing answers and the date in service.

c. Cost or other basis. (auto-calc) Computed as the adjusted cost en-tered above less the preceding special allowance for line 14. This isthe basis to be used for this and all future years.

d. Depreciation in past years allowable. Enter here the depreciation al-lowable in past years, whether taken or not. If you did not takeenough deduction in a prior year you will have to file an amendedreturn for that year to recover the amount; you cannot claim the ex-tra amount here.

Remaining balance. (auto-calc) Computed as line c less line d, butno less than zero.

e. Method of depreciation (SL/DB/SY). The software chooses themethod based on the first two letters in this entry: SL or S/L for thestraight-line method, DB for declining balance method, and SY forsum-of-the-years' digits method. Any other entry allows you to en-ter the deduction yourself on the line labeled "If manual, enteramount to use," below.

f. Life of property (in years). Enter the TOTAL depreciable life of theproperty in years, from the date acquired to the end of its life.

If SL, use remaining balance method? The remaining balance methodmust be used for SL if the property was not previously depreciatedby the straight-line method, such as after a switchover from the de-clining balance method. With this method the deduction for the yearis the remaining balance divided by the remaining life, rather thanline c divided by line f.

If DB, enter DB percentage. Enter the declining balance percentage tobe used, such as 125, 150, or 200.

If DB, auto-switch to SL? If you answer Yes, the DB method is auto-matically changed to the SL remaining balance method when thelatter results in a more favorable deduction, as allowed by the IRS.If the property has a salvage value, however, you may have to re-duce the basis when you use this method.

If manual, enter amount to use. The Manual Method uses this entryas the deduction to appear at line g.

If sold, % of full year. Make an entry here ONLY if the property wassold during the tax year. Enter the percent (from 0 to 100) of a fullyear's depreciation to be used this year. Make sure that this entryreflects the convention you used when you started depreciating thisitem. For example, if you sold the property on March 1st you would

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use 16.67% by the actual date, but 12.5% by the mid-quarter con-vention and 20.83% by the mid-month convention.

% of full year calculated. (auto-calc) A number less than 100% mayappear here if the tax year is the first year of depreciation or theyear of sale. (Note that the percentages used in the calculations aremore precise than the numbers that can be shown on the screen.)

g. Depreciation this year. (auto-calc) Computed according to themethod selected.

PART V, LISTED PROPERTY. (Automobiles, certain other vehicles, cellulartelephones, certain computers, and property used for entertainment, recrea-tion, or amusement.) This section is used to report depreciation for all "listedproperty" and to substantiate business use of a vehicle. Listed property in-cludes cars, computers, and other property that could be partially used forentertainment, recreation, or amusement. Listed property includes cellulartelephones. Except for cars, however, property used EXCLUSIVELY in a tax-payer's trade or business at taxpayer's regular business establishment isEXEMPT from listed property status. When business use is 50% or less, thesection 179 expense deduction is NOT available and the deduction must bedetermined using the straight-line method over an extended life. CAUTION:The IRS also requires you to complete Part V even for vehicles for which youuse the standard mileage rate or deduct lease expenses, completing lines athrough c of the Listed Property Worksheet, all of Section B, and Section C ifapplicable.

RULES for SUVs. The “SUV loophole” was tightened for certain sport utilityvehicles (SUVs) acquired after October 22, 2004. Under the former law, youwere not subject to the usual restrictions on annual deductions for vehicles ifthe SUV was rated at 6,000 pounds gross vehicle weight or more. As a re-sult, because of the increase in the section 179 ceiling to $100,000 for2003, you could generally deduct the entire cost of a heavy SUV in the firstyear if used mostly for business! The American Jobs Creation Act of 2004took a first step at closing the loophole. For heavy SUVs placed in service af-ter October 22, 2004 but rated at no more than 14,000 pounds grossweight, the maximum section 179 deduction is now $25,000. (You shouldidentify these vehicles as Auto Type 4 on our Listed Property Worksheet sothat the proper limitations are applied.)

Section A, Depreciation and Other Information. The section 179 expense de-duction, special 30% or 50% depreciation allowance, and regular deprecia-tion deduction are all claimed here for Listed Property. Note that two separatesets of Listed Property Worksheets support this section. The set accessed atlines 25 and 26 supports only property with more than 50% business use,and the set accessed at line 27 supports only property with 50% or lessbusiness use:

24a Do you have evidence to support the business/investment useclaimed? You must answer for all listed property taken as a whole.


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24b If "Yes", is the evidence written? Again, answer for all propertytaken as a whole.

25 Special allowance for qualified New York Liberty or Gulf OpportunityZone property placed in service during the tax year and used morethan 50% in a qualified business use. (Supported by Listed PropertyWorksheet, Figure 2-27.) This line is used to claim the special 30% or50% depreciation allowance for listed property. The worksheets you ac-cess here serve three purposes: to support the new bonus depreciationdeduction here at line 27, to support the section 179 deductions at col-umn (h) of line 26, and to support the regular depreciation deductions atcolumn (i) of line 26. The computation of these three deductions on thesame worksheet is important because (1) they all relate to listed prop-erty used more than 50% for business, (2) the computation of the spe-cial allowance depends on the sec. 179 deduction claimed for the sameproperty, and (3) the computation of the regular depreciation dependson both the sec. 179 deduction and special allowance claimed for thesame property. CAUTION: You should NOT make an entry here yourselfbut rather complete the supporting worksheets. The proper deductionwill then appear here when you return from the worksheets. Further-more, if you make an entry here manually yourself it will be overwrittenby information on the supporting worksheets once you itemize any ofthe lines supported by this worksheet. (Note that the worksheets thatsupport this and the next three lines are intended ONLY for propertyused in the business more than 50% of the time. The software thereforecomputes zero depreciation on any worksheets attached to these linesthat do not have an entry for business use percentage that exceeds50%.)

26 Property used over 50% in a qualified business use (h) depreciation.(Supported by Listed Property Worksheet, Figure 2-27.) The depre-ciation deduction is posted here from the same set of worksheets assupport the preceding line. This amount is also reflected in the totalat line 28(h), below, and line 21 in Part IV.

26 Property used over 50% in a qualified business use (i) Section 179.(Supported by Listed Property Worksheet, Figure 2-27.) The current-year expense deduction is posted here from the same set of work-sheets as support the preceding two lines. This amount is also usedfor line 29(i), below, and line 7 in Part I.

Cost of new section 179 property in line 26(i). (Supported by ListedProperty Worksheet, Figure 2-27.) Using the same set of work-sheets as the preceding three lines, the cost of all property forwhich the section 179 deduction was claimed this year is postedhere from the worksheets, then used in line 2 of Part I of this form.

New York Liberty Zone cost on line 26 worksheets. (auto-calc; sup-ported by the Listed Property Worksheet, Figure 2-27.) The cost ofproperty identified on the worksheets as “N. Y. Liberty Zone prop-

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erty” is shown here for use in the limitation at line 1 and the cost atline 2 of Form 4562.

Gulf Opportunity Zone cost on line 26 worksheets. (auto-calc; sup-ported by the Listed Property Worksheet, Figure 2-27.) The cost ofproperty identified on the worksheets as “Gulf Opportunity Zoneproperty” is shown here for use in the limitations at lines 1 and 3,and the cost at line 2 of Form 4562.

Qualified Zone and Renewal cost on line 26 worksheets. (auto-calc;supported by the Listed Property Worksheet, Figure 2-27.) The costof property identified on the worksheets as “Qualified empowermentzone/Renewal community sec. 179 property” is shown here for usein the limitation at line 1 and the cost at line 2 of Form 4562.

27 Property used 50% or less in a qualified business use (h) deprecia-tion. (Supported by Listed Property Worksheet, Figure 2-27.) Theworksheets that support this line are intended ONLY for propertyused in the business no more than 50% of the time. The softwaretherefore computes zero depreciation for any worksheets attachedto this line that do not have an entry for business use percentage of50% or less. The depreciation deduction from all appropriate work-sheets combined appears here. This total is also reflected in the to-tal at line 28(h), below, and line 21 in Part IV.

28 Total amounts in column (h) for line 21, page 1. (auto-calc) Com-puted as the sum of lines 25, 26(h) and 27(h), this is the total de-preciation for listed property including the new bonus depreciation.

29 Total amounts in column (i) for line 7, page 1. (auto-calc) Taken asthe amount on line 26(i), and posted to line 7 of Part I, this is thetotal sec. 179 expense for listed property.

Pre-1987 part of depreciation in line 29(h) (for California). (auto-calc, supportedby Listed Property Worksheet, Figure 2-27.) This line is provided to simplifypreparation of a state return by our California Supplement.

If you claim any deductions for vehicles, also see Sections B and C.

Listed Property Worksheet, Figure 2-27. For most entries you should refer tothe details for MACRS/ACRS Worksheets (Figure 2-24) for more information.However, additional restrictions apply to this worksheet as noted below.(Note that the IRS prefers that the worksheets appear in the order of vehiclesfirst, then 5-year property, 10-year property, etc., so you may need tochange the order of the worksheets after you add a new one. See Ch. 7 forinformation on reordering worksheets.)

a. Type of property. Describe property in 10 characters or less.If automobile: 1=regular, 2=electric, 3=truck or van, 4=SUV, 5=exempt. If

the property is a passenger vehicle, it is generally subject to annual limi-tations on depreciation deductions -- the so-called “luxury car limita-tions.” See Table 2-13 (following the details for Section C) for a com-plete list of the limitations, which are applied when you enter 1, 2, or 3here. For most vehicles, 1 is the appropriate entry. Enter 2 if the vehiclewas produced by an original equipment manufacturer and designed to


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run primarily on electricity. The ceiling on depreciation for electric vehi-cles that were placed in service after August 5, 1997 is approximatelytriple that for regular cars. Enter 3 if the vehicle is a passenger truck orvan (including minivans and SUVs built on a truck chassis) rated at6,000 pounds gross vehicle weight or less. The ceiling on first-year de-preciation is $200 to $500 higher for trucks and vans than it is forregular cars. Enter 4 if the vehicle is an SUV (or other passenger vehicle)rated at more than 6,000 pounds gross vehicle but no more than14,000 pounds. This class of vehicle is not subject to the limitations inTable 2-13, but is subject to a reduced maximum for sec. 179 deduc-tion of $25,000 if placed in service after October 22, 2004. Enter 5 forvehicles that are exempt from all cielings, including ambulances,hearses, taxicabs, and certain vehicles rated at more than 6,000 poundswith large cargo areas or high passenger capacity.

QualifiedEmpowermentZone/RenewalCommunityproperty? An-swer Yes onlyif the propertyqualifies asqualifiedempowermentzone propertyor qualified re-newal prop-erty, definedpreviously. AYes answerleads to an in-crease in thelimit on line 1of Form 4562(by the cost ofall qualifiedzone propertiescombined, or$35,000,whichever isless), and onlyhalf of the costof the propertyis used in line 2.

b. Date placed in service. Enter full date in the mm/dd/yy format. Thisentry critically affects all computations.

LISTED PROPERTY(Scrn 1of2)LISTED PROPERTY(Scrn 1of2)LISTED PROPERTY(Scrn 1of2)LISTED PROPERTY(Scrn 1of2) a. Type of pro a. Type of pro a. Type of pro a. Type of propppperty........erty........erty........erty........ If a vehicle,enter 1=regular, If a vehicle,enter 1=regular, If a vehicle,enter 1=regular, If a vehicle,enter 1=regular, 2=elec,3=truck,4=SUV,5=exmpt 0 2=elec,3=truck,4=SUV,5=exmpt 0 2=elec,3=truck,4=SUV,5=exmpt 0 2=elec,3=truck,4=SUV,5=exmpt 0 Qlfd.emp.zone/renew. 179 prop? No Qlfd.emp.zone/renew. 179 prop? No Qlfd.emp.zone/renew. 179 prop? No Qlfd.emp.zone/renew. 179 prop? No b. Date placed in service.... b. Date placed in service.... b. Date placed in service.... b. Date placed in service.... Date acquired(for next three) Date acquired(for next three) Date acquired(for next three) Date acquired(for next three) Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Liberty Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Qlfd. Gulf Op Zone property..? No Other qlfd. for special allow? No Other qlfd. for special allow? No Other qlfd. for special allow? No Other qlfd. for special allow? No Class (3,5,7,10, etc.) 0 Class (3,5,7,10, etc.) 0 Class (3,5,7,10, etc.) 0 Class (3,5,7,10, etc.) 0 % of qlfd business use 0 % of qlfd business use 0 % of qlfd business use 0 % of qlfd business use 0 c. % bus+investment use...... 0 c. % bus+investment use...... 0 c. % bus+investment use...... 0 c. % bus+investment use...... 0 d. Cost or other basis...... 0 d. Cost or other basis...... 0 d. Cost or other basis...... 0 d. Cost or other basis...... 0 Sec.179exp & PRIOR spec allow 0 Sec.179exp & PRIOR spec allow 0 Sec.179exp & PRIOR spec allow 0 Sec.179exp & PRIOR spec allow 0 Eligible for spec�l allowance Eligible for spec�l allowance Eligible for spec�l allowance Eligible for spec�l allowance▒ No▒ No▒ No▒ No Elect 1=0%,2=30%(vs.50) allow 0 Elect 1=0%,2=30%(vs.50) allow 0 Elect 1=0%,2=30%(vs.50) allow 0 Elect 1=0%,2=30%(vs.50) allow 0 Special allowance for ln 25 Special allowance for ln 25 Special allowance for ln 25 Special allowance for ln 25▒ 0▒ 0▒ 0▒ 0 e. Deprec'n basis............ e. Deprec'n basis............ e. Deprec'n basis............ e. Deprec'n basis............▒ 0▒ 0▒ 0▒ 0 Deprec'n in past years 0 Deprec'n in past years 0 Deprec'n in past years 0 Deprec'n in past years 0 [Press PgDn or > for f thru i] [Press PgDn or > for f thru i] [Press PgDn or > for f thru i] [Press PgDn or > for f thru i] ________________________________________ ________________________________________ ________________________________________ ________________________________________

LISTED PROPERTY(Scrn 2of2)LISTED PROPERTY(Scrn 2of2)LISTED PROPERTY(Scrn 2of2)LISTED PROPERTY(Scrn 2of2) f. Period of recovery (years) 0 f. Period of recovery (years) 0 f. Period of recovery (years) 0 f. Period of recovery (years) 0 Farm or elect 150% DB.? No Farm or elect 150% DB.? No Farm or elect 150% DB.? No Farm or elect 150% DB.? No MUST use mid-qtr convn? No MUST use mid-qtr convn? No MUST use mid-qtr convn? No MUST use mid-qtr convn? No Convention used........... Convention used........... Convention used........... Convention used........... g. Method (DB,SL,etc.) g. Method (DB,SL,etc.) g. Method (DB,SL,etc.) g. Method (DB,SL,etc.) Month sold(if this yr) 0 Month sold(if this yr) 0 Month sold(if this yr) 0 Month sold(if this yr) 0 Percentage this year.. 0 Percentage this year.. 0 Percentage this year.. 0 Percentage this year.. 0 h. Deprec'n deduction........ h. Deprec'n deduction........ h. Deprec'n deduction........ h. Deprec'n deduction........▒ 0▒ 0▒ 0▒ 0 i. Sec179 cost elected....... i. Sec179 cost elected....... i. Sec179 cost elected....... i. Sec179 cost elected.......▒ 0▒ 0▒ 0▒ 0

Figure 2-27. Listed Property Worksheet

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Date acquired (for next three). This entry is used only for checkingqualification for to claim the special “bonus” depreciation allowancefor the following three special types of property. The rules for datesas they apply to the special allowance are quite involved, so youshould refer to the IRS instructions for line 14 of Form 4562, whichapply to line 25 as well, for details.

Qualified Liberty Zone property? Answer Yes if New York LibertyZone property. The special depreciation allowance may be allowed ifacquired after September 10, 2001 and before 2007 (2010 for non-residential real and residential rental property).



Class (3, 5, 7, 10, etc.). This 2-digit entry determines the restrictionsto apply and the calculations to use. (See our details for lines 19athrough 20c of Form 4562 for examples of classes to use.)

Business use percentage. Enter percentage, from 0 to 100, that definesthe amount the item was used for business during the tax year. Whenthe business percentage is 50% or less, straight-line depreciation mustbe used, which the software ensures. CAUTION: If you accessed thisworksheet from line 25 or line 26, you will not be allowed to enter anyamounts below if your entry here for business use percentage is 50% orless. Conversely, if you accessed this worksheet from line 27, you willnot be allowed to enter any amounts below if your entry here for busi-ness use percentage is more than 50%.

c. Business/investment use percentage. This entry will automaticallymatch the above business use percentage unless you increase it toreflect investment use of the property in addition to business use.Through this entry you increase the basis for depreciation withoutincreasing the business use for purposes of the above 50% rule.

d. Cost or other basis. Enter actual cost or gross basis, not adjusted ba-sis, here. The basis for depreciation is computed at line e.

Section 179 expense deduction and PRIOR special allowance. Enter thesection 179 deduction taken in the past or to be taken this year (if ac-quired in the current tax year), plus any special allowance claimed a prioryear for this property and the amount of reduction required for prior certainprior credits, such as the Investment Tax Credit (ITC) taken in the past.(The required reduction for ITC is half of any pre-1986 credit unless youchose to take the reduced credit at that time.) Do not enter here any spe-


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cial allowance for the CURRENT year; the special allowance for the currentyear is automatically computed below.. No section 179 deduction is al-lowed in the current year if the business use percentage is 50% or less.This rule is imposed in determining the amount for line h when the date online b lies in the current tax year. See limitations described in Part I of Form4562. If acquired in the current year, your entry will appear at line i, be-low, subject to the limitations for cars if you identified the property as aregular vehicle, electric vehicle, truck or van, or SUV.

Eligible for special allowance? (auto-calc) Answered Yes if one of thequestions for qualified property is answered Yes, above, and eligibledates are entered for both date placed in service and date acquired.

Elect 1=0%, 2=30% (vs. 50%), allowance. If you enter 1, you elect out ofany special allowance. If you enter 2, you elect 30% when the propertyis wligible for 50%. But if you leave the entry at zero, you are indicatingno election, so the 30% or 50% allowance will be computed, below,when applicable. Note that if you identified the property as a vehicletype 1, 2, or 3, the allowance is subject to the limitations shown in Ta-ble 2-13, just as it is for other forms of depreciation. However, noticethat the limits are substantially higher when you claim the special allow-ance. Also note that the special allowance is computed at the next lineONLY if the following two conditions are met:

* percent of business use is more than 50%,* business use start date is within the tax year of the return.CAUTION: If you choose any of the elections you must treat all prop-erty in the same class in the same way and identify the class in ourElection Screens in Part II so that the required statement will beprinted with the official return..

Special allowance for line 25. (auto-calc) If the business use startdate lies in the current tax year and the business use percentageexceeds 50%, a special allowance will appear here unless youelected out of it. The allowance will generally be 50% unless youelect otherwise. However, the special allowance is figured on a re-duced basis computed as line c times line d less the sec. 179 de-duction taken. The allowance is then the applicable percentage ofthat reduced basis, subject to the limitations in Table 2-13 whenapplicable. This result will be reflected in line 25 of Form 4562.

e. Basis for depreciation. (auto-calc) Computed as line d times the per-centage on line c, less the section 179 deduction and the precedingspecial allowance.

Depreciation in past years. Enter total depreciation allowable in thepast, whether taken or not. This entry determines the amount youcan deduct after the end of the recovery period for cars previouslysubjected to luxury car maximums.

f. Recovery period (years). This entry is restricted by the software toallowed values. For example, when the SL method is required be-

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cause of the 50% rule, your entry may be raised to a recovery pe-riod higher than the class label may imply.

Farm or elect 150% DB method? As detailed for the MACRS/ACRSWorksheet, property used in a farming business cannot use the200% DB method, and others may use 150% DB by election.

MUST use mid-quarter convention? (For post-1986 property only.) Ifmore than 40% of your new property for a class was placed inservice in the last quarter of a tax year, you normally must answerYes for all property of the same class for that tax year.

Convention used. (auto-calc line when you enter DB, MA, PRE, AC, or SLas the method.) This line shows the convention used in the automatic cal-culations, using IRS-defined abbreviations: HY (for half-year), MQ (for mid-quarter), FM (for full month), and MM (for mid-month).

g. Method (DB, SL, etc.). Three basic methods are built-in: MACRS (DB orMA), the regular prescribed ACRS (PRE or AC), and the straight-lineelection (SL and S/L). The software recognizes these methods fromthe first two characters of your entry. All other entries, including anyentry with a leading space, permit you to manually enter ANY per-centage for "Percentage this year," below. REMINDER: The softwarechanges your DB, MA, PRE, and AC entry into SL when the businessuse percentage is 50% or less, to conform with IRS rules.

Month sold (if this year). If sold or retired during the tax year, enterthe month sold or retired from 1 to 12. The deduction is determinedautomatically based on the law. (A zero deduction will result for pre-1987 property other than real property under the ACRS rules thatno deduction is allowed in the year of sale.)

Percentage this year. (auto-calc line when you enter DB, MA, PRE, AC,or SL as the method.) If you don't enter a bona fide method, the ManualMethod is assumed and you can enter the percentage here yourself.Otherwise the IRS percentage is displayed here to two decimal places,even though it is retained to three decimal places in the calculationswhen so required by the IRS. CAUTION: Do not use the Manual Methodunless you have an unusual exception, such as transition property, be-cause the software has numerous lesser-known subtleties of the lawbuilt in, handling all the changes of the past decade.

h. Depreciation deduction. (auto-calc) Computed as the basis on line etimes the above percentage, then limited to the amounts in Table 2-13 (following the details for Section C) multiplied by business usepercentage if you entered 1, 2, or 3 as the type of automobile.

i. Section 179 cost elected. (auto-calc) Taken as your entry for section179 expense deduction taken (as previously limited for cars whenapplicable), when the date on line b lies within the tax year andbusiness use percentage exceeds 50%.

When you exit the worksheets, the amounts on all lines d, h, and i are sepa-rately summed and posted to the corresponding lines on Form 4562.


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Section B, Information Regarding Use of Vehicles. (Supported by Vehicle InfoWorksheet, Figure 2-28.) You MUST complete this section for ANY vehiclesused by sole proprietors, partners, more than 5% owners, and related per-sons. You also MUST complete it for employer-provided vehicles if you can-not answer Yes to any of the questions in Section C, below. This entire sec-tion, is supported by Vehicle Info Worksheets. CAUTION: While you canmake entries directly on Form 4562 for tax planning, you MUST completethese worksheets to satisfy the IRS reporting requirements for a return youplan to file. The worksheets are accessible at any of the lines in this section.

Vehicle Info Worksheet, Figure 2-28. See Sec. C, below, to determinewhether you need to complete this part:

Vehicle identifica-tion. Describeeach vehicle in10 charactersor less, so asto uniquelyidentify it withthe proper List-ed PropertyWorksheetcompleted inSection A.

30 Total business miles driven during the year. Enter the number ofmiles attributable to business purposes.

31 Total commuting miles driven during the year. Enter the number ofmiles attributable to commuting to and from work.

32 Total other personal (noncommuting) miles driven. Enter all milesnot included in line 30 or line 31 for the vehicle.

33 Total miles driven during the year. (auto-calc) Computed as the sumof lines 30 through 32.

34 Was the vehicle available for personal use during off-duty hours?Answer Yes or No.

35 Was the vehicle used mainly by a more than 5% owner or relatedperson? Answer Yes or No.

36 Is another vehicle available for personal use? Answer Yes or No.When you return from the worksheets, the totals for lines 30, 31, and 32,and any Yes response to Question 34, 35, or 36, are posted to Form 4562.

Section C, Questions for Employers Who Provide Vehicles for Use by TheirEmployees. Your answers indicate whether you have to complete Section B:

Do you provide vehicles for your employees? If No, do not completethe rest of this section because it does not apply.

37 Do you maintain a written policy statement that prohibits all personaluse of vehicles, including commuting, by your employees?

38 Do you maintain a written policy statement that prohibits personaluse of vehicles, except commuting, by your employees?

VEHICLE INFO WORKSHEETVEHICLE INFO WORKSHEETVEHICLE INFO WORKSHEETVEHICLE INFO WORKSHEET Vehicle identific Vehicle identific Vehicle identific Vehicle identificaaaation....tion....tion....tion.... 30 Tot business miles durng yr 0 30 Tot business miles durng yr 0 30 Tot business miles durng yr 0 30 Tot business miles durng yr 0 31 Tot commuting miles durg yr 0 31 Tot commuting miles durg yr 0 31 Tot commuting miles durg yr 0 31 Tot commuting miles durg yr 0 32 Tot other personal miles... 0 32 Tot other personal miles... 0 32 Tot other personal miles... 0 32 Tot other personal miles... 0 33 Tot miles driven during yr 33 Tot miles driven during yr 33 Tot miles driven during yr 33 Tot miles driven during yr▒ 0▒ 0▒ 0▒ 0 34 Available for pe 34 Available for pe 34 Available for pe 34 Available for perrrrsonalsonalsonalsonal use in off-duty hours......? No use in off-duty hours......? No use in off-duty hours......? No use in off-duty hours......? No 35 Used mainly by over 5% 35 Used mainly by over 5% 35 Used mainly by over 5% 35 Used mainly by over 5% owner or related pe owner or related pe owner or related pe owner or related perrrrson....? Noson....? Noson....? Noson....? No 36 Another vehicle avail- 36 Another vehicle avail- 36 Another vehicle avail- 36 Another vehicle available for personal use......? No able for personal use......? No able for personal use......? No able for personal use......? No

Figure 2-28. Vehicle Info Worksheet

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39 Do you treat all use of vehicles by employees as personal use?40 Do you provide more than five vehicles to your employees and retain

the information received from your employees concerning the use ofthe vehicles?

41 Do you meet the requirements concerning qualified automobile dem-onstration use?

You do not have to complete Section B if you provide no vehicles to employ-ees or you can answer Yes to any question on lines 37 through 41.

Table 2-13. Limitations on Passenger Vehicles

DATE PLACED IN SERVICE DATE PLACED IN SERVICE DATE PLACED IN SERVICE DATE PLACED IN SERVICE TAX YEARTAX YEARTAX YEARTAX YEAR MAXIMUMMAXIMUMMAXIMUMMAXIMUM

6/19/84 through 12/31/84 all $6,000

1/1/85 through 4/2/85 all $6,200

4/3/85 through 12/31/86 all $4,800

1/1/87 through 12/31/90 after 3rd $1,475

1/1/91 through 12/31/92 after 3rd $1,575

1/1/93 through 12/31/94 after 3rd $1,675

1/1/95 through 12/31/96 after 3rd $1,775

1/1/97 through 12/31/97 after 3rd $1,775 (*)

1/1/98 through 12/31/98 after 3rd $1,775 (*)

1/1/99 through 12/31/99 after 3rd $1,775 (*)

1/1/00 through 12/31/00 after 3rd $1,775 (*)

1/1/01 through 9/10/01 after 3rd $1,775 (*)

9/11/01 through 5/5/03 after 3rd $1,775 (*)

5/6/03 through 12/31/03 after 3rd $1,775 (*)

1/1/04 through 12/31/04 3rd $2,850 (*)

" " " after 3rd $1,675 (*)

1/1/05 through 12/31/05 2nd $4,700 (*)

� � � 3rd $2,850 (*)

1/1/06 through 12/31/06 1st $2,960 (*)

" " " 2nd $4,800 (*)

(*) Increases to these limits apply to electric passenger automobiles and trucks and vans as follows:

For electric passenger automobiles after 8/5/1997: For electric passenger automobiles after 8/5/1997: For electric passenger automobiles after 8/5/1997: For electric passenger automobiles after 8/5/1997: All limits are approximately triple (within plus or minus $200) for OEM electric vehicles. See IRS tables for limits.

For trucks and vans after 12/31/02 (under 6,000 lb. gross): For trucks and vans after 12/31/02 (under 6,000 lb. gross): For trucks and vans after 12/31/02 (under 6,000 lb. gross): For trucks and vans after 12/31/02 (under 6,000 lb. gross): add $300 to 1st-year limit for 2006, $500 to 2nd-year limit for 2005 and $400 for 2006, $300 to 3rd-year limit for 2005, $200 to limits after 3rd year.

NOTE: Actual limitation is THE ABOVE AMOUNT MULTIPLIED BY THE BUSINESS USE PERCENTAGE. (After the recovery period has expired, the remaining depreciation not taken because of the above limitations can be deducted subject to these limitations each year until fully depreciated.)


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PART VI, AMORTIZATION. Certain costs such as starting a business, good-will, and other intangibles are not subject to depreciation rules and can beamortized instead. Amortization deductions are separated by date placed inservice into two lines:

42 Amortization of costs that begins in 2006. (Supported by Amortiza-tion Worksheet, Figure 2-29.) Report amortization here ONLY forproperty placed in service during the current tax year. You MUSTuse the supporting worksheet for this line and file them with the re-turn to satisfy IRS reporting requirements.

43 Amortization of costs that began before 2006. (Supported by Amorti-zation Worksheet, Figure 2-29.) Report all other amortization here.Use of the supporting worksheets is optional here.

44 Total. (auto-calc) Computed as the sum of lines 42 and 43.The result on line 44 is automatically posted to the amortization line on theform supported by this copy of Form 4562. (Note that Schedule E has nosuch line because none of the allowed cases apply to it.)

RULES for the amortization of certain costs. The American Jobs Creation Actof 2004 changed the rules for a broad range of special costs paid or incurredafter October 22, 2004. It eliminated the credit for forestation and reforesta-tion costs (Form 3468), but provided for the amortization of up to $10,000of the cost ($5,000 if married filing separately) over an 84-month period. Italso changed the minimum amortization period for start-up costs from 60months to 180 months. And it provided that certain creative propery costscould be amortized over a 15-year period. See IRS Instructions for Form4562 for details on these and other costs for which the amortization ruleswere changed.

Amortization Work-sheet, Figure 2-29. Alllines on the worksheetare informational onlyexcept for line f:

Tax year on Form1040. (auto-calc) Takenfrom your en-try on Form1040, it isused to checkyour date entry for line b.

a. Description of costs. Describe in 25 characters or less.b. Date amortization begins. Enter the acquisition, completion, or ex-

penditure date in the standard mm/dd/yy format. If you accessedthe worksheet at line 42, the date must be in the same tax year asentered on Form 1040, displayed above. If you accessed the work-

AMORTIZATION WORKSHEETAMORTIZATION WORKSHEETAMORTIZATION WORKSHEETAMORTIZATION WORKSHEET Tax year on Form 1040. Tax year on Form 1040. Tax year on Form 1040. Tax year on Form 1040.▒ 2006▒ 2006▒ 2006▒ 2006 a. Description of a. Description of a. Description of a. Description of b. Date amort'n b b. Date amort'n b b. Date amort'n b b. Date amort'n beeeegins.......gins.......gins.......gins....... c. Amort'bl amount........... 0 c. Amort'bl amount........... 0 c. Amort'bl amount........... 0 c. Amort'bl amount........... 0 d. Code section ........ d. Code section ........ d. Code section ........ d. Code section ........ Amortn period (months) Amortn period (months) Amortn period (months) Amortn period (months) OR Amortn % this yr 0 OR Amortn % this yr 0 OR Amortn % this yr 0 OR Amortn % this yr 0 Month sold(if this yr) 0 Month sold(if this yr) 0 Month sold(if this yr) 0 Month sold(if this yr) 0 e. Amortn % or period ....... e. Amortn % or period ....... e. Amortn % or period ....... e. Amortn % or period ....... f. Amortiz'n this yr......... 0 f. Amortiz'n this yr......... 0 f. Amortiz'n this yr......... 0 f. Amortiz'n this yr......... 0

Figure 2-29. Amortization Worksheet

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sheet at line 43, the date must precede the tax year entered onForm 1040. Illegal dates are indicated by the word INVALID.

c. Amortizable amount. Enter total amount to be amortized.d. Code section. Identify the IRS code section under which you are al-

lowed to amortize the property, according to the following list:Sec. 169 for pollution control facilities,Sec. 171 for certain bond premiums,Sec. 174 for research and experimental expenditures,Sec. 178 for cost of acquiring a lease,Sec. 194 for qualified forestation and reforestation costs,Sec. 195 for business start-up expenditures,Sec. 709 for organizational expenditures for a partnership,Sec. 59(e) for optional write-off of certain tax preferences.

See IRS Pub. 535 (Business Expenses) for details.Amortization period (months). If using a simple full-month method of

amortization, enter the total number of months over which the itemis to be amortized.

OR Amortization percentage this year. If using a percentage methodinstead, enter the percentage (up to 100%) here.

Month sold (if this year). If you entered a period, above, and sold or re-tired the item during the tax year, enter the month sold or retired (1to 12). The period over which the deduction is computed is then re-duced to the number of full months before the item was sold.

e. Amortization percentage or period. If you entered an amortizationperiod or percentage above, this line reflects your entry automati-cally, in a standard format using 2 decimal places for percentagesand whole numbers for months. Otherwise, you are free to enterany description text in 10 characters or less.

f. Amortization for this year. If you entered an amortization period orpercentage above, this line reflects that entry (cost times 12 dividedby the amortization period, or the cost times the percentage). Oth-erwise, you are free to enter any deduction that is appropriate. .

When you exit the worksheet, the total of all lines f for all amortization work-sheets is posted to the line supported.



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Form 4684 / Casualties and TheftsWho is it for. This form is designed for reporting gains and losses from casual-ties and thefts. (Gains can result when insurance proceeds exceed the cost orother basis of the property lost.) If covered by insurance, you must file atimely claim in order to be eligible to deduct any net loss. Otherwise youmust reduce your deduction by the amount that the insurance would havecovered. The form is divided into two parts: Section A for personal propertyand Section B for business and income-producing property. The form is ac-cessible through the Road Map through forms and schedules where casualtyand theft gains and losses are reported: line 19 of Schedule A (where per-sonal property loss is deducted) and lines 4 and 11 of Schedule D (wherepersonal property gains and losses are reported), and lines 3 and 14 of Form4797 (where business or income-producing property gains and losses are re-ported).

Use separate Forms 4684 for separate casualties and losses. Only one copyof Form 4684 is built into the software, but the IRS requires you to use sepa-rate copies of Form 4684 for the top part of each page of the form for eachseparate casualty or loss. You should use the single copy provided by thesoftware to report the summary of all casualties and thefts from all separateforms plus the details for one of those casualties or thefts. If you have morethan one separate casualty or theft to report, you must complete separatecopies of Form 4684 (attached to separate, blank, mock returns) for SectionA lines 1 through 12 ONLY, or Section B lines 22 through 30 ONLY, then re-port the amounts from those other copies on the main copy attached to yourreturn. Enter the sum of line 12 of all other Forms 4684 above line 13 of themain copy, the sum of line 4 of all other Forms 4684 above line 14 of themain copy, and the sum of line 32 of all other Forms 4684 below line 32 ofthe main copy.

Is this SUPPLEMENTARY copy of Form 4684? You should answer Yes ONLY ifyou are reporting more than one casualty or theft, and the copy you are cur-rently preparing is NOT the copy that is attached to the return to be filed. Thesupplementary Forms 4684 that you need to complete separately from the re-turn when reporting more than one casualty or theft must not have lines 13through 21 nor 32 through 42 completed, and a Yes answer here ensuresthat those lines are zero.

SECTION A - PERSONAL USE PROPERTY. Use this section to figure casualtyand theft gains and losses for property that is NOT used in a trade or busi-ness and is NOT used for income-producing purposes.

Details for one casualty or theft event. This section is supported by Casualtyand Theft Worksheets, but you should use them to report only one casualtyor theft event on any one copy of Form 4684. Use a separate worksheet foreach separate property lost or damaged. Except when qualified for a hurri-cane-related exception, a $100 deductible is applied separately on each copy

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of Form 4684 for each separate casualty or theft event. You must itemize line4 or 10 to support lines 1 through 9. If you have more than one casualty ortheft event, see the preceding shaded paragraph on handling more than oneForm 4684. Note that all information for the lines 1 through 12 comes fromthe Casualty and Theft Worksheets that support these lines, and you mustview the worksheets for the details of lines 1 through 12. The only data thatappears on the screen without accessing the worksheets are the following to-tals:

1 through 3. The entries for these lines are shown only on the support-ing worksheets, and are not totalled here nor on the form.

4 Gain from casualty or theft. (Supported by the Casualty and TheftWorksheet, Figure 2-30.) Taken as the sum of all gains on line 4 forall worksheets attached to this copy of Form 4684.

5 through 9. The entries for these lines are shown only on the support-ing worksheets, and are not totalled here nor on the form.

10 Casualty or theft loss. (Supported by the Casualty and Theft Work-sheet, Figure 2-30.) Taken as the sum of all losses on line 9 for allworksheets attached to this copy of Form 4684.

For Katrina, Rita, or Wilma:Qualified hurricane-related loss? Answer Yes only if the event re-

ported on this copy of Form 4684 was caused by Hurricane Katrina,Rita, or Wilma, and the corresponding loss arose in the disaster areaof Hurricane Katrina after August 24, 2005, Hurricane Rita afterSeptember 22, 2005, or Hurricane Wilma after October 22, 2005.If Yes, the loss on this copy of Form 4684 is not subject to the$100 deductible for this copy nor the reduction of aggregate losseson all copies of Form 4684 combined by 10% of AGI. The relieffrom these limitations is automatically provided by the software as aresult of your Yes answer here.

11 Smaller of line 10 or $100. (auto-calc) Computed as indicated onlywhen the answer to the preceding question is No. Otherwise, com-puted as zero. This is the part of the loss on line 10 that is not al-lowed as a deduction. (The first $100 of loss for each event is dis-allowed unless qualified for hurricane relief.)

12 Subtract line 11 from line 10. (auto-calc) Computed as indicated, thisis the net deductible loss for this event.

Qualified hurricane-related part of line 12. (auto-calc) Computed asthe amount on line 12 if you answered Yes to “Qualified hurrica-nerelief loss?” Otherwise, zero.


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Casualty and TheftWorksheet, Figure 2-30. Access this work-sheet at line 4 (gain)or 10 (loss) of Form4684, and complete aseparate worksheetfor each separateproperty involved inthe same casualty ortheft.

1 Description –Enter type.Enter type ofproperty herein 15 characters or less.

Location. Enter location in 30 characters or less.Date acquired. Enter date in the standard mm/dd/yy format or, if in-herited, enter INHERITED.

Held for long-term period? Answer Yes if property was held morethan one year before the casualty or loss, or it was inherited prop-erty.

2 Cost or other basis. Enter cost plus improvements, but if the propertyis your main home, subtract any postponed gain from the sale of aprevious main home. If property was received in a trade-in, as a gift,or as an inheritance, see IRS Pub. 551 (Basis of Assets) for specialrules. For losses of deposits from an insolvent or bankrupt bank,make no entries on this line nor the rest of the worksheet. See thefollowing shaded box instead for details on how to report the loss.

3 Insurance or other reimbursement. Enter the amount you received,expect to receive, or would have received had you filed a claim. Ifthe property is insured, you must enter an appropriate amount herewhether or not you decide to file a claim with the insurance com-pany. If payment for loss was other than by insurance, see officialIRS instructions for Form 4684 for details.

4 Gain from casualty or theft. (auto-calc) Computed as line 3 less line2, but no less than zero. If greater than zero, the remainder of theworksheet will be zero and should not be completed.

Fair market value BEFORE event. Enter the price at which the propertywould change hands between a willing seller and a willing buyer,each having knowledge of the relevant facts before the casualty ortheft event.

5 Fair market value BEFORE casualty or theft. (auto-calc) Taken as theabove entry if line 4 is zero, but zero otherwise.

Fair market value AFTER event. Enter the price at which the propertywould change hands between a willing seller and a willing buyer,

CASUALTY & THEFT WORKSHEETCASUALTY & THEFT WORKSHEETCASUALTY & THEFT WORKSHEETCASUALTY & THEFT WORKSHEET 1 Description � Enter type: 1 Description � Enter type: 1 Description � Enter type: 1 Description � Enter type: and location: and location: and location: and location:

Date a Date a Date a Date accccquired........quired........quired........quired........ Held for long-term period? No Held for long-term period? No Held for long-term period? No Held for long-term period? No 2 Cost or other b 2 Cost or other b 2 Cost or other b 2 Cost or other baaaasis........ 0sis........ 0sis........ 0sis........ 0 3 Insurance/other rei 3 Insurance/other rei 3 Insurance/other rei 3 Insurance/other reimmmmbursmnt 0bursmnt 0bursmnt 0bursmnt 0 4 Gain fr cas 4 Gain fr cas 4 Gain fr cas 4 Gain fr casuuuualty/theft.....alty/theft.....alty/theft.....alty/theft.....▒ 0▒ 0▒ 0▒ 0 Fair market value BEFORE event 0 Fair market value BEFORE event 0 Fair market value BEFORE event 0 Fair market value BEFORE event 0 5 Fair market val BEFORE..... 5 Fair market val BEFORE..... 5 Fair market val BEFORE..... 5 Fair market val BEFORE.....▒ 0▒ 0▒ 0▒ 0 Fair market value AFTER event. 0 Fair market value AFTER event. 0 Fair market value AFTER event. 0 Fair market value AFTER event. 0 6 Fair market val AFTER...... 6 Fair market val AFTER...... 6 Fair market val AFTER...... 6 Fair market val AFTER......▒ 0▒ 0▒ 0▒ 0 7 Subtract line 6 from 5..... 7 Subtract line 6 from 5..... 7 Subtract line 6 from 5..... 7 Subtract line 6 from 5.....▒ 0▒ 0▒ 0▒ 0 8 Smaller of line 2 or 7..... 8 Smaller of line 2 or 7..... 8 Smaller of line 2 or 7..... 8 Smaller of line 2 or 7.....▒ 0▒ 0▒ 0▒ 0 9 Subtract line 3 from 8..... 9 Subtract line 3 from 8..... 9 Subtract line 3 from 8..... 9 Subtract line 3 from 8.....▒ 0▒ 0▒ 0▒ 0

Figure 2-30. Casualty and Theft Worksheet

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each having knowledge of the relevant facts after the casualty ortheft event.

6 Fair market value AFTER casualty or theft. (auto-calc) Taken as theabove entry if line 4 is zero, but zero otherwise.

7 Subtract line 6 from line 5. (auto-calc) Computed as indicated.8 Smaller of line 2 or line 7. (auto-calc) Computed as indicated.9 Subtract line 3 from line 8. (auto-calc) Computed as indicated, but no

less than zero.Lines 4 and 9 are separately summed from all worksheets attached to thiscopy of Form 4684 and posted to lines 4 and 10 of Form 4684 itself.

Special procedure for losses of deposits in insolvent or bankrupt banks. Ifyou incurred a loss of deposits in a financial institution because it became in-solvent or bankrupt, you have two choices in how to deduct the loss:• You can deduct the loss (less any expected proceeds from state insur-

ance) as a miscellaneous deduction at line 22 of Schedule A (Form1040). The most you can claim here is $20,000 ($10,000 if marriedfiling separately), and your deduction is subject to the usual 2% AGI limitfor that line of Schedule A.

OR…• You can deduct the loss in this section of Form 4684 using the following

procedure. Complete a worksheet for line 4 with ONLY line 1 completed,identifying the institution on the first line and entering “Insolvent financialinst.” on the second line. Then, once all worksheets for the line are com-pleted, when you return to Form 4684 increase the total for line 10 bythe amount of loss incurred.

Note that the loss due to the insolvency is never shown separately from otherproperty listed in the worksheets, but that’s how the IRS wants it!WARNING: Anytime you itemize line 4 or 10, the total for line 10 revertsback to the sum of line 9 from all the worksheets, and you will have to in-crease the total anew once you return to Form 4684!

Summary of all personal casualties and thefts. This section summaries theresults of lines 1 through 12 for all casualty and theft events reported onseparate Forms 4684. You can complete this section only if your answer to"Is this SUPPLEMENTARY copy of 4684" (at the beginning of this form) wasNo, indicating that this is your main copy of Form 4684 -- the one attachedby the software to your return.

Line 12 from this Form 4684. (auto-calc) Taken from line 12 on theprior screen.

Qualified hurricane-related part of line 12. (auto-calc) Taken fromthe line below line 12 on the prior screen, this is the amount on line12 if you answered Yes to “Qualified hurricane-relief loss?”

Line 12 from all other Forms 4684. Enter the sum of line 12 for allForms 4684 except this one.


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Qualified hurricane-related part of line 12 from all other Forms 4864.Enter line 12 of all other copies of Form 4684 for which hurricanerelief is indicated.

13 Amounts on line 12 of all Forms 4684. (auto-calc) Computed as thesum of line 12 from all copies of Form 4684 combined.

Line 4 from this Form 4684. (auto-calc) Taken from line 4, as indi-cated.

Line 4 from all other Forms 4684. Enter the sum of line 4 for all Forms4684 except this one.

14 Amounts on line 4 of all Forms 4684. (auto-calc) Computed as thesum of the above two amounts.

15 If line 14 more than line 13, enter difference. (auto-calc) Computedas indicated, an amount appears here only if the aggregate of allpersonal casualties and thefts for the year results in a net gain. If anet gain exists, all gains and losses that comprise this net gain arereported on Schedule D. You must therefore identify below whatpart of this result stems from short-term gains and losses (that is,gains or losses on property held one year or less).

Short-term net for this Form 4684. (auto-calc) If an amount appears online 15, the net short term gain or loss in lines 1 through 9 of thiscopy of Form 4684 appears here based on the worksheet entries.

Short-term net for all other Forms 4684. If an amount appears on line15, combine the short-term gains and losses reported on all Forms4684 except this one and enter the result here. Enter net gain as apositive or net loss as a negative number.

Short-term net for Schedule D. (auto-calc) Computed as the sum ofthe above two amounts, this result is posted to line 4 of ScheduleD.

Long-term net for Schedule D. (auto-calc) The remainder, this resultis posted to line 11 of Schedule D.

28% rate part of the above. This line applies only to collectibles. Ifany of the long-term gain or loss applies to collectibles (such as art,antiques, gems, stamps, coins, etc.), you must enter the amounthere, for less favorable treatment than other capital gains.

16 If line 14 less than line 13, enter difference. (auto-calc) Computed asindicated, an amount appears here only if the aggregate of gainsand losses from all personal casualties and thefts for the year com-bined is a net loss. If zero, the rest of this section will be zero andno loss will be claimed.

17 Amounts on line 12 of all Forms 4684 on which line 11 is zero. (auto-calc) Computed as the sum of “Qualified hurricane-related part ofline 12” plus “Qualified hurricane-related part of line 12 from allother Forms 4864” (above line 13), this is the amount of loss notsubject to reduction by 10% of AGI.

18 Subtract line 17 from line 16. (auto-calc) Computed as indicated, butno less than zero. This result will be zero if all losses are hurrica-

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nerelated losses. If zero, the rest of this section remains zero andthe amount on line 17 is posted to line 19 of Schedule A.

19 10% of AGI (Form 1040, line 38). (auto-calc) Computed as indicated ifline 18 is nonzero; otherwise, zero.

20 Subtract line 19 from line 18. (auto-calc) Computed as indicated ifline 18 is nonzero; otherwise, zero. This is the part of the loss online 18 that exceeds 10% of your adjusted gross income, which isthe only tax deductible part of this loss.

21 Add lines 17 and 20. (auto-calc) Computed as indicated if line 18 isnonzero; otherwise, zero.

Deduction for Schedule A, line 19. (auto-calc) Taken as line 21 if line 18is nonzero, or line 16 otherwise. This is the sum of hurricane-relatedlosses and the tax-deductible part of other net losses.

This result is claimed as an itemized deduction at line 19 of Schedule A.

SECTION B - BUSINESS AND INCOME-PRODUCING PROPERTY. Use thissection to figure casualty and theft gains and losses for property that is usedin a trade or business or is used for income-producing purposes.

Part I, Casualty or Theft Gain or Loss. This section is supported by Casualtyand Theft Worksheets, but you should use them to report only one casualtyor theft event on this copy of Form 4684. Use a separate worksheet for eachseparate property lost or damaged. You must itemize line 25 or 31 to supportlines 22 through 30. If you have more than one casualty or theft event, seethe earlier shaded paragraph on handling more than one Form 4684. (TheCasualty and Theft Worksheets for this section are identical to those de-scribed previously for Personal Property, except that line numbers are 22through 30 instead of 1 through 9. They are therefore not detailed again.)The totals that appear on the screen from the worksheets are:

25 Gain from casualty or theft. (Supported by the Casualty and TheftWorksheet, similar to Figure 2-30.) Taken as the sum of all gains online 25 for all worksheets attached to this copy of Form 4684.

31 Casualty or theft loss. (Supported by the Casualty and Theft Work-sheet, similar to Figure 2-30.) Taken as the sum of all losses on line31 for all worksheets attached to this copy of Form 4684.

If overrode line 30 on a worksheet, itemize here to explain calculation.There are special situations in which you may have to report else-where some of the losses reported on Form 4684. For example, ifthe property lost was your home and you use part of your home forbusiness, you will have to report the business-related part of thecasualty or theft loss on Form 8829, even though you report thedetails here. We therefore provide two lines above line 30 of eachworksheet for entering the amount that will be reported elsewhereand therefore not included in line 30 of Form 4684. If you make anentry on one of these special lines, you must explain why you ex-cluded the amount from Form 4684 in a supporting statement for


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this line. See the IRS Instructions for Form 4684, Section B, for de-tails.

Part II, Summary of Gains and Losses. This section summaries the results oflines 22 through 31 for all casualty and theft events reported on separateForms 4684. You can complete this section only if your answer to "Is thisSUPPLEMENTARY copy of 4684" (at the beginning of this form) was No, in-dicating that this is your main copy of Form 4684.

Property Held One Year or Less. Use this section to summarize short-termgains and losses from all Forms 4684 combined.

32 Itemize to detail gain/loss. (Supported by Casualty or Theft Sum-mary Worksheets, Figure 2-31.) The short-term gains and lossesfrom all Forms 4684 must be itemized in these worksheets. The netgain or loss from all worksheets combined appears on this line.

Short-term net in Part I of this Form 4684. (auto-calc) Computed fromthe Casualty and Theft Worksheets in Part I of this copy of Form4684.

Short-term net in Part I of all other Forms 4684. Enter the short-termpart of the net from Part I for all other copies of Form 4684.

Part I vs. Part II ERROR. (auto-calc) Computed as the net on line 32less the sum of the above two lines. An error here means that thetotals from the worksheets in Part I of all Forms 4684 do not matchthe totals from the worksheets in Part II of this Form 4684, andmust be corrected.

(b)i Loss on trade, business, rental or royalty property. (auto-calc)Computed as the sum of amounts on the corresponding line on theCasualty or Theft Summary Worksheets for line 32 of this copy ofForm 4684.

Loss on income-producing property. (auto-calc) Computed as thesum of amounts on the corresponding line on the Casualty or TheftSummary Worksheets for line 32 of this copy of Form 4684.

Loss on employee property. (auto-calc) Computed as the sum ofamounts on the corresponding line on the Casualty or Theft Sum-mary Worksheets for line 32 of this copy of Form 4684.

(b)ii Loss on income-producing and employee property. (auto-calc)Computed as the sum of the preceding two amounts.

(c) Gain from casualties and thefts includible in income. (auto-calc)Computed as the sum of amounts on the line c of the Casualty orTheft Summary Worksheets for line 32 of this copy of Form 4684.

33 Totals. Add amounts on line 32. (auto-calc lines) Computed as thesum of “Net gain or loss” on the Casualty or Theft Summary Work-sheets for line 32 of this copy of Form 4684, which corresponds toline (c), above, less lines (b)i and (b)ii.

34 Combine line 33, columns (b)i and (c). (auto-calc) Computed as linec, above, less line (b)i.

35 Amount from line 33, column (b)ii. (auto-calc) Taken as line b(ii),above.

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Property Held More Than One Year. Use this section to summarize long-termgains and losses from all Forms 4684 combined.

36 Casualty or theft gains from Form 4797, line 32. (auto-calc) Postedhere from Form 4797 as indicated.

37 Itemize to detail gain/loss. (Supported by Casualty or Theft Sum-mary Worksheets, Figure 2-31.) The long-term gains and lossesfrom all Forms 4684 must be itemized in these worksheets. The netgain or loss from all worksheets combined appears on this line.

Long-term net in Part I of this Form 4684. (auto-calc) Computed fromthe Casualty and Theft Worksheets in Part I of this copy of Form4684.

Long-term net in Part I of all other Forms 4684. Enter the long-termpart of the net from Part I for all other copies of Form 4684.

Part I vs. Part II ERROR. (auto-calc) Computed as the net in line 37less the sum of the above two lines. An error here means that thetotals from the worksheets on Part I of all Forms 4684 do notmatch the totals from the worksheets on Part II of this Form 4684,and must be corrected.

(b)i Loss on trade, business, rental or royalty property. (auto-calc)Computed as the sum of amounts on the corresponding line on theCasualty or Theft Summary Worksheets for line 37 of this copy ofForm 4684.

Loss on income-producing property. (auto-calc) Computed as thesum of amounts on the corresponding line on the Casualty or TheftSummary Worksheets for line 37 of this copy of Form 4684.

Loss on employee property. (auto-calc) Computed as the sum ofamounts on the corresponding line on the Casualty or Theft Sum-mary Worksheets for line 37 of this copy of Form 4684.

(b)ii Loss on income-producing and employee property. (auto-calc)Computed as the sum of the preceding two amounts.

(c) Gain from casualties and thefts includible in income. (auto-calc)Computed as the sum of amounts on the line c of the Casualty orTheft Summary Worksheets for line 37 of this copy of Form 4684.

38 Total Losses. 37(b)(i) and 37(b)(ii). (auto-calc lines) Computed as thesum of lines (b)i and (b)ii, above. This is the total of losses for alltypes of property combined.

39 Total gains. Add lines 36 and 37(c). (auto-calc lines) Computed asline 36 plus line (c), above.

40 Add amounts on line 38, columns (b)i and (b)ii. (auto-calc) Computedas the result on line 38, above.

41 If line 40 loss more than line 39 gain. The next two lines are com-pleted only if there is a net long-term loss overall.

41a Combine line 38, column (b)i and line 39. (auto-calc) The gains fromboth business and income-producing properties, and the losses frombusiness property alone, are netted here.


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41b Amount from line 38, column (b)ii. (auto-calc) The losses from in-come-producing properties alone is summed here.

42 If line 40 equal to or less than 39, combine 36 and 40. (auto-calc)Computed as line 36 less line 40, but no less than zero. This resultis posted to line 3 of Form 4797.

Ordinary net in lines 34 and 41a for Form 4797. (auto-calc) Computedas indicated and posted to line 14 of Form 4797.


Posting to Schedule A and Form 4797. Results in Part II that are not citedabove as being posted to Form 4797 are posted to Schedule A instead,sometimes in a circuitous way that uses Form 4797 as a pass-through de-vice.

When line 40 is more than line 36:• The part of lines 35 and 41b attributable to employee property isposted to line 22 of Schedule A, where it is subject to a floor based on2% of AGI.• The part of lines 35 and 41b attributable to income-producing prop-erty is posted to line 27 of Schedule A, where there is no floor.When line 40 is less than or equal to line 36:The loss on line 38(b)(ii) is posted to line 18a of Form 4797, where it islimited to the loss on line 11 of Form 4797, then posted to Schedule Aas follows:• The part of the limited amount attributable to employee property isposted to line 22 of Schedule A, where it is subject to a floor based on2% of AGI.• The part of the limited amount attributable to income-producing prop-erty is posted to line 27 of Schedule A, where there is no floor.

Casualty or TheftSummary Worksheet,Figure 2-31. Accessthis worksheet at line25 (gain) or 31 (loss),and complete a sepa-rate worksheet foreach separate propertyinvolved in the samecasualty or theft.

a. Identify. Iden-tify the casualty or theft in 25 characters or less.

Trade, business, rental or royalty property? Answer Yes if the propertywas used in your trade or business, but NOT as an employee, orwas rental or royalty property.

CASUALTY OR THEFT SUMMARYCASUALTY OR THEFT SUMMARYCASUALTY OR THEFT SUMMARYCASUALTY OR THEFT SUMMARY a Identify........ a Identify........ a Identify........ a Identify........ Trade,bus, rental,royalty? No Trade,bus, rental,royalty? No Trade,bus, rental,royalty? No Trade,bus, rental,royalty? No Income-producing property? No Income-producing property? No Income-producing property? No Income-producing property? No Employee pro Employee pro Employee pro Employee propppperty........erty........erty........erty........▒ Yes▒ Yes▒ Yes▒ Yes Net gain or loss 0 Net gain or loss 0 Net gain or loss 0 Net gain or loss 0 b (i)Trade,bus,etc. loss.... b (i)Trade,bus,etc. loss.... b (i)Trade,bus,etc. loss.... b (i)Trade,bus,etc. loss....▒ 0▒ 0▒ 0▒ 0 Loss on income property Loss on income property Loss on income property Loss on income property▒ 0▒ 0▒ 0▒ 0 Loss on employee prop�y Loss on employee prop�y Loss on employee prop�y Loss on employee prop�y▒ 0▒ 0▒ 0▒ 0 b (ii)Incm-prd/employee loss b (ii)Incm-prd/employee loss b (ii)Incm-prd/employee loss b (ii)Incm-prd/employee loss▒ 0▒ 0▒ 0▒ 0 c Gain cas/th includ c Gain cas/th includ c Gain cas/th includ c Gain cas/th includiiiible....ble....ble....ble....▒ 0▒ 0▒ 0▒ 0

Figure 2-31. Casualty or Theft Summary

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Income-producing property? Answer Yes only if it was property heldfor investment, such as stocks and vacant land.

Employee property? (auto-calc) Automatically Yes if the preceding twoanswers are No, and Yes otherwise. This is property you used inperforming services as an employee.

Net gain or loss. Enter gain as a positive or loss as a negative.b(i). Trade, business, rental or royalty loss. (auto-calc) If “net gain or

loss” is a loss and you identified this worksheet as applying to atrade, business, rental or royalty property, the loss appears here asa positive number.

Loss on income property. (auto-calc) If “net gain or loss” is a lossand you identified this worksheet as applying to income-producingproperty, the loss appears here as a positive number.

Loss on employee property. (auto-calc) If “net gain or loss” is a lossand you identified this worksheet as applying to employee property,the loss appears here as a positive number.

b(ii). Income-producing or employee property loss. (auto-calc) Com-puted as the sum of the preceding two amounts.

c. Gain from casualty or thefts includible in income. (auto-calc) If net isa gain, the gain is repeated here.

Lines b(i), b(ii), and c are separately summed and posted to Form 4684 asseparate columns of either line 33 or lines 38 and 39, depending on whetheryou itemized the short-term line (line 32) or the long-term line (line 37).


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Form 4797 / Sales of Business PropertyWho is it for? Form 4797 is used mainly to report the sale or exchange of de-preciable property, such as trade or business property and rental property,and includes the recapture of past depreciation allowable. It is also used forinvoluntary conversions and section 179 and 280F recapture for reducedbusiness use. Most other sales are reported on Schedule D, not here. Form4797 is accessible through the Road Map at line 14 of Form 1040 and line12 of Schedule D.

Passive loss limitations. If you sold an interest in a passive activity, the gainor loss is used in Form 8582 to determine the passive loss limitations for thisand other forms. If you sold the entire interest, only the gains are reported onForm 8582, and the losses are fully deductible. If you sold a partial interest,both the gains and losses are reported on Form 8582, and the losses aresubject to the passive loss limitations. These rules and the handling of car-ryovers, significant participation amounts, and pro-rating among differentforms and schedules are all built-in and fully automatic without requiring youto complete any passive activity worksheets yourself. However, you shouldread the section on significant participation under Form 8582 to see if youneed to enter any special adjustment to Form 8582, if you have significantparticipation amounts. In addition, you must take special care to identify pas-sive amounts for Part III directly on Form 4797 itself, because the worksheetssupporting Part III do not contain passive activity questions.

Long-term (Part I) vs. Short-term (Part II) capital transactions. The two partsof the form are similar, but you must take care to enter the proper transac-tions in the proper parts. Assets must generally be held more than one yearto qualify as long-term holdings (figured by counting the day AFTER you re-ceived the property through the day you disposed of it). Special rule forfarms: Cattle and horses qualify as long-term holdings only if held more than24 months, whereas other livestock qualify if held more than 12 months.

Worksheets for Parts I and II separated by type. Worksheets that are prefor-matted like the IRS form support lines 2 and 10 of Form 4797, separated ac-cording to type of property under the passive loss rules:

• Worksheets for Active Rental Real Estate - for passive activities that re-quire posting to lines 1a, 1b, and 1c of Form 8582, and

• Worksheets for All Others - for all other passive activities (which requireposting to lines 3a, 3b, and 3c of Form 8582) and nonpassive activities.

You must always use the worksheet designed for the type of property yousold or else the passive loss rules may be misapplied.

Part III sometimes necessary before Parts I and II can be completed. Al-though the net gains and losses for most sales are reflected in Parts I and IIof this form, the details for sales with gains and subject to the recapture ofdepreciation and certain other deductions are reported in Part III instead. Theresults in Part III are then automatically posted to the appropriate lines in

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Parts I and II. Part III must be used to report only sales that result in a gainfor

depreciable trade or business property held more than one year, in-cluding certain cattle, horses, and livestock (section 1245 property),

residential rental property held more than one year (section 1250property),

nonresidential rental property held more than one year (section 1250property if placed in service after 12/31/86, or if placed in servicefrom 1/1/81 through 12/31/86 and depreciated by straight-linemethods; otherwise section 1245 property),

farmland held more than one year but less than 10 years and uponwhich soil, water, or land clearing expenses were deducted (section1252 property),

oil, gas, or geothermal property (section 1254 property),disposition of Sec. 126 cost-sharing payments (section 1255 property).

Any of the above property that was sold at a loss must be detailed directly inPart I or Part II, not Part III.

Unrecaptured sec. 1250 gain. Throughout our Form 4797 you will see linesfor unrecaptured sec. 1250 gain which do not appear on the official form.These lines show information used in the Schedule D Tax Worksheet, whichis used to provide the tax computation for the return when capital gains mayreduce the overall tax. In most cases these amounts come automatically fromworksheets you complete on Form 4797 and supporting forms. However, youmust enter the amounts yourself when they relate to forms that are not builtinto Tax Preparer. See the details for Schedule D for more information onthese items and the role they play in the capital gains tax.

FOR ALL SALES OR EXCHANGES OF REAL ESTATE:1 Sales reported on Form 1099-S or equivalent included on line 2, 10, or 20.Enter here the gross proceeds from all real estate sales and exchanges re-ported to you on Forms 1099-S (or a substitute statement) that you will bereporting on Form 4797, whether they are short-term or long-term holdings.These amounts should also be included in your entries for gross sales price onthe worksheets that support lines 2, 10, and 20 of Form 4797.

PART I, PROPERTY HELD FOR MORE THAN 1 YEAR - Sales or Exchanges ofProperty Used in a Trade or Business, and Involuntary Conversions FromOther Than Casualty and Theft. Lines 2 through 9 are used for reportinggains and losses for long-term holdings (those held more than one year).

2 Sales or exchanges of property held more than 1 year. Long-term sales andexchanges not reported elsewhere in the return are entered here in four sepa-rate sets of worksheets. CAUTION: Only long-term holdings should be re-ported on any worksheets that support line 2. But remember that some long-term holdings must be reported in the worksheets in Part III instead, detailedlater. (Short-term holdings are reported in worksheets that support line 10.)CAUTION: Do NOT include sales reported in Part III of Form 4797.


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Special exclusions allowed at lines 2 and 10. Exclusions that you can claimon worksheets for lines 2 and 10 include:

(1) Exclusion of gain from sale of DC Zone Assets. If you sold or exchangedassets in a District of Columbia Enterprise Zone that you held more than5 years, you may be able to exclude qualified capital gain. See IRS In-structions for Form 4797 for details. Report the gain as you normallywould in Part III of Form 4797, then claim the exclusion on a Sec. 1231Gain/Loss Worksheet for line 2 by entering “DC Zone Excl’n” in column(a), entering Yes for “Bypass date checking,” and entering the exclusionas a negative number in “NET (your entry if d=e=f=0).”

(2) Election to defer gain from certain dispositions of electric transmissionproperty. If sold or exchanged after October 22, 2004, you may elect todefer part of the realized gain on this property. See IRS Instructions forForm 4797 for details. Report the gain as you normally would in Part IIIof Form 4797, then claim the exclusion in two parts: (a) On a Sec. 1231Gain/Loss Worksheet for line 2, enter “Deferred 451(i)“ in column (a),enter Yes for “Bypass date checking,” and enter the exclusion to the ex-tent of the gain included in Form 4797, line 6, as a negative number in“NET (your entry if d=e=f=0).” (b) On a Sec. 1231 Gain/Loss Work-sheet for line 10, enter “Deferred 451(i)“ in column (a), enter Yes for“Bypass date checking,” and enter the remaining exclusion not claimedat line 2 as a negative number in “NET (your entry if d=e=f=0).”

For sec. 1231 gain or loss NOT reported to you on Sch. K-1: Using oneworksheet for each transaction, any number of transactions may be en-tered on the following lines for transactions NOT reported to you on aSchedule K-1. (Note that no lines appear for unrecaptured sec. 1250gain because transactions that would result in those gains are reportedin Part III of Form 4797, not here.)Active rental real estate:

(d) Sales Price. (auto-calc) This is the sum of sales prices entered onall the worksheets that are accessed on the next line.

2(g) Net for Active Rental Real Estate. (Supported by the Sec. 1231Gain/Loss Worksheet, Figure 2-32.) Enter only long-term transac-tions involving rental real estate in which you actively participatedon the worksheets you access at these lines.

All other transactions:(d) Sales Price. (auto-calc) This is the sum of sales prices entered onall the worksheets that are accessed on the next line.

2(g) Net for All other transactions. (Supported by the Sec. 1231Gain/Loss Worksheet, Figure 2-32.) Enter all other transactions onthe worksheets you access at these lines.

For sec. 1231 gain or loss reported to you on Sch. K-1: Using one work-sheet for each transaction, any number of transactions may be enteredon the following lines from Schedules K-1 received from partnerships, Scorporations, estates, and trusts.

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K-1 Sec. 1231 Active rental real estate:2(g) Sch. K-1 net for Active Rental Real Estate. (Supported by theSch. K-1 Sec. 1231 Gain/Loss Worksheet, Figure 2-33.) Enter onlylong-term transactions involving rental real estate in which you ac-tively participated on the worksheets you access at these lines.

Unrecaptured sec. 1250 gain. (auto-calc) This is the sum of unrecap-tured sec. 1250 gain for all K-1 worksheets that are accessed onthe preceding line.

K-1 Sec. 1231 All others:2(g) Sch. K-1 net for All other transactions. (Supported by the Sch. K-1 Sec. 1231 Gain/Loss Worksheet, Figure 2-33.) Enter all othertransactions on the worksheets you access at these lines.

Unrecaptured sec. 1250 gain. (auto-calc) This is the sum of unrecap-tured sec. 1250 gain for all K-1 worksheets that are accessed onthe preceding line.

2 Total gain or loss for entire year. (auto-calc) Computed as the sum of allpreceding totals for line 2(g). Note that no totals of unrecaptured sec. 1250gain are shown here. Instead, they are used in special computations for theamount to be used in Schedule D tax computations. See the last screen ofForm 4797 for the result.

3 Gain from Form 4684 line 42. (Road Map line, supported by Form 4684.)The long-term gain from casualties and thefts is posted here.

4 Section 1231 gain from Form 6252, line 26 or 37. (Road Map lines, supportedby Form 6252.) Five separate copies of Form 6252 are available for fiveseparate installment sales. Long-term gains in lines 26 and 37 of Form(s)6252 are posted here.

Unrecaptured sec. 1250 gain in line 4. (Road Map line, supported byForm 6252.) The amount of gain identified on Form 4684 as unre-captured sec. 1250 gain is posted to this line.

5 Section 1231 gain or loss from like-kind exchanges from Form 8824. (IfPremium Level, supported by Form 8824.) Any long-term or other section1231 gain or loss for the year from like-kind exchanges, as determined byForm 8824, is reported here.

6 Gain on line 32 from other than casualty and theft. (auto-calc) Taken from“Remainder for 4797 line 6” below line 32 in Part III of this form, this is line6(g) on the official form.

Passive loss limitations. The complex interface with Form 8582 is enforcedin this part of the form. You should pay particular attention to the lines la-beled “W/S ERROR” because they indicate that you must view the work-sheets at line 2 once again in order to update them with changes in Form8582.

Total gain to Form 8582 line 1a. (auto-calc) The sum of gains from thepreceding worksheets for rental real estate with active participation.


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Total loss to Form 8582 line 1b. (auto-calc) The sum of losses from thepreceding worksheets for rental real estate with active participation.

Active rental real estate loss unallowed in prior year. This entry is usedin line 1c of Form 8582. Enter here any loss carryover from theprior year stemming from passive loss limitations on the long-termsale of active rental real estate reported on last year's Form 4797.This carryover is automatically transferred by the software from theprior-year return when you use the translate feature on a return thathas 2005 as the entry for tax year on Form 1040 (as long as youanswered Yes to "Transfer all prior $ amounts" for the translation).Nevertheless, you must appropriately distribute this total among theworksheets for line 2 yourself so that the unallowed amounts cal-culated on the worksheets reflect the proper prorationing among theworksheets. An amount on the below W/S ERROR line will alert youof the need to do so.

Active rental real estate unallowed loss for 2006. (Road Map line, sup-ported by Form 8582.) This disallowance comes automatically fromForm 8582, but can only be determined upon the final recalculationof the return. You can access Form 8582 with the Itemize Key atthis line, but there is no need to do so because the form is auto-matically generated and completed upon the final recalculation ofthe return. Once the return is complete, you may have to view eachworksheet for lines 2 so that the unallowed losses are reallocatedbased upon the final return. An amount on the below W/S ERRORline will alert you of the need to do so.

Total gain to Form 8582 line 3a. (auto-calc) The sum of gains from thepreceding worksheets for passive activities.

Total loss to Form 8582 line 3b. (auto-calc) The sum of losses from thepreceding worksheets for passive activities.

Other passive prior unallowed loss. This is the loss carryover from theprior year stemming from passive loss limitations on sales reportedon the Schedule D for 2005. This carryover is automatically postedhere by the software from the prior-year return when you use thetranslate feature on a return that has 2005 as the entry for tax yearon Form 1040 (as long as you answered Yes to "Transfer all prior $amounts" for the translation). Nevertheless, you must appropriatelydistribute this total among the worksheets for line 2 yourself so thatthe unallowed amounts calculated on the worksheets reflect theproper prorationing among the worksheets. An amount on the be-low W/S ERROR line will alert you of the need to do so.

Other passive unallowed loss in 2006. (Road Map line, supported byForm 8582.) This disallowance comes automatically from Form8582, but can only be determined upon the final recalculation of thereturn. You can access Form 8582 with the Itemize Key at this line,but there is no need to do so because the form is automaticallygenerated and completed upon the final recalculation of the return.

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Once the return is complete, you may have to view each worksheetfor lines 2 so that the unallowed losses are reallocated based uponthe final return. An amount on the below W/S ERROR line will alertyou of the need to do so.

Significant participation part of prior unallowed losses. When reportingcarryovers for activities that are significant participation activities in2006, the IRS requires that you include those carryovers in the sig-nificant participation net to the extent that they are offset by gainsfor the same activity. This rule materially affects whether significantparticipation activities will be classified as passive activities. Youmust enter here the part of the 2005 carryover that is offset by sig-nificant participation gains which you have entered on the work-sheets for line 2. (See our instructions for Form 8582 for more de-tails on significant participation activities.)

W/S ERROR in prior unallowed losses. (auto-calc) Computed as thesum of prior unallowed losses you entered on all the worksheets forline 2, less the total prior unallowed losses shown above (which youentered or "translate" posted). If this result is nonzero, it means thatyou have not properly allocated the total prior unallowed lossesamong all the worksheets you have completed. You must return tothe worksheets and revise the entries. Your record of unallowedloss for each item for the previous year should guide your entries onthe worksheets.

W/S ERROR in current unallowed losses. (auto-calc) Computed as thesum of unallowed losses computed the last time you viewed theworksheets for line 2, less the total losses unallowed shown abovefor 2006 (which comes automatically from Form 8582). If this re-sult is nonzero, it means that the allocation of unallowed losses onyour worksheets is not based on the final return, so you must vieweach worksheet so that the unallowed losses can be reallocated.

7 Combine lines 2 through 6. (auto-calc line) Computed as the sum of allgains and loss in lines 2 through 6 less the appropriate disallowed amounts. Ifline 7 reflects a disallowance from Form 8582 or an additional loss due to acarryover from 2005, the IRS code "PAL" appears beside the result on theprintout of Form 4797. If line 8 has no entry, line 9 is zeroed and line 7 isposted to Schedule D.

8 Nonrecaptured net section 1231 losses from prior years. See IRS Pub. 544(Sales and Other Dispositions of Assets) for an explanation of these losses.

Nonrecaptured prior net section 1231 losses. Enter loss carried overfrom prior years here. Your entry becomes a positive number in ac-cordance with IRS instructions.

8 Nonrecaptured prior net section 1231 losses. (auto-calc) Computed asthe preceding entry only when line 7 is a gain; otherwise, zero.

9 Subtract line 8 from line 7. (auto-calc) If line 8 is nonzero, computed as line7 less line 8, but no less than zero; otherwise, zero.


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Net gain for Schedule D, line 11. (auto-calc) If line 7 is a gain and line 8 iszero, computed as the gain on line 7, if any. If line 7 is a gain and line 8 isnonzero, taken as the gain on line 9, if any. Otherwise, zero. Any gain thatappears here is posted to line 11 of Schedule D as a long-term capital gain.

Gain/Loss Worksheet, Sec. 1231 or Ordinary, Figure 2-32. (Supports line 2 forSec. 1231 and line 10 for Ordinary capital gains and losses.) The worksheetfollows the form of the columns on the Official Form 4797, with several addi-tions that make possible the automation of Form 8582.

a. Description of property. Describe property in 15 characters or less.Material participant? Answer Yes here if the property is NOT an inter-

est in a passive activity; otherwise the gain or loss may be used onForm 8582. CAUTION: You must answer No for rental real estatesince it must always be classified as passive whether you materiallyparticipate or not.

Significant participant? If you answered No above, you must also an-swer this question. See details for Schedule C for a discussion ofmaterial vs. significant participation.

Active rental real estate. (auto-calc) Answered Yes if you accessed theline from a section labeled “Active Rental Real,” and No otherwise.

Publicly TradedPartnership?If this is aPubliclyTraded Part-nership,amountsshould notbe posted toForm 8582and com-bined withpassive ac-tivities eventhough theyare subjectto the pas-sive lossrules. They must be handled individually and separately from allother investments. Since passive losses are deductible only to theextent of passive gains, this means that no overall loss can beclaimed for a PTP except in the year of its sale. A Yes answer hereprevents the amounts on this worksheet from being used on Form8582, and you must enter only amounts allowed this year yourself.

Entire interest sold? If you answer Yes, only passive gains are postedto Form 8582. If you answer No, both passive gains and passivelosses are posted to Form 8582.

SEC. 1231 GAIN/LOSSSEC. 1231 GAIN/LOSSSEC. 1231 GAIN/LOSSSEC. 1231 GAIN/LOSS a. Descr. of property ...... a. Descr. of property ...... a. Descr. of property ...... a. Descr. of property ...... Material partic Material partic Material partic Material particiiiipant..? Nopant..? Nopant..? Nopant..? No Significant pa Significant pa Significant pa Significant parrrrticipnt? Noticipnt? Noticipnt? Noticipnt? No Active rental real est Active rental real est Active rental real est Active rental real est▒ No▒ No▒ No▒ No Publicly Traded Prtshp? No Publicly Traded Prtshp? No Publicly Traded Prtshp? No Publicly Traded Prtshp? No Entire interest sold..? No Entire interest sold..? No Entire interest sold..? No Entire interest sold..? No Bypass date checking..? No Bypass date checking..? No Bypass date checking..? No Bypass date checking..? No b. Date a b. Date a b. Date a b. Date accccquired(mm/dd/yy)quired(mm/dd/yy)quired(mm/dd/yy)quired(mm/dd/yy) c. Date sold (mm/dd/yy) c. Date sold (mm/dd/yy) c. Date sold (mm/dd/yy) c. Date sold (mm/dd/yy) d. Gross sales price... 0 d. Gross sales price... 0 d. Gross sales price... 0 d. Gross sales price... 0 e. Depr'n allowed since acq 0 e. Depr'n allowed since acq 0 e. Depr'n allowed since acq 0 e. Depr'n allowed since acq 0 f. Cost or other b f. Cost or other b f. Cost or other b f. Cost or other baaaasis.... 0sis.... 0sis.... 0sis.... 0 NET (your entry if d=e=f=0) 0 NET (your entry if d=e=f=0) 0 NET (your entry if d=e=f=0) 0 NET (your entry if d=e=f=0) 0 Sig par net for Form 8582 Sig par net for Form 8582 Sig par net for Form 8582 Sig par net for Form 8582▒ 0▒ 0▒ 0▒ 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582▒ 0▒ 0▒ 0▒ 0 g. GAIN or LOSS g. GAIN or LOSS g. GAIN or LOSS g. GAIN or LOSS ▒ 0▒ 0▒ 0▒ 0

Figure 2-32. Gain/Loss Worksheet

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Bypass date checking? Answer Yes only if you want to defeat thebuilt-in protections against reporting a sale in the wrong part. Ex-amples of valid use of this bypass include the reporting of the saleof business stock and certain hedge transactions, or enteringINHERITED in line b, or reporting on line 10 the sale of cattle orhorses held 24 months or less.

b. Date acquired. Enter date acquired in the mm/dd/yy format. This en-try is critical to date checking to determine whether or not a trans-action qualifies for long-term treatment.

c. Date sold. Enter date sold in the mm/dd/yy format. This entry is criti-cal to date checking.

d. Gross sales price. Enter total proceeds from the sale here.e. Depreciation allowed since acquisition. Enter depreciation allowed or

allowable, including any Section 179 expense deduction taken,whether or not you actually used it.

f. Cost or other basis. Enter the net purchase price and any costs of thesale not already reflected in line d, above. If the entire interest issold, be sure to increase this entry by the amount of unused losscarryovers from Form 8582 for this property.

NET (your entry if d=e=f=0). This line will normally be computed asline d plus line e less line f. However, if lines d, e, and f are zero,you may enter any net here yourself (positive for gain, negative forloss). (This capability is provided for special types of transactionsthat cannot be reported using sales prices, costs, and dates.)

Significant participation net for Form 8582. (auto-calc) Taken as thepreceding net if you answered Yes to "Significant participant,"above, and zero otherwise.

PRIOR-year unallowed loss. Enter the unallowed loss last year for thisactivity. Although the total prior unallowed losses shown on Form4797 are determined automatically during the translation of theprior-year return (as long as you answered Yes to "Transfer all prior$ amounts" for the translation), you must allocate that total amongall activities in these worksheets, guided by the disallowancesshown on the previous year's worksheets.

Net elsewhere for the same activity. If other transactions for the samepassive activity appear elsewhere on the return, you must enter thenet gain or loss from all such other transactions here in order for theallocation of unallowed losses among the various worksheets to beperformed in strict conformance with the IRS rules. If the sum ofthe net on this line plus the net shown above for this particulartransaction less the prior-year unallowed loss is an overall gain, alllosses for this worksheet are allowed in full (and more of the totaldisallowance on Form 8582 is allocated to other passive activities).

Unallowed THIS year on Form 8582. (auto-calc lines) Computed usingthe math on the IRS worksheets without requiring you to completeany IRS worksheets yourself, this result is assured of full accuracy


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only when you view the worksheet after the final recalculation ofthe return.

g. GAIN or LOSS. (auto-calc) Computed as the above NET less prior un-allowed loss plus loss unallowed this year.

When you return from the worksheets the separate totals for lines d and gand various amounts for Form 8582 are carried back to Form 4797.

Schedule K-1 Gain/Loss Worksheet, Sec. 1231 or Ordinary, Figure 2-33.Amounts for these worksheets are identified on the Schedules K-1 that youreceive as amounts for line 2 or 10 of Form 4797:

a. Description. Identify the entity from which you received the Sched-ule K-1 in 25 characters or less.

Material participant? You MUST answer Yes here if the property sold is notan interest in a passive activity. Otherwise the income or loss will beused on Form 8582. CAUTION: You must answer No if the property isrental real estate or you are a limited partner in the partnership, sincethese cases must be classified as passive whether you materially partici-pate or not.

Significant par-ticipant? Ifyou answeredNo above, youmust also an-swer thisquestion. Seedetails forSchedule C fora discussion ofmaterial vs.significant par-ticipation.

Active rental real estate. (auto-calc) Answered Yes if you accessed theline from a section labeled “Active Rental Real,” and No otherwise.CAUTION: Limited partners do not qualify, so you must access theworksheet from the “All others” line for limited partnerships..

Publicly Traded Partnership? If this is a Publicly Traded Partnership,amounts should not be posted to Form 8582 and combined withpassive activities even though they are subject to the passive lossrules. They must be handled individually and separately from allother investments. Since passive losses are deductible only to theextent of passive gains, this means that no overall loss can beclaimed for a PTP except in the year of its sale. A Yes answer hereprevents the amounts on this worksheet from being used on Form8582, and you must enter only amounts allowed this year yourself.

SCH K-1 SEC 1231 GAIN/LOSSSCH K-1 SEC 1231 GAIN/LOSSSCH K-1 SEC 1231 GAIN/LOSSSCH K-1 SEC 1231 GAIN/LOSS a. Description a. Description a. Description a. Description Material partic Material partic Material partic Material particiiiipant..? Nopant..? Nopant..? Nopant..? No Significant pa Significant pa Significant pa Significant parrrrticipnt? Noticipnt? Noticipnt? Noticipnt? No Active rental real est Active rental real est Active rental real est Active rental real est▒ No▒ No▒ No▒ No Publicly Traded Prtshp? No Publicly Traded Prtshp? No Publicly Traded Prtshp? No Publicly Traded Prtshp? No Entire interest sold..? No Entire interest sold..? No Entire interest sold..? No Entire interest sold..? No Net income or loss.... 0 Net income or loss.... 0 Net income or loss.... 0 Net income or loss.... 0 Sig par net for Form 8582 Sig par net for Form 8582 Sig par net for Form 8582 Sig par net for Form 8582▒ 0▒ 0▒ 0▒ 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Net elsewhere for same activty 0 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582▒ 0▒ 0▒ 0▒ 0 g. GAIN or LOSS g. GAIN or LOSS g. GAIN or LOSS g. GAIN or LOSS ▒ 0▒ 0▒ 0▒ 0

Figure 2-33. Schedule K-1 Gain/Loss Worksheet

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Entire interest sold? If you answer Yes, only passive gains are postedto Form 8582. If you answer No, both passive gains and passivelosses are posted to Form 8582.

Date acquired. Enter date acquired in the mm/dd/yy format (such as03/12/87). This entry affects the transfers to Form 8582.

Net income or loss. Enter the amount reported on Schedule K-1. Enter again as a positive number and a loss as a negative number.

Significant participation net for Form 8582. (auto-calc) The preceding netwill appear here if you answered Yes to "Significant participant" above.

PRIOR-year unallowed loss. Enter the unallowed loss last year for thisactivity. Although the total prior unallowed losses shown on Form4797 are determined automatically during the translation of theprior-year return (as long as you answered Yes to "Transfer all prior$ amounts" for the translation), you must allocate that total amongall activities in these worksheets, guided by the disallowancesshown on the previous year's worksheets.

Net elsewhere for the same activity. If other transactions for the samepassive activity appear elsewhere on the return, you must enter thenet gain or loss from all such other transactions here in order for theallocation of unallowed losses among the various worksheets to beperformed in strict conformance with the IRS rules. If the sum ofthe net on this line plus the net shown above for this particulartransaction is an overall gain, all losses for this worksheet are al-lowed in full (and more of the total disallowance on Form 8582 isallocated to other passive activities).

Unallowed THIS year on Form 8582. (auto-calc lines) Computed using themath on the IRS worksheets without requiring you to complete any IRSworksheets yourself, this result is assured of full accuracy only whenyou view the worksheet after the final recalculation of the return.

g. GAIN or LOSS. (auto-calc) Computed as your entry for “Net incomeor loss” modified by prior-year unallowed loss (which reduces thenet) and loss unallowed THIS year (which increases the net).

When you return from the worksheets the separate totals for lines b and c arecarried back to Form 4797. In addition, gains and losses for lines 1a, 1b, 3a,and 3b of Form 8582 are computed, keeping the significant participationamounts separate.

PART II, ORDINARY GAINS AND LOSSES. Lines 10 through 18 are used forreporting gains and losses for short-term holdings (those held one year orless) and certain recapture amounts. CAUTION: You should never report thesale of inherited property in Part II, because inherited property is treated as along-term holding regardless of the actual holding period.

Special requirements for small business stock. If you have a loss from thesale of small business (section 1244) stock, you can report the loss (up to alimit) as an ordinary loss in a worksheet for line 10 of Form 4797. (If thesale resulting in a gain, it is reported on Schedule D like the sale of any other


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stock, qualifying for capital gains rates if held more than 1 year.) However,you must meet a number of conditions to qualify as a section 1244 stock,and you must also attach a statement to the return providing certain detailsof the transaction. The maximum allowed loss for this kind of sale is generally$50,000 ($100,000 if married filing jointly), with the excess reported as anordinary short-term loss on Schedule D, which is subject to a $3,000 per yearlimitation on losses. For details on the qualifications and further restrictionson the loss deduction, see the IRS Instructions for Form 4797 and IRS Pub.550 (Investment Income and Expenses).

10 Ordinary gains and losses. Ordinary gains and losses not reported else-where in the return are entered here in four separate sets of worksheets. Theworksheets accessed here are the same as ones described for line 2, above,except that date checking ensures that only property held 1 year or less is re-ported here. Among the long-term holdings that you could report here as or-dinary gains and losses are the dissolution or sale of a partnership, and thesale of small business stock at a loss. (All worksheets are accessed at line(g), and all other lines are auto-calc lines based on worksheet entries.)CAUTION: Do NOT include sales reported in Part III of Form 4797.

For ordinary gain or loss NOT reported to you on Sch. K-1: Using oneworksheet for each transaction, any number of transactions may be en-tered on the following lines for transactions NOT reported to you on aSchedule K-1:Active rental real estate:

(d) Sales Price. (auto-calc) This is the sum of sales prices entered onall the worksheets that are accessed on the next line.

10(g), Net for Active Rental Real Estate. (Supported by the OrdinaryGain/Loss Worksheet, similar to Figure 2-32.) Enter only transac-tions involving rental real estate in which you actively participatedon the worksheets you access at these lines.

All other transactions:(d) Sales Price. (auto-calc) This is the sum of sales prices entered onall the worksheets that are accessed on the next line.

10(g), Net for All other transactions. (Supported by the OrdinaryGain/Loss Worksheet, similar to Figure 2-32.) Enter all other trans-actions on the worksheets you access at these lines.

For ordinary gain or loss reported to you on Sch. K-1: Using one work-sheet for each transaction, any number of transactions may be enteredon the following lines from Schedules K-1 received from partnerships, Scorporations, estates, and trusts. Remember that these lines are in-tended only for sales the partnership transacts; any sale of your sale in-terest in the partnership, or a dissolution of the partnership, is reportedon the Ordinary Gain/Loss Worksheets, above.K-1 Sec. 1231 Active rental real estate:

10(g), Sch. K-1 net for Active Rental Real Estate. (Supported by theSch. K-1 Ordinary Gain/Loss Worksheet, similar to Figure 2-33.) En-

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ter only long-term transactions involving rental real estate in whichyou actively participated on the worksheets you access at this line.

K-1 Sec. 1231 All others:10(g), Sch. K-1 net for All other transactions. (Supported by the Sch.K-1 Ordinary Gain/Loss Worksheet, Figure 2-33.) Enter all othertransactions on the worksheets you access at this line.

For short-term gains from installment sales (Form 6252): Gains from in-stallment sales of short-term holdings (property held 1 year or less) arereported here. CAUTION: While the amount from Form 6252 is postedhere automatically and the proper calculations on Form 4797 are auto-matic, you must itemize to a special worksheet on the second line be-low in order for the amount to be printed in the format required by theIRS. (Note that ordinary gains stemming from recapture rules ratherthan short-term holdings are posted to line 15, not here.)

Ordinary gains from Form 6252 lines 26 and 37. (Road Map line, sup-ported by Form 6252.) Five copies of Form 6252 are built into thesoftware for reporting up to five installment sales. Ordinary gains inlines 26 and 37 of Form(s) 6252 are posted here and reflected inthe later total for line 10(g).

ITEMIZE here if an amount is shown above. (Supported by the Ordi-nary Gain/Loss Worksheet, similar to Figure 2-32.) If an amount ap-pears on the preceding line you MUST itemize this line to create theworksheet required for printouts and e-file output. The worksheet isfully automatic once you itemize, automatically generating thewording required by the IRS and the amount from Form 6252.

CAUTION: If the above two amounts are NOT IDENTICAL, you MUST itemizeabove line so that IRS printing and e-file format are proper. The twoamounts may differ if Form 6252 is changed after you create the precedingworksheet. You should therefore check that the preceding two lines matchafter the final recalculation of the return.

10(g) Total ordinary gain or loss. (auto-calc) Computed as the sum of all pre-ceding totals for line 10(g).

11 Loss, if any, from line 7. (auto-calc) If line 7 is negative, the loss is postedhere as a positive number.

12 Gain from line 7, or amount from line 8 if applicable. (auto-calc) If line 9shows a gain, the amount from line 8 is posted here. Otherwise, any gain online 7 is posted here if there is an entry on line 8.

13 Gain, if any, from line 31. (auto-calc) Taken from Part III as indicated.

14 Net gain or loss from Form 4684, lines 34 and 41a. (Road Map line, sup-ported by Form 4684.) Any net gain or loss from casualties and thefts isposted here from lines 34 and 41a of Form 4684, which is accessible fromthis line.


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15 Ordinary gains from installment sales in Form 6252, line 25 or 36. (RoadMap line, supported by Form 6252.) Five separate copies of Form 6252 areavailable. Gains recaptured as ordinary income in lines 25 and 36 of Form(s)6252 are posted here. This amount includes recapture from Section 1252,1254, and 1255 for installment sales that are reported in Part III of Form4797. (Note that ordinary gains from Form 6252 due to a short-term holdingperiod, rather than recapture, are posted to line 10(g), not here.)

16 Ordinary gain or loss from like-kind exchanges from Form 8824. (If Pre-mium Level, supported by Form 8824.) Ordinary gain or loss for like-kind ex-changes is reported here.

Passive loss limitations. The complex interface with Form 8582 is enforcedin this part of the form. You should pay particular attention to the lines la-beled “W/S ERROR” because they indicate that you must view the work-sheets at line 2 once again in order to update them with changes in Form8582.

Total gain to Form 8582 line 1a. (auto-calc) The sum of gains from thepreceding worksheets for rental real estate with active participation.

Total loss to Form 8582 line 1b. (auto-calc) The sum of losses from thepreceding worksheets for rental real estate with active participation.

Active rental real estate loss unallowed in prior year. This entry is usedin line 1c of Form 8582. Enter here any loss carryover from theprior year stemming from passive loss limitations on the long-termsale of active rental real estate reported on last year's Form 4797.This carryover is automatically transferred by the software from theprior-year return when you use the translate feature on a return thathas 2005 as the entry for tax year on Form 1040 (as long as youanswered Yes to "Transfer all prior $ amounts" for the translation).Nevertheless, you must appropriately distribute this total among theworksheets for line 10 yourself so that the unallowed amounts cal-culated on the worksheets reflect the proper prorationing among theworksheets. An amount on the below W/S ERROR line will alert youof the need to do so.

Active rental real estate unallowed loss for 2006. (Road Map line, sup-ported by Form 8582.) This disallowance comes automatically fromForm 8582, but can only be determined upon the final recalculationof the return. You can access Form 8582 with the Itemize Key atthis line, but there is no need to do so because the form is auto-matically generated and completed upon the final recalculation ofthe return. Once the return is complete, you may have to view eachworksheet for lines 2 so that the unallowed losses are reallocatedbased upon the final return. An amount on the below W/S ERRORline will alert you of the need to do so.

Total gain to Form 8582 line 3a. (auto-calc) The sum of gains from thepreceding worksheets for passive activities.

Total loss to Form 8582 line 3b. (auto-calc) The sum of losses from thepreceding worksheets for passive activities.

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Other passive prior unallowed loss. This is the loss carryover from theprior year stemming from passive loss limitations on sales reportedon the Schedule D for 2005. This carryover is automatically postedhere by the software from the prior-year return when you use thetranslate feature on a return that has 2005 as the entry for tax yearon Form 1040 (as long as you answered Yes to "Transfer all prior $amounts" for the translation). Nevertheless, you must appropriatelydistribute this total among the worksheets for line 10 yourself sothat the unallowed amounts calculated on the worksheets reflectthe proper prorationing among the worksheets. An amount on thebelow W/S ERROR line will alert you of the need to do so.

Other passive unallowed loss in 2006. (Road Map line, supported byForm 8582.) This disallowance comes automatically from Form8582, but can only be determined upon the final recalculation of thereturn. You can access Form 8582 with the Itemize Key at this line,but there is no need to do so because the form is automaticallygenerated and completed upon the final recalculation of the return.Once the return is complete, you may have to view each worksheetfor lines 2 so that the unallowed losses are reallocated based uponthe final return. An amount on the below W/S ERROR line will alertyou of the need to do so.

Significant participation part of prior unallowed losses. When reportingcarryovers for activities that are significant participation activities in2006, the IRS requires that you include those carryovers in the sig-nificant participation net to the extent that they are offset by gainsfor the same activity. This rule materially affects whether significantparticipation activities will be classified as passive activities. Youmust enter here the part of the 2005 carryover that is offset by sig-nificant participation gains which you have entered on the work-sheets for line 10. (See our instructions for Form 8582 for more de-tails on significant participation activities.)

W/S ERROR in prior unallowed losses. (auto-calc) Computed as thesum of prior unallowed losses you entered on all the worksheets forline 10, less the total prior unallowed losses shown above (whichyou entered or "translate" posted). If this result is nonzero, it meansthat you have not properly allocated the total prior unallowed lossesamong all the worksheets you have completed. You must return tothe worksheets and revise the entries. Your record of unallowedloss for each item for the previous year should guide your entries onthe worksheets.

W/S ERROR in current unallowed losses. (auto-calc) Computed as thesum of unallowed losses computed the last time you viewed theworksheets for line 10, less the total losses unallowed shown abovefor 2006 (which comes automatically from Form 8582). If this re-sult is nonzero, it means that the allocation of unallowed losses on


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your worksheets is not based on the final return, so you must vieweach worksheet so that the unallowed losses can be reallocated.

17 Combine lines 10 through 16. (auto-calc) Computed as the sum of allgains and losses in lines 10 through 16 less the appropriate disallowedamounts. If line 17 reflects a disallowance from Form 8582 or an additionalloss due to a carryover from 2005, the IRS code "PAL" appears beside theresult on the printout of Form 4797.

18 Allocation to Schedule A and Form 1040:Form 4684 loss for Schedule A, line 22. (auto-calc line, supported byForm 4684) Any loss on line 38(b)(ii) of Form 4684 that stems fromemployee property appears here after being limited to its proratedshare of loss on line 11. This result will be posted to line 22 ofSchedule A where it is subjected to a threshold based on 2% ofAGI.

Form 4684 loss for Schedule A, line 27. (auto-calc line, supported byForm 4684) Any loss on line 38(b)(ii) of Form 4684 that stems fromincome-producing property appears here after being limited to itsprorated share of loss on line 11. This result will be posted to line27 of Schedule A, which has no threshold that must be exceeded.

18a Loss from Form 4684 for Schedule A. (auto-calc lines) Computed asthe sum of the preceding two amounts, this is the part of the lossesin line 17 that is claimed on Schedule A, subject to the AGI-relatedlimitations inherent in Schedule A.

18b Balance for Form 1040, line 14. (auto-calc) Computed as line 17plus line 18a, and posted to line 14 of Form 1040, this is the gainor loss on Form 4797 that is reported directly on Form 1040 ratherthan through Schedule A or Schedule D.

PART III, GAIN FROM DISPOSITION OF PROPERTY UNDER SECTIONS 1245,1250, 1252, 1254, AND 1255. This part is used for reporting the details on long-term gains subject to the recapture of depreciation and certain other deduc-tions as ordinary gains. ONLY SALES RESULTING IN A GAIN ARE REPORTEDHERE; all losses are reported directly in Parts I and II. Also, ONLY LONG-TERM HOLDINGS ARE REPORTED HERE; short-term holdings (those held oneyear or less) are reported directly in Part II. Pay particular attention to the in-stallment sale question; it critically affects the automation of Form 6252.Also note that the passive activities are not identified on the supportingworksheets due to lack of space; you must identify total passive gains for allworksheets combined in the lines for Form 8582 detailed below. When en-tering cost or other basis in the following worksheets, if the entire interest issold be sure to increase the cost by the amount of unused loss carryoversfrom Form 8582 for these properties.

Worksheets provide details for all property. The details for lines 22 through30 of this section are all carried by the Gain/Recapture Worksheets that sup-port this section, which are detailed in the next shaded section. This two-

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screen worksheet contains ALL of the lines, but the lines that are actually ac-tive depend on the line you itemize to reach the worksheet. A separate lineaccesses the worksheet for each of the five kinds of property covered in thissection. Although the worksheets appear identical, a separate set of work-sheets supports each of the five separate lines. Only the totals transferredback to Form 4797 from the worksheets appear on the screen for Part III.

Total gains:Total section 12xx gain. (auto-calc lines, supported by the

Gain/Recapture Worksheet, Figures 2-34a and 2-34b.) Total gainsfor all five sets of worksheets appear on these five lines.

24 Total gains. (auto-calc) Computed as the sum of the preceding five“total gain” lines.

Gains in line 24 for Form 8582 lines 1a and 3a. Enter here any gainsreported above that are eligible for use on Form 8582 to offset pas-sive losses. These gains will be posted to Form 8582 as indicated.CAUTION: You must identify passive gains for all of the aboveworksheets here yourself, because passive activities are not identi-fied on the worksheets.

Ordinary gains:25 Section 1245 property. (Supported by the Gain/Recapture Worksheet,

Figures 2-34a and 2-34b.) Long-term sales of depreciable trade orbusiness property are reported here. In addition, sales of nonresidentialreal property that do not qualify as section 1250 property, below, arereported here. Sales of cattle and horses held less than 24 monthsand livestock held less than 12 months, however, are reported in PartII. ALL past depreciation is recaptured through the worksheet for thisproperty. (New recapture rules apply to the disposition of amortizablesection 197 intangibles after August 8, 2005. See IRS Instructions forline 25 of Form 4797 for information on when it is appropriate tocombine these dispositions into one transaction.)

26 Section 1250 property. (Supported by the Gain/Recapture Worksheet,Figures 2-34a and 2-34b.) Under the more favorable treatment ofSec. 1250, only deductions in excess of straight-line depreciationare recaptured, and for some property the recaptured amountphases out to zero after 16-2/3 years of holding the property. ALLresidential rental property qualifies. Nonresidential rental propertythat qualifies includes (1) all property placed in service after12/31/86, (2) 15-year, 18-year, and 19-year property depreciatedunder the alternate ACRS (optional straight-line) method, (3) 15-year, 18-year, and 19-year property used mostly outside the U.S.,and (4) 15-year property that is low-income housing. All other non-residential rental property is subject to recapture under Sec. 1245,above. The percentages to enter above line 26b and 26e are 100%for most property, but more favorable percentages are allowed forresidential rental property (line 26e ONLY) and low-income housing


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(lines 26b and 26e) when held longer than 100 months. See IRSPub. 527 (Residential Rental Property) for details.

27 Section 1252 property. (Supported by the Gain/Recapture Worksheet,Figures 2-34a and 2-34b.) Report here long-term gains for farmlandheld less than 10 years upon which soil, water, or land clearing ex-penses were deducted.

28 Section 1254 property. (Supported by the Gain/Recapture Worksheet,Figures 2-34a and 2-34b.) Report here gains on dispositions of oiland most other mineral property.

29 Section 1255 property. (Supported by the Gain/Recapture Worksheet,Figures 2-34a and 2-34b.) Report here gains on dispositions of sec-tion 126 cost-sharing payments.

Gain/RecaptureWorksheet, Figures 2-34a and 2-34b. All de-tails for Part III are re-ported on these work-sheets:

19a Descriptionof property.Enter de-scription in25 charac-ters or less.

Bypass datechecking?Unless an-swer Yes,date soldmust exceeddate acquiredby more than 1 year for any gain to be computed on this work-sheet.

19b Date acquired. Enter date acquired in the usual mm/dd/yy for-mat.19c Date sold. Enter date sold in the standard mm/dd/yy format. Note

that the property must have been held more than one year to be re-ported here if it is section 1245, 1250, or 1252 property; otherwisethe entire gain would be ordinary income.

Installment sale? If you answer Yes, the recapture and long-termgains are posted to Form 4797 and then the selected copy of Form6252, as detailed below line 28.

20 Gross sales price. Enter total proceeds from the sale here. If thisamount was not included in line 1, you must explain why in a sup-porting statement for line 1.

21 Cost or other basis. Enter the net purchase price and any costs ofthe sale not already reflected in line 20, above.

GAIN/RECAPTURE-Screen 1of2GAIN/RECAPTURE-Screen 1of2GAIN/RECAPTURE-Screen 1of2GAIN/RECAPTURE-Screen 1of2 a 19 Description of a 19 Description of a 19 Description of a 19 Description of Bypass date checking? No Bypass date checking? No Bypass date checking? No Bypass date checking? No b Date a b Date a b Date a b Date accccquired..........quired..........quired..........quired.......... c Date sold.............. c Date sold.............. c Date sold.............. c Date sold.............. Installment sale? No Installment sale? No Installment sale? No Installment sale? No 20 Gross sales price......... 0 20 Gross sales price......... 0 20 Gross sales price......... 0 20 Gross sales price......... 0 21 Cost or other b 21 Cost or other b 21 Cost or other b 21 Cost or other baaaasis....... 0sis....... 0sis....... 0sis....... 0 22 Depreciation a 22 Depreciation a 22 Depreciation a 22 Depreciation alllllowed...... 0lowed...... 0lowed...... 0lowed...... 0 23 Adjusted b 23 Adjusted b 23 Adjusted b 23 Adjusted baaaasis............sis............sis............sis............▒ 0▒ 0▒ 0▒ 0 24 Total gain................ 24 Total gain................ 24 Total gain................ 24 Total gain................▒ 0▒ 0▒ 0▒ 025 If sec. 1245 property:25 If sec. 1245 property:25 If sec. 1245 property:25 If sec. 1245 property: a Depreciation a a Depreciation a a Depreciation a a Depreciation alllllowed......lowed......lowed......lowed......▒ 0▒ 0▒ 0▒ 0 b Smaller of ln 24 or 25a... b Smaller of ln 24 or 25a... b Smaller of ln 24 or 25a... b Smaller of ln 24 or 25a...▒ 0▒ 0▒ 0▒ 026 If sec. 1250 property:26 If sec. 1250 property:26 If sec. 1250 property:26 If sec. 1250 property: a Add'l deprec'n after 1975. 0 a Add'l deprec'n after 1975. 0 a Add'l deprec'n after 1975. 0 a Add'l deprec'n after 1975. 0 Percentage for 26b.... 0 Percentage for 26b.... 0 Percentage for 26b.... 0 Percentage for 26b.... 0 b % of smaller of 24 or 26a. b % of smaller of 24 or 26a. b % of smaller of 24 or 26a. b % of smaller of 24 or 26a.▒ 0▒ 0▒ 0▒ 0 c Subtract line 26a from 24. c Subtract line 26a from 24. c Subtract line 26a from 24. c Subtract line 26a from 24.▒ 0▒ 0▒ 0▒ 0 d Add'l depr aftr69&before76 0 d Add'l depr aftr69&before76 0 d Add'l depr aftr69&before76 0 d Add'l depr aftr69&before76 0

Figure 2-34a. Gain/Recapture Worksheet, Screen 1

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22 Depreciation allowed. Enter total depreciation or depletion allowedor allowable since acquisition, whether or not you actually used it,including any section 179 expenses claimed. You should reducethis amount by any recapture already reported, and may have to addother deductions to this total. See the IRS instructions for this linefor more detail.

23 Adjusted basis. (auto-calc) Computed line 21 less line 22.24 Total gain. (auto-calc) Computed as line 20 less line 23, but no less

than zero. If a gain does not appear here, you should be reportingthis sale in Part I or Part II of Form 4797, not here.

25 If sec. 1245 property: The following two lines are always zero unlessyou accessed the worksheet through line 25 of Form 4797.

25a Depreciation allowed. (auto-calc) Automatically equal to line 22.25b Smaller of line 24 or 25a. (auto-calc) Computed as indicated, thisis the amount recaptured as ordinary income for sec. 1245 prop-erty.


26a Additional depreciation after 1975. Enter, for the years after1975 only, the amount by which depreciation taken exceeds theamount that straight-line depreciation would provide. See IRS in-structions for details.

Percentage for line 26b. Enter 100% for most property, but see IRSsec. 1250(a)(1)(B) for what to enter for low-income rental housing

26b % of smaller of 24 or 26a. (auto-calc) Computed as the abovepercentage times the smaller of line 24 or line 26a.

26c Subtract line 26a from line 24. (auto-calc) Computed as indicated.26d Additional depreciation after 1969 and before 1976. Enter, forthe years after 1969 and before 1976 only, the amount by whichdepreciation taken exceeds the amount that straight-line deprecia-tion would provide. If the depreciation taken is actually LESS thanstraight-line depreciation, reduce your entry for line 26a by thatamount instead (but no less than zero).

26e Smaller of line 26c or 26d. (auto-calc) Computed as the smaller ofline 26c or line 26d.

26f Section 291 amount (corporations only). (auto-calc) Since this en-try is relevant only to corporate returns, not Form 1040 returns, it isautomatically zeroed for this software.

26g Add lines 26b, 26e, & 26f. (auto-calc) Computed as indicated, thisis the amount recaptured as ordinary income for section 1250 prop-erty.


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27 If sec. 1252property: Thefollowing twolines are alwayszero unless youaccessed theworksheetthrough line 27of Form 4797.

27a Soil, wa-ter, and landclearing ex-penses. En-ter expensesfor farmlandas indicated.

Percentagefor line 27b.(auto-calc) Computed as 100% for farmland disposed of before the6th year after it was acquired, 80% if disposed of during the 6thyear, 60% if disposed of during the 7th year, 40% if disposed ofduring the 8th year, and 20% if disposed of during the 9th year. Ifdisposed of after the 9th year, no recapture is due and the saleshould be reported in Part I of Form 4797, not here.

27b Line 27a times applicable %. (auto-calc) Computed as the abovepercentage times line 27a.

27c Smaller or line 24 or 27b. (auto-calc) Computed as indicated, thisis the amount recaptured as ordinary income for section 1252 prop-erty.


28a Intangible drilling, et al. Enter intangible drilling and develop-ment costs, expenditures for development of mines and other natu-ral deposits, and mining exploration costs. Expenses already in-cluded in income under other provisions of law are not subject torecapture again. See IRS Instructions for Form 4797 for details.

28b Smaller of line 24 or 28a. (auto-calc) Computed as indicated, thisis the amount recaptured as ordinary income for section 1254 prop-erty.


Ordinary income part of line 24. If any of the gain on line 24 istreated as ordinary gain under sections 1231 through 1254, enterthat part of the gain here. This entry is used to modify the computa-tion at line 29b.

e Smaller of line 26c or 26d e Smaller of line 26c or 26d e Smaller of line 26c or 26d e Smaller of line 26c or 26d▒ 0▒ 0▒ 0▒ 0 f Sec. 291 amount (corprtns) f Sec. 291 amount (corprtns) f Sec. 291 amount (corprtns) f Sec. 291 amount (corprtns)▒ 0▒ 0▒ 0▒ 0 g Add lines 26b, 26e, & 26f g Add lines 26b, 26e, & 26f g Add lines 26b, 26e, & 26f g Add lines 26b, 26e, & 26f▒ 0▒ 0▒ 0▒ 027 If sec. 1252 property:27 If sec. 1252 property:27 If sec. 1252 property:27 If sec. 1252 property: a Soil,water,land clrg expen 0 a Soil,water,land clrg expen 0 a Soil,water,land clrg expen 0 a Soil,water,land clrg expen 0 Percentage for 27b.... Percentage for 27b.... Percentage for 27b.... Percentage for 27b....▒ 0▒ 0▒ 0▒ 0 b Line 27a times applcable % b Line 27a times applcable % b Line 27a times applcable % b Line 27a times applcable %▒ 0▒ 0▒ 0▒ 0 c Smaller of line 24 or 27b. c Smaller of line 24 or 27b. c Smaller of line 24 or 27b. c Smaller of line 24 or 27b.▒ 0▒ 0▒ 0▒ 028 If sec. 1254 property:28 If sec. 1254 property:28 If sec. 1254 property:28 If sec. 1254 property: a Intangible drilling, et al 0 a Intangible drilling, et al 0 a Intangible drilling, et al 0 a Intangible drilling, et al 0 b Smaller of line 24 or 28a. b Smaller of line 24 or 28a. b Smaller of line 24 or 28a. b Smaller of line 24 or 28a.▒ 0▒ 0▒ 0▒ 029 If sec. 1255 property:29 If sec. 1255 property:29 If sec. 1255 property:29 If sec. 1255 property: Ordinary inc part of ln 24 Ordinary inc part of ln 24 Ordinary inc part of ln 24 Ordinary inc part of ln 24 Sec 126 excl Sec 126 excl Sec 126 excl Sec 126 excluuuusions.... 0sions.... 0sions.... 0sions.... 0 Percentage for 29a.... 0 Percentage for 29a.... 0 Percentage for 29a.... 0 Percentage for 29a.... 0 a Applicable amount undr 126 a Applicable amount undr 126 a Applicable amount undr 126 a Applicable amount undr 126▒ 0▒ 0▒ 0▒ 0 b Smaller of line 24 or 29a. b Smaller of line 24 or 29a. b Smaller of line 24 or 29a. b Smaller of line 24 or 29a.▒ 0▒ 0▒ 0▒ 0 SUMMARY:Ordinary gn(Recapture) SUMMARY:Ordinary gn(Recapture) SUMMARY:Ordinary gn(Recapture) SUMMARY:Ordinary gn(Recapture)▒ 0▒ 0▒ 0▒ 0 Long-trm gain for 6252 Long-trm gain for 6252 Long-trm gain for 6252 Long-trm gain for 6252▒ 0▒ 0▒ 0▒ 0 Unrecaptured 1250 gain Unrecaptured 1250 gain Unrecaptured 1250 gain Unrecaptured 1250 gain▒ 0▒ 0▒ 0▒ 0

Figure 2-34b. Gain/Recapture Worksheet, Screen 2

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Sec 126 exclusions. Enter total payments previously excluded fromincome under IRS section 126.

Percentage for line 29a. Enter 100% for property disposed of lessthan 10 years after receipt of the last payment excluded, and 10%less (but no less than zero) for every full or partial year thereafter.

29a Applicable payments excluded from income under sec. 126.(auto-calc) Computed as the above percentage times the total sec-tion 126 exclusions.

29b Smaller of line 24 or 29a. (auto-calc) Normally computed as indi-cated, but if you made an entry above for “Ordinary income part ofline 24,” line 24 is replaced by line 24 less that entry before per-forming the computation. This line shows the amount of gain recap-tured as ordinary income for section 1255 property.

SUMMARY:Ordinary gain (Recapture). (auto-calc) Computed as line 25b for sec-tion 1245 property, line 26g for section 1250 property, line 27c forsection 1252 property, line 28b for section 1254 property, and line29b for section 1255 property.

Long-term gain. (auto-calc) Computed as the total gain on line 24less the preceding ordinary gain.

Unrecaptured sec. 1250 gain. (auto-calc) This line is computed only ifyou accessed the worksheet by itemizing line 26, which is the linefor section 1250 property. When applicable, it is computed as thelesser of the preceding long-term gain vs. the amount by which de-preciation on line 22 exceeds the ordinary gain (recapture) shownabove.

When you return from the worksheets, totals for lines 24 through 29 areposted to Form 4797 as well as the four types of gains shown at the end ofthe worksheets. In addition, amounts for installment sales are posted sepa-rately from other sales in order to properly distribute totals to the proper linesand forms.

Allocations to Form 6252. The results from the worksheets are summarizedhere, and amounts destined for Form 6252 (for installment sales) are sub-tracted out before the results are posted to Parts I and II of Form 4797.HINT: Form 6252 is accessible from lines 4 and 16 of Form 4797, but lines12, 25, and 36 of Form 6252 will not have the proper amounts until youcomplete this part of Form 4797.

Sec. 1245 and 1250 recapture for Form 6252 line 12. (auto-calc) Fromworksheets identified as installment sales only, this is the total “Ordi-nary gain (Recapture)” shown in the summary at the end of the work-sheets for section 1245 and 1250 property. Your entries on the nextfive lines determine how this total is split among the five available cop-ies of Form 6252. This entire amount will be posted to copy 1 of Form6252 if you make no entries below.


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Part for Form 6252 copy 2, line 12. Enter the portion of the above re-capture total to be posted to copy 2 of Form 6252.Part for Form 6252 copy 3, line 12. Enter the portion of the above re-capture total to be posted to copy 3 of Form 6252.Part for Form 6252 copy 4, line 12. Enter the portion of the above re-capture total to be posted to copy 4 of Form 6252.Part for Form 6252 copy 5, line 12. Enter the portion of the above re-capture total to be posted to copy 5 of Form 6252.Part for Form 6252 copy 1, line 12. (auto-calc) Computed as the ear-lier recapture total less the above four amounts.

Sec. 1252, 1254, and 1255 recapture for Form 6252 line 25. (auto-calc)From worksheets identified as installment sales only, this is the total“Ordinary gain (Recapture)” shown in the summary at the end of theworksheets for section 1252, 1254, and 1255 property. Your entrieson the next five lines determine how this total is split among the fiveavailable copies of Form 6252. This entire amount will be posted tocopy 1 of Form 6252 if you make no entries below.

Part for Form 6252 copy 2, line 25. Enter the portion of the above re-capture total to be posted to copy 2 of Form 6252.Part for Form 6252 copy 3, line 25. Enter the portion of the above re-capture total to be posted to copy 3 of Form 6252.Part for Form 6252 copy 4, line 25. Enter the portion of the above re-capture total to be posted to copy 4 of Form 6252.Part for Form 6252 copy 5, line 25. Enter the portion of the above re-capture total to be posted to copy 5 of Form 6252.Part for Form 6252 copy 1, line 25. (auto-calc) Computed as the ear-lier recapture total less the above four amounts.

Unrecaptured sec. 1250 gain for Form 6252. (auto-calc) From work-sheets identified as installment sales only, this is the total “Unrecap-tured 1250 gain” shown in the summary at the end of the worksheetsfor section 1250 property. Your entries on the next five lines determinehow this total is split among the five available copies of Form 6252.This entire amount will be posted to copy 1 of Form 6252 if you makeno entries below.

Part for Form 6252 copy 2. Enter the portion of the above recapturetotal to be posted to copy 2 of Form 6252.Part for Form 6252 copy 3. Enter the portion of the above recapturetotal to be posted to copy 3 of Form 6252.Part for Form 6252 copy 4. Enter the portion of the above recapturetotal to be posted to copy 4 of Form 6252.Part for Form 6252 copy 5. Enter the portion of the above recapturetotal to be posted to copy 5 of Form 6252.Part for Form 6252 copy 1. (auto-calc) Computed as the earlier re-capture total less the above four amounts.

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Summary of Part III Gains. The results from the worksheets are summarizedhere, and amounts destined for Form 6252 (for installment sales) are sub-tracted out before the results are posted to Parts I and II of Form 4797.HINT: Form 6252 is accessible from lines 4 and 16 of Form 4797, but lines12, 25, and 36 of Form 6252 will not have the proper amounts for a current-year sale until you complete this part of Form 4797.

30 Total gains for all properties. (auto-calc) Computed as the sum ofline 24 from all of the worksheets.

Ordinary gains for ALL properties. (auto-calc) Computed as the sumof lines 25b, 26g, 27c, 28b, and 29b (the “Ordinary gain (Recap-ture)” shown in the summary at the end of the worksheets).

Form 6252 recapture to exclude. (auto-calc) This is the recapture forsec. 1245 and 1250 installment sale property. The years that recap-ture for these classes of property is taxed are determined on Forms6252. Recapture is usually not fully taxed currently for these prop-erties.

31 Ordinary gains for line 13. (auto-calc) Computed as the ordinarygains for ALL properties less the above Form 6252 recapture to ex-clude. (Notice that, contrary to sec. 1245 and 1250 property, re-capture for installment sales of sec. 1252, 1254, and 1255 is al-ways fully taxed currently and is therefore included in this line.)

Long-term gains for ALL properties. (auto-calc) Computed as line 30less ordinary gains for ALL properties.

Form 6252 long-term gains to exclude. (auto-calc) From worksheetsidentified as installment sales only, this is the total “Long-term gain”shown in the summary at the end of the worksheets. The years thatthese gains are is taxed are determined on Forms 6252. They areusually not fully taxed currently or else the sales wouldn’t be classi-fied as installment sales. CAUTION: You must provide additional in-formation directly on Form 6252 before the amount excluded hereappears on a Form 6252.

32 Long-term gains. (auto-calc) Computed as long-term gains for ALLproperties less long-term gains for Form 6252.

Casualty and theft part of line 32, for Form 4684. Enter here the por-tion of line 32 attributable to casualty and theft. This entry isposted to line 36 of Form 4684.

Remainder for Form 4797 line 6(g). (auto-calc) Computed as line 32less the above entry, this result is posted to line 6 in Part I of Form4797.

Unrecaptured section 1250 gain in Form 4797, Part I. This section is used tocompute unrecaptured sec. 1250 gain in the return that is associated withPart I of Form 4797, in accordance with the way the amounts throughout thereturn for unrecaptured sec. 1250 gain are used on Schedule D.


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For gains in Part III (but not Form 6252). (auto-calc) This is the total“Unrecaptured sec. 1250 gain” shown in the summary at the end ofthe worksheets excluding worksheets identified as installment sales.

For gains from Form 6252s. (auto-calc) This is the unrecaptured sec.1250 gain associated with the gain shown on line 4 of Form 4797,which comes from line 26 or 37 of Forms 6252. (The amount ofunrecaptured sec. 1250 gain that is currently taxable is determinedon the associated Form 6252.)

From Schedule K-1s from partnerships and S corporations. (auto-calc)This is the total unrecaptured section 1250 gain identified on theSch. K-1 Sec. 1231 Gain/Loss Worksheets you completed for line 2of Form 4797.

Adjusted amount for line 19 of Schedule D, Part IV. (auto-calc) Com-puted as the sum of the above three amounts, then limited to nomore than the gain on line 7 of Form 4797, subject to further re-duction by line 8, in accordance with the IRS Unrecaptured Section1250 Gain Worksheet (which appears at the end of the IRS Instruc-tions for Schedule D). This result is posted to Schedule D as justone component of line 19 of Schedule D in its complex calculationof tax.

PART IV, Recapture Amounts Under Sections 179 and 280F When BusinessUse Drops to 50% or Less. Recapture required because of a change in thepercentage of business use of the property is reported here. Lines labeled (a)are for recapture of section 179 deduction. Lines labeled (b) are for recaptureof depreciation of listed property.

33 Prior allowable (a) Sec. 179. Enter section 179 deduction taken thatis now subject to recapture for all but listed property.

33 Prior allowable (b) Sec. 280F. Enter depreciation allowable, whethertaken or not, for listed property that is now subject to recapture. Besure to include any section 179 deduction claimed for the property.

34 Recomputed depreciation (a) Sec. 179. Enter the extra amount ofdepreciation that would have been allowable over the years if thesection 179 deduction had not been claimed.

34 Recomputed depreciation (b) Sec. 280F. (a) Sec. 179. Enter the totaldepreciation over the years that would have been allowable had thebusiness been used less than 50% for business for all those years.This deduction is usually be based on a straight-line depreciation.

35 Recapture amount. (auto-calc lines) Computed as line 33 less line34, separately for columns (a) and (b).

The amounts on lines 35a and 35b must be reported as "Other income" onthe form or schedule for which the original deductions applied (such asSchedule C, Schedule F, Form 2106, etc.).


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Form 4835 / Farm Rental Income and ExpensesWho is it for? Form 4835 is used to report farm rental income, providing youmeet ALL of the following criteria:

• you own the property on which the farm operates,• the activity is a rental activity (as defined for passive activities on Form

8582),• the rental income is based on production (such as the amount of crops

or livestock produced by the tenant), rather than a flat rate, and• you did not materially participate in the operation or management of the

rented farm (as defined for self-employment on Schedule SE).If you don’t meet all these criteria, you should report the income elsewhereon the return, not on this form. For example,

• if you are the tenant, or you materially participate in the operation ormanagement of the farm, you should report the activity as Farm Self-employment on Schedule F;

• if the rent you receive is based on a flat charge for pasture or farmland,you should report the activity as Rental Real Estate on Schedule E.

Form 4835 parallels Schedule F. Form 4835 is nearly identical to Part I and IIof Schedule F, where farm income is reported using the cash (not accrual)method. Rather than repeat all the detail of Schedule F here, we thereforehighlight only the differences here. Therefore, you should refer to our instruc-tions for Schedule F for details not shown here.

GENERAL INFORMATION. Your answers here control how this activity istreated under the passive activity rules on Form 8582.

Employer ID Number (EIN). Enter the EIN here in the standard 10-character format (00-0000000) only if required to file employment,excise, alcohol, tobacco, or firearms tax returns, or you had a Ke-ogh plan. CAUTION: Do NOT enter social security number here.

A Active participant during 2006? Answer Yes only if you participatedin a significant way in management decisions or arranging for othersto provide services to maintain the rental activity. If the activity isclassified as a passive activity in the next section, the gains andlosses for this activity will be treated on Form 8582 as• Rental Real Estate Activities with Active Participation if you an-

swer Yes, or• All Other Passive Activities if you answer No.See Form 8582 for details.

Exception to PAL limitations. Unless you can answer Yes to some of thefollowing questions, the activity will be considered a passive activity and thededuction of losses will be limited through Form 8582.

Are you a real estate professional? If you qualify as a real estate pro-fessional, then you may qualify to have this rental activity treated asa nonpassive activity.


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Did you "materially participate" in the operation of this business during2006? You can generally answer Yes if you participated in the op-eration of this rental business for more than 500 hours during theyear. See our instructions for Form 8582 for details.

Were you a "significant participant" in the operation of this business?If you do not satisfy the requirements for material participation, youmay be classified as a significant participant. You are tentativelyconsidered to be a significant participant if you participated in theactivity for more than 100 hours but no more than 500 hours duringthe tax year. See our instructions for Form 8582 for details on whatconstitutes significant participation. (No entry is accepted here isyou answered Yes to "material participant in 2006.")

Unlike other activities, rental activities like this one are almost always treatedas passive activities. Whereas material participation is enough to cause an ac-tivity to be classified as nonpassive, for this rental activity, you must be a realestate professional as well. So, for this form the activity is treated as a non-passive activity ONLY if you are BOTH a real estate professional AND either(1) a material participant, or (2) a significant participant and the net of ALLsignificant participation activities through the return taken together is a gain.


PART I, GROSS FARM RENTAL INCOME. This part is similar to Part I ofSchedule F, but there are enough differences to show the details here.

1 Income from production of livestock and other items based on pro-duction. Enter the total gross rental income here.

2a Total distributions from cooperatives (Forms 1099-PATR). Enter thetotals from any Forms 1099-PATR that you receive, including ALLpatronage dividends.

2b Taxable amount in line 2a. Enter the part of line 2a that is taxable.This is usually the amount on line 2a less the patronage dividendsfrom buying personal items, capital assets, or depreciable assets.

3a Total agricultural program payments. Enter both cash and noncashpayments, including price support payments, diversion payments,and cost-share payments, and payments in the form of materialsand services reported to you on Forms 1099-G or CCC-182.

3b Taxable amount in line 3a. Enter the full amount on line 3b unlesssome of the payments are nontaxable, such as payments receivedunder certain conservation programs. See IRS Pub. 225 (Farmer’sTax Guide) for details.

4a Commodity credit loans reported under election. Enter here the loanproceeds from any loans from the Commodity Credit Corporation(CCC) which you elect to report as income when received, showingthe details of the loans in a supporting statement for this line.

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4b CCC loans forfeited. Report the full amount forfeited even if you re-ported the loan proceeds as income.

4c Taxable amount related to line 4b. If you did NOT elect to report theamount forfeited as income, enter here the same amount as line 4b.If you DID elect to report the amount forfeited as income, but theamount forfeited is different from your basis in the commodity, youmay still have to make an entry here. See IRS Pub. 225 (Farmer’sTax Guide) for details.

5 Crop insurance proceeds and certain disaster payments. You shouldreport on the following lines total crop insurance proceeds, includingdisaster payments under the Federal disaster assistance acts, actu-ally received in 2006, whether you elect to include them as incomethis year or next year.

5a Amount received in 2006. Enter total crop proceeds here.5b Taxable amount in line 5a. Unless you elect to include them as in-

come next year, as indicated by your answer to 5c, enter the fullamount on line 5a here.

5c Do you elect to defer the proceeds to 2007, and attach statement? Ifyou make the election you must justify it in a supporting statementfor this line. See IRS Pub. 225 (Farmer’s Tax Guide) for details onwhat to include.

5d Amount deferred from 2005. If you elected on your 2005 return toinclude crop insurance proceeds from that year in 2006 income, en-ter that amount.

6 Other income. Report here any other taxable income, including• barter income,• fuel credit refunds,• profit or loss on sales of commodity futures if they were made as

a hedge against price changes,• recapture on Form 4797, line 35 (sections 179 and 280F(b)(2))

that relates to deductions previously taken for this farm,• any inclusion amount on leased property other than vehicles,• amount canceled or forgiven on a discharge of your business

debt,• recovery of bad debts,• recapture of credits taken for clean-fuel vehicles, and• recapture of credit taken for clean-fuel vehicle refueling property.

7 Gross farm rents. (auto-calc) Computed as the sum of lines 1, 2b, 3b,4a, 4c, 5b, 5d, 6, and 7.

PART II, EXPENSES--FARM RENTAL PROPERTY. This part of Form 4835 isidentical to Schedule F except for the line numbers. The expenses on lines 8through 31 of Form 4835 have precisely the same labels and meanings aslines 12 through 35 of Schedule F. Therefore, you should refer to our detailsfor Schedule F for important instructions on the entries in this section. Afterline 31 there are just a few technical differences.


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32 NET FARM RENTAL INCOME OR LOSS. (auto-calc) Computed as grossfarm income on line 7 less total expenses on line 31, this line has no equiva-lent on the official Schedule F because it is the net income BEFORE applyingthe at-risk and passive activity loss limitations. As such, it is analogous to theline we have added to Schedule F labeled “Tentative net income.”

SUMMARY. This part is analogous to the all lines after line 35 of Schedule F.The only difference is that this form includes a provision for active participa-tion in addition to other passive activities. As a result, depending on the an-swer in the General Information section, if the activity is classified as passivegains and losses may be included in lines 3a, 3b, and 3c of Form 8582, justlike Schedule F, or they may be included in lines 1a, 1b, and 1c if affordedthe favorable treatment of active participation in rental real estate. Otherthan that, the section matches Schedule F:

33a and 33b, At-risk questions. (auto-calc lines) Lines 33a and 33b ofForm 4835 are analogous to line 37a and 37b of Schedule F.

33c Deductible loss for Schedule E, line 40. (auto-calc) This line isanalogous to line 36 of Schedule F, and is the net farm rental in-come or loss AFTER applying the at-risk and passive loss limitations.

The result on line 33c is posted to Schedule E, line 40. If no Schedule E ex-ists for the return, the schedule is automatically generated upon the final re-calculation of the return, and made a permanent part of the return in order tohold the results of Form 4835.

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Form 4868

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Form 4868 / Automatic Extension of Time to FileWho is it for? This form is used to apply for an automatic extension of time tofile a U.S. Individual Income Tax Return. You must file Form 4868 by thedue date of the return, April 16, 2007, and, if approved, your next filingdeadline will be October 15, 2007. Note that if you were classified as “outof the country” when the return was due, you have an extra 2 months to filewithout filing this return. (See “When to file Form 4868,” below, for the ob-tuse IRS definition of “out of the country.”) However, if you still cannot meetthe new June 15, 2007 deadline, you can use this form for an additional 4months, so that your next filing deadline is, again, October 15, 2007. By fil-ing this form with a reasonable estimate of your tax liability, you avoid a stiffpenalty for filing late, which is usually 5% per month (60% per annum!) up toa 25% maximum. Form 4868 is accessible through the Road Map at line 69of Form 1040.

Not an extension of time to pay. This form gives you an extension of time tofile, not an extension of time to pay. If you do not pay the total tax liabilityestimated on this form, or your estimate is inaccurate, you will be subject tointerest and late payment penalties. Interest is charged at a rate that dependson the financial markets, generally about 8 to 10% per annum rate in recentyears. Penalties generally add another 6% per annum, so your overall ratecould be as high as 18% per annum (10% plus 6%). If you want to avoidthese interest charges and penalties, you should try to accurately estimateyour tax liability and pay all tax due.

How the software works. Because this form is used to estimate the tax liabil-ity when the return is not yet complete and could be far from the final ver-sion, we intentionally refrain from completing this form automatically, butgive you helpful guidance instead. It is up to you to make the final determina-tion of estimates to report to the IRS on this form.

6-month extension now automatic. Form 4868 now provides a 6-month ex-tension of time to file rather than the 4-month extrension prior to 2006. As aresult Form 4868 extends your time to file from April 16, 2007 to October15, 2007.

WHEN TO FILE FORM 4868. If you were “out of the country” (in the IRSsense) on April 16, 2006, you have an automatic 2-month extension of timeto file without filing this form. In the IRS sense, “out of the country” on April16 does not mean that you were physically out of the country on that date.Rather, it means that you are classified as an “out of the country” taxpayerthrough your answers to the following two questions:

Do you live and work outside of the U.S. and Puert Rico? You can an-swer Yes only if BOTH your living quarters and your main place ofwork are outside the U.S. and Puerto Rico.


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Are you in military service outside the U.S.? You can answer Yes onlyif you are in military or naval service outside the U.S. and PuertoRico.

Are you a U.S. citizen or resident? Resident in this sense means thatyou normally live in the U.S. and are qualified to file Form 1040 (asopposed to Form 1040-NR), but live outside the U.S. currently onlybecause of temporary work.

Your classification as “out of the country” in the IRS sense controls the auto-matic answers to the following two questions:

You must file by April 16. (auto-calc) Answered Yes if the first twoquestions are answered No or the last question is answered No. IfYes, you must file this form by April 16, 2006 to avoid a penalty.

You may file until June 15. (auto-calc) Answered Yes if either of thepreceding questions is answered Yes. If Yes, you can file your re-turn without penalty and without filing Form 4868 until June 15,2006. If you still cannot file your return by June 15, you can fileForm 4868 by that date for an additional 2-month extension. If aYes appears here, line 8 of this form is answered Yes and the corre-sponding box is checked on the official printout of the form.CAUTION: Even if you don’t have to file Form 4868 or Form 1040until June 15, you still must pay the amount due by April 16 in or-der to avoid interest and penalties.

To avoid interest and penalties, you should accurately estimate the balancedue (line 6 of this form) and pay that amount by the regular due date of thereturn (April 16, 2007 for individuals).

PART I, IDENTIFICATION. Most information for this section comes automati-cally from Form 1040.

Information from Form 1040:Filing status. (auto-calc) Taken from your entry on Form 1040.1 Name(s) and address on 1040. (auto-calc lines) The names and ad-

dress you entered on Form 1040 are shown here. These are usedfor Form 4868 unless you supply a temporary alternate for this formfollowing line 3, below.

2 Your social security number (SSN). (auto-calc) Taken from your entryon Form 1040.

3 Spouse’s social security number (SSN). (auto-calc) Taken from yourentry on Form 1040.

Alternate address (agent):Use below name and address instead? If you answer Yes, your en-tries on the lines that follow this question are used in place of thepreceding name(s) and address on the printed Form 4868. Youwould do this if you want any correspondence with the IRS regard-ing this extension to be sent to a different address, or an agent.

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PART II, INDIVIDUAL INCOME TAXES. Estimates for Form 1040 amounts areentered here. (Note that the sections for gift and GST tax are no longer a partof Form 1040. See Chapter 1 for more information.)

Tax on current Form 1040, line 63. (auto-calc) Taken from Form 1040 asindicated, this line is your total tax at the current state of the return.

4 Estimated tax liability for 2006. Enter the total tax you estimate for2006, using the preceding amount for guidance.

Payments on current Form 1040, line 72 (excluding line 69). (auto-calc) Taken from Form 1040 line 72 with any entry on line 69(where line 10 of this form is posted) removed. This is your totalpayments, including withholding and prior estimated tax payments,but excluding any payment to be made with this form.

5 Total 2006 payments. Enter the total payments tax you estimate for2006, using the preceding amount for guidance.

6 BALANCE DUE. (auto-calc) Computed as line 4 less line 5.7 Amount you are paying. Enter the amount you are enclosing with this

form. If you do not pay the amount on line 6, and line 6 is an accu-rate estimate of your liability, you may be subject to interest andpenalties on your underpayment, as explained previously.

Interest and penalties may apply. (auto-calc) Answered Yes if line 7 isless than line 6 to warn you that you could be charged a penalty onthe amount underpaid unless you can show reasonable cause for notpaying on time. You must show cause when you file your return, notwhen you file Form 4868, explaining in a statement attached to thatreturn the reason for not paying the full amount due on time.

8 Were you out of the country and a U.S. citizen or resident? (auto-calc)Answered Yes only if the answer to “You may file until June 15” isYes (on screen 1 of Form 4868).

9 Do you file Form 1040NR or 1040NR-EZ and did not receive wages asan employee subject to U.S. income tax withholding. (auto-calc)Automatically No because this software is designed for Form 1040returns, not Form 1040NR or 1040NR-EZ returns.


CONFIRMATION NUMBER. If you pay your estimated balance due by creditcard, you will get a confirmation number. You can enter the confirmationnumber in the space provided on the top part of the printed Form 4868. Aspace is no longer provided for this confirmation number on the form yousend to the IRS (the bottom part of the page). (The IRS considers paying bycredit card to Link2Gov Corporation or Official Payments Corporation to be e-filing Form 4868, whether you pay over the internet or by phone.)


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Form 4952 / Investment Interest Expense Deduction(Included in Standard and Premium Level software ONLY. )

Purpose. This form is used to figure the amount of interest expense that youcan deduct each year for investment loans. The deduction is limited to be nomore than qualified investment income each year. However, that investmentincome does not include income from passive activities nor tax-exempt inter-est. It also does not include qualified dividends and capital gains unless youelect to include them (or a portion of them), in which case they are taxed atregular tax rates rather than the more favorable capital gains tax rates. Theallowed deduction computed on this form is normally reported as an itemizeddeduction at line 13 of Schedule A, but there are some exceptions as detailedlater. Form 4952 is accessible through the Road Map at line 13 of ScheduleA. (This form is not used for interest on business or personal loans. Intereston business loans is deducted on the form used to report the business in-come, such as Schedule C. Interest on personal loans is not deductible at all,except for home mortgages, which are reported directly on Schedule A.)

CAUTION: If you have investment income other than interest, dividends, andcapital gain distributions, YOU must enter that income manually. Other thaninterest, dividends, and capital gain distributions, the software has no way ofknowing what other income on the return is qualified investment income.This is an unfortunate result of the IRS design in which disposition of per-sonal, investment, and business property are all reported on the same forms,such as Schedule D and Form 4797, and not separately identified. Therefore,if you have any investment gains and losses on Schedule D or Form 4797,you must (except for capital gain distributions) enter them yourself as com-ponents of lines 4a and 4d.

PART I, TOTAL INVESTMENT INTEREST EXPENSE. The interest you want toconsider for deduction is reported here.

Investment interest expense from Sch. K-1. Enter the interest paid oraccrued in 2006 as reported to you on a Schedule K-1 from a part-nership or S corporation.

Other investment interest expense. Enter here all other qualified in-vestment interest you paid or accrued in 2006. For the purposes ofthis form, investment interest does NOT include home mortgage in-terest, interest related to a passive activity, nor interest related totax-exempt income. On the other hand, it usually does include inter-est on a margin account with your brokerage. See IRS instructionsfor other exclusions and more details.

1 Investment interest expense paid or accrued in 2006. (auto-calc)Computed as the sum of the preceding two lines.

2 Disallowed investment interest expense from 2005 Form 4952, line 7.Enter as indicated. This is the amount not deductible for the priortax year but carried over to the 2006 return.

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3 TOTAL INVESTMENT INTEREST EXPENSE. (auto-calc) Computed asthe sum of lines 1 and 2.

PART II, NET INVESTMENT INCOME. The income that can be used to justifythe interest expense is determined here:

Interest on Form 1040, line 8a. (auto-calc) Taken from Form 1040, asindicated, this is ordinary interest received.

Interest on Form 1040, line 9a. (auto-calc) Taken from Form 1040, asindicated, this is ordinary dividends received.

Child interest and dividends in Form 1040, line 21. (auto-calc) Takenfrom the line labeled “Form 8814” at line 21 of Form 1040, but re-duced by any amount in that line that is attributable to Alaska Per-manent Fund dividends. (The amount attributed to Alaska Perma-nent Fund dividends is computed in accordance with a proratedmethod described in IRS Pub. 550.) This is the amount of your chil-dren’s interest and dividend income that you are reporting on yourreturn to avoid having to file returns for the children.

Other gross investment income. Enter here all other qualified in-vestment interest, including nonpassive royalty income and annui-ties. DO NOT include any gains or losses on sales or other disposi-tion of investment assets; these are reported on line 4d instead.Also, do not include any amount from Form 8814 (interest and divi-dends of your children) because they are already included in thepreceding line.

4a Gross investment income. (auto-calc) Computed as the sum of thepreceding four lines.

4b Qualified dividends included on line 4a. (auto-calc) Taken from line9b of Form 1040, this is the part of line 9a identified as qualifieddividends. They are eligible for low capital gains tax rates and arenot automatically included in investment income for this form.However, you can elect to have them included in investment in-come on this form (so that you can deduct more interest) if youidentify them to be taxed at ordinary tax rates instead of capitalgains tax rates. You make that election at line 4g, below.

4c Subtract line 4b from line 4a. (auto-calc) Computed as indicated.Capital gain distributions (Schedule D, line 13). (auto-calc) Takenfrom Schedule D, as indicated, this amount includes any amountfrom your children by means of Form 8814.

Other net gain or loss from investment property. Enter here anyother gain or loss on the return that stems from qualified investmentproperty. This amount is typically found on Schedule D and/or Form4797, and includes both long-term and short-term amounts. It alsoincludes the sale of both capital assets and other assets, as long asthey were held for investment. (Do not include any capital gain dis-tributions from Schedule B or Form 8814; they are already includedin the preceding line.)


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4d Gross investment income. (auto-calc) Computed as the sum of thepreceding two lines, but no less than zero, this is the net gain fromthe disposition of property held for investment.

Capital gain distributions (Schedule D, line 13). (auto-calc) Takenfrom the corresponding line above line 4d. Capital gains are inten-tionally included in both line 4d and 4e.

Other long-term capital gain or loss from investment property. Enterhere any other long-term capital gain (or loss) on the return. Thisamount is usually found in Part II of Schedule D, but be sure to ex-clude the capital gain distributions already shown on the precedingline.

Net short-term capital gain or loss from investment property. Enterhere any short-term capital gain (or loss) on the return. This amountis usually found in Part I of Schedule D.

4e Smaller of line 4d or your net capital gain from the disposition ofproperty held for investment. (auto-calc) First the net long-termcapital gain is computed (as the sum of the first two of the preced-ing three lines, but no less than zero); then the net short-term capi-tal loss is computed (as the preceding line only if negative); then thetwo are combined to arrive at the net capital gain. Line 4e is thenthe lesser of this result and the gain on line 4d. This is the maxi-mum amount of capital gain that is excluded from investment in-come for this form, because of its favorable tax treatment, butwhich can be included back at line 4g by electing to forego the fa-vorable tax treatment.

4f Subtract line 4e from line 4d. (auto-calc) Computed as indicated.4g Amount from lines 4b and 4e that you elect to include in investment

income. Thus far, investment income is the sum of lines 4c and 4f.The qualified dividends in line 4b have been excluded in arriving atline 4c, and the capital gains in line 4e have been excluded in arriv-ing at line 4f. However, as noted above, you can elect to includeany or all of the amounts in lines 4b and 4e in investment income,but will have to forego their favorable tax treatment in the process.This is accomplished through your entry here, which affects the taxcomputation on Schedule D. Your entry here causes some or all ofqualified dividends in 4b and/or capital gains in 4e to be taxed atordinary rates, but allows their reinclusion in investment income onthis form (in order to allow a greater investment interest deduction)so that potentially more interest can be deducted. Before making anentry here you should carefully consider the tax consequences. It isa good idea to make your final decision only after the entire return iscomplete. You can then experiment with entries on this line by us-ing our Recalculate Key (shift-F8 or ctrl-B) to recompute the entirereturn after each change. (CAUTION: NEVER make an entry here ifthe investment income total at line 4h is greater than or equal to

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line 3. An entry in this case will never lower your tax and will usu-ally increase it.)

Default attributable to line 4e. (auto-calc) Computed as the lesser ofline 4g and line 4e, this is the maximum amount of line 4g that youcan attribute to line 4e. Unless you make another election on thenext line, the IRS will attribute this part of your entry on line 4g tocapital gains, and not qualified dividends. For most taxpayers thiswill be the optimum choice because it results in the lowest tax atline 44 of Form 1040.

Amount of attribution you elect to shift to line 4b. If you use Form1116, you may find it beneficial to attribute a lesser amount to line4e and a greater amount to line 4b because it could result in enoughof an increase in the credit from Form 1116 to reduce the overalltax after credits even through line 44 of Form 1040 is increased.Your entry here is limited by the software so that the amount at-tributed to line 4b does not exceed line 4b, and the amount attrib-uted to 4b and 4e combined is equal to the amount on line 4g.

Modified line 4e for Schedule D. (auto-calc) If you make no entry onthe preceding line, the amount on line 4e appears here unmodified,and is used that way in the Schedule D tax computations. However,if you do make an entry, and it is accepted by the software, a lesseramount will appear here and used in the Schedule D tax computa-tions to compute a lesser amount of capital gains at favorable taxrates. In the latter case, this amount will appear on the dotted linefor line 4e on the official printout of Form 4952 along with theword ”Elec” to flag to the IRS that this special election is beingmade.

4h Investment income. (auto-calc) Computed as the sum of lines 4c, 4f,and 4g.

Total on Schedule A, line 22. (auto-calc) Taken from Schedule A, asindicated. This total includes both investment expenses and job ex-penses, so you must identify the investment expense part on thefollowing three lines.Part for investment expense from Schedule B. (auto-calc) Takenfrom the corresponding part of Schedule A, line 22, this is theamount of investment expense you identified on the 1099-INT and1099-DIV worksheets that you completed for Schedule B.Part from Schedule E, line 38(e). (auto-calc) Taken from the corre-sponding part of Schedule A, line 22, this is income from a REMICthat is reported as taxable income on Schedule E but deductible onSchedule A, line 22.Other investment expense in Schedule A, line 22. Enter other in-vestment expenses included in Schedule A, line 22, but not re-flected in the preceding two lines. TIP: Be sure to include deprecia-tion or amortization related to qualified investment property that isincluded in line 22 of Schedule A. (CAUTION: Do not include the


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amounts from Forms 4684 and 4797 that appear on Schedule A,line 22. These amounts relate to property used as an employee, notinvestment property. Investment expenses from these forms arereported at Schedule A, line 27, and are included below.)Limitation from Schedule A, line 26. (auto-calc) The deduction forlines 20 through 22 of Schedule A is limited to the part that ex-ceeds 2% of AGI, as reflected in line 26. The same limitation ap-plies to your application of amounts in line 22 to line 5, below.

Part of Schedule A, line 22, for line 5. (auto-calc) Computed as thelesser of the preceding limitation and the sum of the three invest-ment expense amounts that precede it, this is the only part ofSchedule A, line 22, that is allowable for line 5 of Form 4952.

Total on Schedule A, line 27. (auto-calc) Taken from Schedule A, asindicated. This total also includes both investment expenses and jobexpenses, so you must identify the investment expense part on thefollowing three lines.Part for investment expense from Form 4684, lines 32 and 38b. (auto-calc) Taken from the corresponding part of Schedule A, line 27, thisis the loss from casualty or theft on Form 4684 associated with in-vestment property.Part for investment expense from Form 4797, line 18b(1). (auto-calc)Taken from the corresponding part of Schedule A, line 27, this isalso the loss from casualty or theft on Form 4797 associated withinvestment property.Other investment expense in Schedule A, line 27. Enter other in-vestment expenses included in Schedule A, line 27, but not re-flected in the preceding two lines.

Part of Schedule A, line 27, for line 5. (auto-calc) Computed as the to-tal of the preceding three lines, this is the only part of Schedule A,line 27, that is allowable for line 5 of Form 4952.

Other investment expense for line 5. Enter any other investment ex-penses that are qualified for inclusion in line 5, below.

5 Investment expenses. (auto-calc) Computed as the sum of “Part ofSchedule A, line 22, for line 5,” “Part of Schedule A, line 27, forline 5,” and “Other investment expense for line 5.”

6 NET INVESTMENT INCOME. (auto-calc) Computed as line 4h less line5, but no less than zero, this is the maximum amount of interestyou can deduct this year.

PART III, INVESTMENT INTEREST EXPENSE DEDUCTION. The final result iscomputed here:

7 Disallowed investment interest expense. (auto-calc) Computed as line3 less line 6, but no less than zero, this is the amount disallowedthis year but carried forward to your Form 4952 for tax year 2007.

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8 INVESTMENT INTEREST EXPENSE DEDUCTION. (auto-calc) Com-puted as the smaller of line 3 or line 6, this is the amount you candeduct on your return for tax year 2006.

Allocation of line 8. Where you report your deduction depends on the specif-ics of the interest expenses:

Not-at-risk activities. If any of your investment interest expense is at-tributable to an activity for which you are not at risk, you will haveto complete Form 6198 to determine the amount you are allowed todeduct for that activity. Enter here the part of line 8 that you can-not deduct, as determined from Form 6198.

Royalties (for Schedule E line 12 or 13). If any of the interest expenseis attributable to royalties reported in Part I of Schedule E, you mustenter here the part of line 8 attributable to those royalties and alsoenter it on line 12 of 13 of the appropriate worksheet that supportsline 4 of Schedule E.

Nonpassive business. If any part of the amount in line 8 is attributableto a nonpassive trade or business, enter that amount here and onthe schedule you use to report other income and expenses for theactivity.

Other not for Schedule A. If any other part of the amount in line 8 is at-tributable to an activity for which a deduction on Schedule A is notappropriate, enter that amount here and report it on the appropriateform for that activity.

Balance for Schedule A, line 13. (auto-calc) Computed as line 8 less thesum of the preceding four amounts, this amount is automaticallyposted to line 13 of Schedule A for inclusion in itemized deductions.

CAUTION. Except for Schedule A, no amounts in the preceding allocationsare posted elsewhere automatically. You must enter the appropriate amountselsewhere as instructed above.



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*Form 4970 / Tax on Accumulation Distribution of TrustsPurpose. This form is used by beneficiaries of certain domestic trusts to fig-ure a partial tax on “accumulation distributions” reported to them by thetrusts via Part IV of Schedule J (Form 1041). Form 4970 is accessiblethrough the Road Map at the ADT line above line 63 Form 1040. (This formis not applicable if the trust was created on March 1, 1984 or later.)


*Form 4972 / Tax on Lump-Sum DistributionsPurpose. This form is used to figure a favorable tax on a total distribution ofthe entire balance from a qualified plan, including pension, profit-sharing, andstock bonus plans. (IRAs are not qualified.) The plan participant can be you oryour benefactor (upon death), but the plan participant must have been bornbefore January 2, 1936. Form 4255 is accessible through the Road Map atline 43b of Form 1040. (Each spouse who received a lump-sum distributionmust file a separate Form 4972, so two copies of Form 4972 are available –one for each spouse.)


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Form 5329

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Form 5329 / Additional Tax on Qualified Plans (IRAs, etc.)Who is it for? This form is used to compute penalty taxes for distributions(withdrawals) that violate the government rules for certain plans. The planscovered include all types of Individual Retirement Accounts (IRAs), otherqualified retirement plans, annuities, modified endowment contracts, certaineducation accounts, and Medical Savings Accounts (MSAs). Transactionssubject to penalty include! Early distributions (within the minimum 5-year waiting period for Roth

IRAs, and under age 59-1/2 for all others)! Distributions from education accounts not used for educational expenses! Excess contributions to Traditional and Roth IRAs, ESAs, MSAs, and

HSAs! Excess Accumulation in qualified retirement plans (that is, insufficient

withdrawals when a minimum withdrawal is required)Even if you do not owe a penalty you may be required to file this form to ex-plain any exceptions to which you are entitled. Form 5329 is accessiblethrough the Road Map at line 60 of Form 1040.

Automatically created for excess IRA contributions. Unless you chose toblock its auto-creation through the Control Form, Form 5329 is automaticallycreated for the relevant spouse based on entries on Form 1040 when any ofthe following are true:! A distribution was entered on Form 1040, line 15a and the age at year-

end for the corresponding spouse is under 60.5.! The distribution entered on line Form 1040, line 15a exceeds the taxable

amount on line 15b.! The IRA contribution entered above Form 1040, line 32 is more than the

allowed deduction included in the total shown at line 32.! A taxable distribution from an education account is included in Form

1040, line 21.Form 8606 is automatically created under the first three conditions, and mustbe completed before Form 5329. (The age test is 60.5 rather than 59.5 be-cause your age at the time you receive the distribution is what matters, notyour age at year-end. Therefore, if your age at year-end is at least 59.5 butless than 60.5, you must answer the age question on Form 5329 to let thesoftware know whether you received the distribution before age 59.5.)

You may be qualified to omit Form 5329. Form 5329 provides a number ofexceptions to the early distribution penalty, but you do not have to file Form5329 if the Form 1099-R you receive properly identifies the exception. Youhave no penalty and can omit Form 5329 if the Distribution Code in box 7 ofForm 1099-R is one of the following:! Code 2: a known exception to the early distribution (under age 59-1/2)

penalty applies! Code 3: the distribution is because of disability of the recipient! Code 4: the distribution is because of death of the recipient! Code G: direct rollover to an IRA from a non-IRA


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! Code H: direct rollover or transfer to a qualified plan or annuityIf any of these codes appear and properly apply to your case, you do nothave to file Form 5329 and identify the exception in order to claim the excep-tion. Instead, you can either block its automatic creation through the ControlForm or enter the distribution as a negative in the line “Adjustment to totalfor I” in Part I of Form 5329.

GENERAL INFORMATION. This copy of the form is associated with theproper spouse and taxable distributions for that spouse are consolidated here.

Identification. One copy of Form 5329 is available for each spouse. The copyyou are currently using is identified here.

Social security number for this copy. (auto-calc) The social security en-tered on Form 1040 for the spouse whose copy you chose whenyou entered Form 5329.

Is this spouse's copy (vs. you)? (auto-calc) This answer is also auto-matic based on your choice when you entered.

Are you filing this form by itself? If you do not have to file Form 1040yet you have to file Form 5329 because you owe a tax on this formor are eligible for a special exception to the tax, answer Yes here sothat the form will show the name, address, and social securitynumber of the filer. The taxpayer, and paid preparer if any, mustsign the bottom of page 2 of this form when filed separately fromForm 1040.

Address, city, state, ZIP. (auto-calc lines) These entries for the top ofthe form come automatically from your entries on Form 1040 if youanswered Yes to the preceding question.

If this is an Amended Return, check here. Answer Yes only if this formis completed for filing with a Form 1040X for 2006. (You must al-ways use the Form 5329 designed for the tax year for which youare filing the amended return.)

DISTRIBUTIONS ON FORM 1040. All taxable distributions reported on lines 15and 16 of Form 1040 are reflected here, excluding rollovers and other distri-butions not currently taxed. Early distributions from most pensions are pe-nalized in Part I of this form. The following lines are used to show the amountcomputed for the penalty in Part I. If you have reason to believe that this totalshould not be subject to the early distribution penalty, you can then makeadjustments above line 1 of Part I or identify exceptions in line 2 of Part I.

IRA distributions on Form 1040, line 15b. (auto-calc) Taken from Form1040 for the appropriate spouse, this is the taxable distributionsfrom IRAs, from either line 2a of the 1099-R Worksheets that haveYes for line 7, or Form 8606, if one exists, for the appropriatespouse.

Less conversions and Roth IRA distributions. (auto-calc, supportedby Form 8606) If you converted a traditional IRA into a Roth IRA,you must complete Form 8606 so that the proper taxable amount is

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computed for line 15b of Form 1040. If the conversion follows allthe IRS rules, and you have identified it as such on Form 8606, theamount appears here so that you are not penalized on the conver-sion. Distributions from Roth IRAs are included here because theyare not eligible for exclusion due to age; instead, they are deductedfrom the total at this line then added back to the total after the agetest. (Roth IRA distributions are based on the results in Part III ofForm 8606 for the appropriate spouse.)

Plus income on excess IRA contributions. You must include any in-come earned on any excess IRA contributions, whether distributedor not.

Pension distributions on Form 1040, line 16b. (auto-calc) Taken fromForm 1040 for the appropriate spouse, this is the taxable distribu-tions from pensions and annuities other than IRAs, from line 2a ofthe 1099-R Worksheets that have No for line 7.

Taxable lump-sum distributions on Form 4972. (If Premium Level, sup-ported by Form 4972.) Distributions received in a lump sum are eli-gible for special treatment through Form 4972. The taxable part ofdistributions reported on Form 4972 is reported here.

Age (as entered on Form 1040). (auto-calc) Taken from our Form1040 as indicated, you MUST enter year-end ages for you andspouse on our Form 1040 for the proper operation of Form 5329.

Distributions made to you before age 59-1/2? Automatically Yeswhen the above age is less than 59.5, and automatically No whenthe above age is at least 60.5, you MUST answer this questionyourself if your age is at least 59-1/2 but no more than 60-1/2,since the answer cannot be known automatically in those cases.Answer Yes if ANY distributions were received before age 59-1/2;you will exclude those that were not later.

Distributions early due to age. (auto-calc) Computed as the sum of allof the above distributions and adjustments if your answer to theabove question is Yes, but zero otherwise.

Roth distributions (early at any age). (auto-calc) Distributions fromRoth IRAs are generally subject to a penalty because the 5-yearwaiting period has not yet lapsed, irrespective of the recipient’s age,since Roth IRAs were created less than 5 years ago. Therefore, thetaxable Roth IRA distribution appears here based on the results inPart III of Form 8606. This is the amount shown by the softwarebelow line 27 of the appropriate spouse’s Form 8606, and is the re-sult of a complex allocation of distributed amounts with past contri-butions and conversions.

TENTATIVE TOTAL FOR PART I. (auto-calc) Computed as “Distributionsearly due to age” plus “Roth distributions (early at any age).”


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PART I, ADDITIONAL TAX ON EARLY DISTRIBUTIONS. This part relates totaxable distributions received before age 59-1/2, or Roth IRAs distributionsreceived before the required 5-year waiting period.

Early distributions for Part I. You can adjust the previously computed total forthis section if you are not required to complete this part because of a knownexception code appearing on the Form 1099-R you received.

TENTATIVE TOTAL FOR PART I. (auto-calc) Taken from the result of thepreceding section.

IRA part of the above. (auto-calc) The part of the total stemmingfrom traditional and Roth IRAs is shown here.

No additional tax on early distributions for victims of hurricane Katrina, Rita,or Wilma. The additional tax does not apply to qualified hurricane distribu-tions. You are qualified for this exception only if you received the distributionafter the hurricane hit (August 24 for Katrina, September 22 for Rita, and Oc-tober 22 for Wilma), your main home was located in an IRS-listed disasterarea on a particular date (August 28 for Katrina, September 23 for Rita, andOctober 23 for Wilma), and you sustained economic loss because of the hur-ricane. You claim this exception by your entry on the following line. See theIRS Instructions for Form 8915 for details.

Qualified hurricane distribution in total for Part I. The amount you en-ter here is subtracted from the total before being used in Part I ofthis form. You must report these distributions on IRS Form 8915,Qualified Hurricane Retirement Plan Distributions and Repayments(not built into the software), and, for IRA distributions, Form 8606.

IRA part of the above. Enter the distributions included in the preced-ing entry that are from traditional and Roth IRAs.

Other adjustment to total for Part I. If you are NOT required to file Form5329 for any of the distributions for Part I because an exceptionapplies and it is properly identified in box 7 of Form 1099-R, youshould enter the excepted amount here as a negative number. Youwill not have to identify the exception on line 2 for this distribution.(See the shaded box on the first page of this section for details onwhat codes qualify you to exclude Form 5329.) If some of your dis-tributions were received before age 59-1/2 and some were not, youshould answer Yes to the age question and enter here the total forthose that were NOT received early (excluding Roth IRAs) as anegative number.

IRA part of other adjustment. Enter the part of the preceding adjust-ment that relates to distributions from traditional and Roth IRAs.

FINAL TOTAL FOR PART I. (auto-calc) Computed as “TENTATIVETOTAL FOR PART I” plus “Other adjustment to total for Part I” less“Qualified hurricane distribution in total.”

IRA part of the above. (auto-calc) Computed is the IRA part of thetentative total plus “IRA part of other adjustment” less the IRA partof the qualified hurricane distribution.

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1 Early distributions included in gross income attributable to. You must iden-tify the types of plans to which the above distributions apply:

1a Qualified retirement plans (including IRAs). (auto-calc) All distribu-tions are attributed to this line until you make entries on the linesthat follow. As you make entries, the amount appearing here is low-ered so that the total at line 1 matches the total for Part I shownabove.

IRA part of line 1a. (auto-calc) The software ensures that this amountcan be no more than line 1a or the "IRA part of above" entered ear-lier.

1b Annuity contracts. Enter the taxable part of any annuity contract dis-tribution you received before reaching age 59-1/2.

1c Modified endowment contracts. Enter the taxable part of any distri-bution you received before age 59-1/2 under a modified endowmentcontract (Sec. 7702A) entered into after June 20, 1988.

1d Prohibited IRA transactions. Enter prohibited transactions, such asany amount you borrowed from your IRA (account or annuity) thatno longer qualified as an IRA on the first day of the tax year, or anyamount of your IRA annuity that you pledged as security for a loanif under age 59-1/2 at the time. Code 5 should appear in box 7 ofthe Form 1099-R you receive for this distribution.

1e Pledging of IRA accounts as security. Enter any amount of your IRAaccount that you pledged as security for a loan if under age 59-1/2at the time.

1f Investing IRA in collectibles. Enter any amount of your IRA that youinvested in collectibles (art, rugs, antiques, metals, gems, stamps,coins, etc.) if under age 59-1/2 at the time. See IRS Sec. 408(m)for and the IRS Instructions for Form 5329 for details.

1 Early distributions in gross income. (auto-calc) Computed as the sumof lines 1a through 1f, which will match the total displayed aboveline 1.

2 Exceptions to distributions subject to additional taxes. Early distributionsare allowed under certain special circumstances. You must identify hereamounts that qualify for exclusion from the tax on early distributions, identi-fying the reason for the exception with IRS codes 01 through 12. The excep-tions are not allowed for all types of retirement plans, so they are groupedbelow in accordance with the restrictions placed on them, rather than in IRSnumerical order. The software then applies the exceptions in an order thatmaximizes the credit, with the most restricted withdrawals excepted first. Ifmore than two exception applies, you must itemize one of the exception linesso that all exceptions will appear in a supporting statement; otherwise onlythe last exception entered will be appear on the official printout of Form5329. CAUTION: Because the following entries are limited based on line 1amounts, you must properly complete all parts of line 1 before you make anyentries here, or else your entries may be inappropriately reduced or zeroed.


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Itemizing may be required. To ensure the proper reporting on the official re-turn, if you choose more than one exception you must itemize at least one ofthe exception lines. This procedure ensures that the breakdown among multi-ple exceptions is printed in a supporting statement for line 2.

Exceptions NOT applicable to IRAs, annuities, modified endowment con-tracts. The following entries are limited to line 1 less line 1b, line 1c, and theIRA part of line 1a:

Due to separation from service: 01. Enter amount withdrawn ONLY ifseparated from employment in or after the year of reaching age 55(age 50 if a qualified public safety employee). The lower age al-lowed for public safety employees is new for 2006; see IRS instruc-tions for details.

Made to an alternate payee under qualified domestic relations order:06. Enter as indicated. This is limited to the indicated amount lessthe preceding entry.

Exceptions NOT applicable to annuities nor modified endowment contracts.The following entries are limited to line 1 less line 1b, line 1c, and the pre-ceding amounts already excepted:

Medical expenses on Schedule A, line 1. (Road Map line, supported bySchedule A.) The total on line 1 of Schedule A, if any, is postedhere.

Medical expenses if no Schedule A is filed. If you do not file a Sched-ule A for this return, enter here the medical expenses that youwould enter on line 1 of Schedule A if you had filed one.

Part above 7.5% of AGI. (auto-calc) Using the amount on line 1 ofSchedule A, or the above amount if no Schedule A exists, 7.5% ofline 38 of Form 1040 is subtracted from this medical expense, andany remaining positive amount appears here.

CAUTION: If filing jointly and both spouses have a Form 5329 with anamount on line 1, you must override the preceding line on both copies ofForm 5329 so that the SUM of amounts on the two copies of Form 5329 isequal to the part of medical expenses above 7.5% of AGI. This procedure isrequired to prevent the same excepted amount from being applied twice.

To the extent of deductible medical expenses: 05. (auto-calc) Computedas the lesser of (a)the above amount, or (b) the total for line 1 lesslines 1b and 1c and the preceding amounts already excepted.

Made to an unemployed person for health insurance premiums: 07. En-ter amount received as indicated, but not if already claimed underexception 05.

Made for higher education expenses: 08. This exception allows you towithdraw amounts for qualified higher education expenses.

Made for first home purchase: 09. This exception allows you to with-draw amounts for your first-time purchase of a home.

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Exceptions NOT applicable to modified endowment contracts. The followingentries are limited to line 1 less line 1c and the preceding amounts alreadyexcepted:

Due to death: 04. Enter the amount received due to death.

ALL others (applicable to all retirement plans). The following entries are lim-ited to line 1 less the preceding amounts already excepted:

Made as part of substantially equal lifetime periodic payments: 02. En-ter amount received as indicated.

Due to total and permanent disability: 03. Enter amount received be-cause of a disability.

Due to an IRS levy of the qualified plan: 10. Enter amount caused by anIRS levy.

Made to reservists while serving on active duty for at least 180 days:11. Enter amount of qualified distributions from IRAs or elective de-ferrals. This exception appears on the form for the first time for2006, even though it applies to all qualified distributions after Sep-tember 11, 2006; see IRS instructions for details.

Other (itemize if necessary): 12. Enter any additional excludable amounthere. See IRS instructions for line 2 for examples of what else is al-lowable. If your exception is not listed in the IRS instructions, youmust explain your entry in a supporting statement for this line.

2 Early distributions in line 1 excepted from additional tax. (auto-calc) Com-puted as the sum of exceptions 01 through 12.

3 Amount subject to additional tax. (auto-calc) Computed as line 1 less line 2,this is the total amount subject to the additional tax. However, the penaltyrate that applies depends on the type of plan.

Part of line 3 from SIMPLE plans. Your entry here is limited to be nomore than line 3. Your distribution is from a SIMPLE retirement planif the amount is included in boxes 1 and 2a of Form 1099-R anddesignated with a code “S” in box 7.

Amount subject to 25% tax. (auto-calc) Computed as 25% of theabove entry because SIMPLE plans are subject to a 25% penalty onearly distributions.

Amount subject to 10% tax. (auto-calc) Computed as 10% of the re-mainder of line 3 less the “Part of line 3 from SIMPLE plans.”

4 ADDITIONAL TAX. (auto-calc) Computed as the sum of the above two pen-alties. This result is reflected in line 60 of Form 1040.

PART II, ADDITIONAL TAX ON CERTAIN DISTRIBUTIONS FROM EDUCATIONACCOUNTS. This part of the form applies to taxable distributions reported online 21 of Form 1040 stemming from Coverdell Education Savings Accounts(ESAs) and Qualified Tuition Programs (QTPs).

5 Distributions included in income from Coverdell ESAa and QTPs.(auto-calc line, supported by Form 1040) Taken from the entry forthe appropriate spouse on line 21 of Form 1040.


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Enter allowed exceptions below. You will not owe a penalty on the pre-ceding amount if any of the following exceptions apply. You must enterthe dollar amount included in line 5 that applies to each applicable ex-ception:• Due to disability or death. Enter the amount withdrawn due to dis-

ability or death of the recipient.• Due to section 25A(g)(2) payment. Enter the amount distributed as a

part of a scholarship, allowance, or payment described in IRS sec.25A(g)(2).

• Due to QTP and ESA distributions used for advanced education at amilitary academy. Enter the amount withdrawn from a QTP or ESAand used to pay for advanced education of the beneficiary at a U.S.military academy.

• Due to distributions included in income in order to be used for Hopeand Lifetime Learning Credits. Enter the amount withdrawn andused for qualified higher education expenses, and included in in-come at Form 1040 line 21 so that they could be used to figure theHope and Lifetime Learning Credits.

• Other allowed exceptions. Enter here any other allowed exceptions,itemizing the exceptions in a supporting statement for this line.

6 Distributions excepted. (auto-calc) Computed as the sum of all aboveexceptions.

7 Amount subject to additional tax. (auto-calc) Computed as line 5 lessline 6, but no less than zero.

8 ADDITIONAL TAX. (auto-calc) Computed as 10% of line 7.The result on line 8 is reflected in line 60 of Form 1040.

PART III, ADDITIONAL TAX ON EXCESS CONTRIBUTIONS TO TRADITIONALIRAs. This part of the form is fully automatic for most taxpayers.

Itemize to access Form 8606. This line provides access from Form 5329to Form 8606 through the Road Map. If you have made any non-deductible IRA contributions, you must generally complete Form8606 before you can complete this part of Form 5329.

Gross IRA contribution on Form 1040. (auto-calc) Taken as the contribu-tion for the appropriate spouse entered above line 32 of Form 1040.

Additional contribution entered ONLY on Form 8606. (auto-calc) Takenfrom the entry above line 1 of Form 8606 for the appropriatespouse, this is the amount voluntarily contributed as a nondeduct-ible contribution, even though it is allowed as a deduction by law.

IRA deduction allowed on Form 1040. (auto-calc) Taken as the appropri-ate spouse’s part of the total IRA deduction at line 32 of Form1040.

Additional allowed on Form 8606. (auto-calc) Taken from line 1 of Form8606 for the appropriate spouse, this is the amount allowed onForm 8606 as a nondeductible contribution.

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Computed excess (from Forms 1040 and 8606). (auto-calc) Computed asthe above two amounts contributed less the above two amountsallowed.

Amount withdrawn by the due date of the return. You can eliminateyour penalty on excess contributions if you withdraw them and theincome earned on them by the due date of the return. Enter hereamount withdrawn excluding the income earned on that amount. aare allowed to Enter an adjustment ONLY if there are special cir-cumstances why the above total will not be proper for line 5 afterthe final recalculation of the return.

Withdrew income on excess too? Answer Yes only if you also withdrewthe extra income earned on the excess contributions withdrawn. Ifyou cannot answer Yes, you are not allowed to reduce the penalizedamount by the above withdrawal.

Other amount excluded. You would normally have no entry here, butthis line is provided for any other amount that can be legally ex-cluded from penalty.

Excess contributions for line 15. (auto-calc) Computed as the computedexcess from Forms 1040 and 8606 less the above exclusion and, ifthe answer to “Income on above amount withdrawn?” is Yes, the“Amount withdrawn by the due date of the return.”

Line 16 of 2005 Form 5329. Enter the indicated amount, if any, fromthe prior-year Form 5329 for the appropriate spouse.


9 Excess contributions from 2005 Form 5329 line 16. (auto-calc) If theprior line 17 was greater than zero, taken from the above entry fromthe prior line 16. Otherwise, zero.

10 Traditional IRA contribution credit. (auto-calc) Computed in accor-dance with the IRS worksheets and Pub. 590, you may have anamount here if your actual IRA contribution for 2006 is less thanthe allowed amount.

Taxable 2006 Traditional IRA distributions. (auto-calc) Computedfrom the amounts shown in screen 1 of this form as IRA distributionon 1040 line 15b less conversions and Roth IRA distributions.

Withdrawal for line 12 in the above. Enter any part of the precedingdistribution that was withdrawn to reduce prior excess contribu-tions. This amount will be reflected in line 12, below.

11 2006 traditional IRA distributions included in income. (auto-calc)Computed as “Taxable 2006 Traditional IRA distributions” less“Withdrawal for line 12 in the above.”

Withdrawal in Traditional IRA distribution (auto-calc) Taken as theentry that precedes line 11.

Other withdrawal for line 12. Enter all other prior excess contribu-tions withdrawn in 2006.


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Adjustment for line 12. See IRS instructions for line 12 of Form 5329to determine whether the sum of the preceding two amounts prop-erly reflects the amount for line 12. If not, you can make a positiveor negative adjustment here.

12 2006 distributions of prior year excess contributions. (auto-calc)Computed as the sum of the preceding two lines.

13 Add lines 10, 11, and 12. (auto-calc) Computed as indicated.14 Prior year excess contributions. (auto-calc) Computed as line 9 less

line 13, but no less than zero.15 Excess contributions for 2006. (auto-calc) Taken as the “Excess con-

tributions for line 15” computed before line 9.16 Total excess contributions. (auto-calc) The sum of lines 14 and 15.

IRA value on 12/31/06 from Form 8606. (auto-calc) Taken from theamount you entered above line 6 of Form 8606 for this spouse.

If no value on Form 8606, enter IRA value on 12/31/06 here. If noForm 8606 exists with the return, enter the year-end value for theappropriate spouse. (An entry is not actually required if the valueexceeds line 16. Unless you answer Yes to the question below, azero entry will be taken as no entry.)

If no value shown above, is it truly zero? In case the year-end valueis truly zero, you must so indicate by a Yes answer here.

17 ADDITIONAL TAX. (auto-calc) Computed as 6% of the lesser of line16 or the year-end value of traditional IRAs.

The result on line 17 is reflected in line 60 of Form 1040.

PART IV, ADDITIONAL TAX ON EXCESS CONTRIBUTIONS TO ROTH IRAs.Your contributions to a Roth IRA are subject to the same limitations as thosefor a traditional IRA, and the contributions for the two combined cannot ex-ceed these limitations. Excess contributions for the current year are deter-mined in Part III of our Form 8606, which you should complete before pre-paring Form 5329. Even if you had no current-year excess, you will have tocomplete this part is you had a penalty tax on an excess last year (that is, anamount on the prior-year Form 5329, line 25.)



18 Excess contributions on line 24 of 2005 Form 5329. (auto-calc) If theprior line 25 was greater than zero, taken from the above entry fromthe prior line 24. Otherwise, zero.

Contribution credit from Form 8606. (auto-calc) Computed as theamount by which 2006 Roth IRA contributions fell short of themaximum allowed contributions for 2006, this amount appears onthe screen following line 19 of the appropriate spouse’s Form 8606.See the IRS Instructions for Form 8606 for details.

Adjustment for line 19. Enter any adjustment to the preceding auto-matically computed amount. See IRS Pub. 590 for details.

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19 Roth IRA contributions credit. (auto-calc) Computed as the sum ofthe preceding two amounts.

Qualified Roth distributions to include in line 20. Qualified Roth dis-tributions are generally Roth IRA distributions that are not includiblein income, such as those made at age 59½ or later, upon death,due to disability, or for qualified first-time homebuyer expenses. Youshould generally enter here all qualified Roth distributions. However,if you file Form 8606, do not include any such distributions includedin line 19 of that form, such as those for qualified first-time home-buyer expenses.

20 2006 distributions from Roth IRAs. (auto-calc) Taken as the amounton line 19 of the appropriate spouse’s Form 8606 for 2006 plus thepreceding entry, but no less than line 18 if your answer for the nextquestion is Yes.

Withdrew ALL of Roth IRAs? Answer Yes if the entire amount of ALLRoth IRAs was withdrawn in 2006. If Yes, see impact at line 20.

21 Add lines 19 and 20. (auto-calc) Computed as indicated.22 Prior year excess contributions. (auto-calc) Computed as line 18 less

line 21, but no less than zero.Excess contributions from Form 8606. (auto-calc line, supported byForm 8606) The excess contributions are computed in Part III ofForm 8606 using the Roth IRA Contribution Worksheet, which ap-pears in the IRS Instructions for Form 8606.

Other excess for line 23. If you had no distributions from Roth IRAsand therefore do not need to complete Part III of Form 8606 to re-port them, you can enter the excess contributions here rather thanusing Form 8606 to compute them.

23 Excess contributions for 2006. (auto-calc) Computed as the sum ofthe preceding two amounts.

24 Total excess contributions. (auto-calc) Computed as the sum of lines22 and 23.

Value of Roth IRAs on 12/31/06. Enter the value of all your Roth IRAscombined on the last day of the tax year.

Contributions made to Roth IRAs in 2007 for 2006. Enter contributionsmade for 2006 during the grace period January 1, 2007 throughApril 16, 2007.

Total for limit on line 25. (auto-calc) Computed as the sum of theabove two lines.


25 ADDITIONAL TAX. (auto-calc) Computed as 6% of the lesser of line24 or the “total for limit on line 25.”



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PART V, ADDITIONAL TAX ON EXCESS CONTRIBUTIONS TO COVERDELLESAs. Contributions to your Coverdell ESAs are subject to their own set ofrules, which have much lower limits than those for traditional and Roth IRAs.All benefactors combined can contribute no more than $500 per year to yourCoverdell ESA, and a benefactor with more than $110,000 of modified AGI($160,000 if married filing jointly) cannot make any contributions.




27 Coverdell ESA contributions credit. Enter the amount by which thecontributions for 2006 fell short of the allowed maximum contribu-tions. (Determination of the allowed maximum is detailed in the IRSInstructions for Form 8606, line 31.)

28 2006 distributions from Coverdell ESAs. Enter total distributions ex-cluding rollovers or returned excess contributions.


line 29, but no less than zero.31 Excess contributions for 2006. Enter the excess contributions over

your contribution limit. Separate limitations apply to the benefactorand the beneficiary. No more than $2,000 can be contributed toany one beneficiary, but the benefactor is also limited in the amounthe or she can contribute to all beneficiaries combined, and that limitdepends on the benefactor’s AGI. See the IRS instructions for thisline for details.

32 Total excess contributions. (auto-calc) Computed as the sum of lines30 and 31.

Value of Coverdell ESAs on 12/31/06. Enter the value of the accountat the end of the year for the appropriate spouse.


33 ADDITIONAL TAX. (auto-calc) Computed as 6% of the lesser of line32 or the year-end value of the Roth IRAs.


PART VI, ADDITIONAL TAX ON EXCESS CONTRIBUTIONS TO ARCHERMSAs. Archer Medical Savings Accounts (MSAs), which were new for 2002,are a form of self-insurance for those who have no other health insuranceplan and are either self-employed or employees of a small company.


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35 MSA contribution credit. If you contributed less than allowed in2006, you may have a contribution credit. See IRS Instructions forForm 5329.

36 Taxable 2006 distributions from MSAs. Enter the amount from line10 of the 2006 Form 8853 for the appropriate spouse.


line 37, but no less than zero.39 Excess contributions for 2006. If you or your employer made any

contributions to your MSA, you should use Form 8853 (built intothe software only at the Premium Level) to determine whether thecontributions exceeded allowed limits. The excess contribution isthe amount by which Form 8853 line 4 exceeds the smaller of line5 or 6. (The limit is generally 65% to 75% of the deductible for theplan, up to the income of the beneficiary.)

40 Total excess contributions. (auto-calc) The sum of lines 38 and 39.Value of MSAs on 12/31/06. Enter the value of all medical savings ac-counts on the last day of the tax year.


41 ADDITIONAL TAX. (auto-calc) Computed as 6% of the lesser of line40 or the year-end value of the MSAs.


PART VII, ADDITIONAL TAX ON EXCESS CONTRIBUTIONS TO HEALTHSAVINGS ACCOUNTS (HSAs). Health Savings Accounts are a form of self-insurance for those who are covered under a high-deductible health plan buthave no other health insurance (except as specifically allowed).

Line 48 of 2005 Form 5329. Enter the indicated amount, if any, from theprior-year Form 5329 for the appropriate spouse.

Line 49 of 2005 Form 5329. Enter the indicated amount, if any, from theprior-year Form 5329 for the appropriate spouse.


43 HSA contribution credit. (auto-calc for Premium Level, supported byForm 8889) If you contributed less than allowed in 2006, you mayhave a contribution credit. See IRS Instructions for Form 5329.

44 2006 distributions from HSAs from Form 8889, line 14. (auto-calc forPremium Level, supported by Form 8889) The amount from line 14of the 2006 Form 8889 for the appropriate spouse is reported here.



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46 Prior year excess contributions. (auto-calc) Computed as line 42 lessline 45, but no less than zero.

47 Excess contributions for 2006. (auto-calc for Premium Level, sup-ported by Form 8889) If you or your employer made any contribu-tions to your HSA, you should use Form 8889 (built into the Pre-mium Level software only) to determine whether the contributionsexceeded allowed limits. The excess contribution is the amount bywhich Form 8889, line 2 exceeds Form 8889, line 10. See IRS In-structions for Forms 5329 and 8889 for details.

48 Total excess contributions. (auto-calc) The sum of lines 46 and 47.Value of HSAs on 12/31/06. Enter the value of all health savings ac-counts on the last day of the tax year.


49 ADDITIONAL TAX. (auto-calc) Computed as 6% of the lesser of line48 or the year-end value of the HSAs.


PART VIII, ADDITIONAL TAX ON EXCESS ACCUMULATION IN QUALIFIEDRETIREMENT PLANS (including IRAs). IRS-qualified plans are subject to strictrules on when you MUST start drawing on the plans. If you did not receivethe minimum required distribution in the prescribed period, you owe a penaltyas figured here.

Minimum required distribution. Distributions must start by April 1stof the year following the year you reach age 70-1/2. Enter amountrequired for 2006. Note that the value of all accounts (as of De-cember 31 of the year preceding the distribution) must be dividedby a certain multiple for your life expectancy, as listed in tables inIRS Pub. 590 (IRAs) or 939 (Pension General Rule).

Age (from Form 1040). (auto-calc) Taken from your age entry on ourForm 1040 for the appropriate spouse.

Distributions are year after age 70-1/2? (auto-calc) Since distribu-tions must start by April 1st of the year following the year youreach age 70-1/2, your age at year-end for the first year you receivethe distributions will be 71-1/2 or more. The answer here is there-fore Yes only if the age shown above is 71.5 or more.

50 Minimum required distribution. (auto-calc) Taken as the amount en-tered above for minimum required distribution if the answer to theabove question is Yes, and zero otherwise.

IRA distributions on Form 1040, line 15a. (auto-calc) Taken from Form1040 as indicated, this amount may include rollovers and other non-taxable distributions.

Pension distributions on Form 1040, line 16a. (auto-calc) Taken fromForm 1040 as indicated, this amount may include nontaxable distri-butions.

Gross lump-sum distributions. (If Premium Level, supported by Form4972.) Distributions received in a lump sum are eligible for special

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treatment through Form 4972. The gross distributions, not just thetaxable part, reported on Form 4972 are reported here. This entrycan be no less than your entry preceding Part I for “Taxable lump-sum distributions on Form 4972.”

Adjustment for line 51. Enter any adjustment or other applicable dis-tributions. Note that if you have more than one IRA, you can takethe required minimum distributions from any one or more individualIRAs.

51 Amount actually distributed. (auto-calc) Computed as the sum ofthe above three gross distributions plus the above adjustment.

52 Subtract line 51 from line 50. (auto-calc) Computed as indicated.Itemized claim for WAIVER? You may be able to get the tax excused,but you must justify your claim for an excuse in a detailed support-ing statement at this line. You must convince the IRS that the ex-cess accumulation was caused by a reasonable error, and that youhave taken steps to remedy the problem. Even though the claim isjustified, you must pay the tax that appears below NOW, and theIRS will refund it later if the IRS agrees with the claim.

53 ADDITIONAL TAX. Multiply line 52 by 50%. (auto-calc) As indicated.The result on line 53 is reflected in line 60 of Form 1040.

SUMMARY OF PARTS I THROUGH VIII. The taxes from all seven parts of theform are combined here.

Total tax for Form 1040, line 60. (auto-calc) Computed as the sum oflines 4, 8, 17, 25, 33, 41, 49, and 53. This total, combined withthe corresponding total for the other copy of Form 5329, if any, isposted to Form 1040, line 60.

Extra line for personal memos. The supporting statement you create forthis line will not be printed as a part of the official return. This line isprovided only to allow you to make private notes or reminders.


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Form 5695 / Residential Energy Credits(Included in Standard and Premium Level software ONLY. )

Purpose. New for tax year 2006, this form is used by individuals to claimresidential energy credits. Two separate credits are convered by this form:

• Nonbusiness energy credit. This credit, claimed in Part I of the form,relates to such energy efficiency improvements to your main homeas insulation, exterior windows and doors, furnaces, etc. The creditis generally 10% of the cost, but is limited to no more than $500credit for all improvements combined, and any disallowed amountcannot be carried over to any other year.

• Residential energy efficient property credit. This credit, claimed inPart II of the form, relates to alternative energy sources (solar elec-tricity, solar water heating, and fuel cells) installed in your home(not restricted to your main home except for fuel cells). It provides agenerous credit of 30% of the costs, with no fixed cap on the totalcredit allowed, and any any disallowed amount can be carried overto next year.

Both credits are considered “residential energy credits” by the IRS, and bothapply only to improvements to your home in the United States. Although theIRS titles for these credits do not distinguish them well, the main differencesare that the first credit applies only to your main home, and the second creditapplies only to alternative energy sources. Form 5884 is accessible throughthe Road Map from the two lines above line 52 of Form 1040.

PART I, NONBUSINESS ENERGY PROPERTY CREDIT. Credit for passive en-ergy efficiency improvements and traditional energy property is claimed here.Only improvements to a U.S. residence you use as your main home qualifyfor this credit.

1 Were the qualified energy efficiency improvements or residential energyproperty costs made to your main home loacted in the United States? If not,you do not qualify for this credit and no credit will be computed in Part I irre-spective of your entries.

2 Qualified energy efficiency improvements. Passive improvements to theenergy efficiency of your main home are reported here. Qualification of spe-cific improvements is defined by the IRS by reference to recent supplementsto the International Energy Conservation Code (IECC). See IRS instructions forspecific IECC criteria for each entry. You may use a manufacturer’s certifica-tion or Energy Star label to determine whether an item meets the IECC re-quirements. Enter amounts you paid for the following items, but do not in-clude amounts for on-site preparation, assembly, or original installation of thecomponents:

a Insulation material or system specifically and primarily designed toreduce heat loss or gain in your home. Enter amount you paid, in-cluding vapor retarders and seals, but not structural components orfinished surfaces.

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b Exterior windows (including skylights). Include storm windows in-stalled with the exterior windows.

Amount you paid. Enter amount you paid for the qualifying items.Amount joint occupants paid. If you occupied your home jointly with

someone other than your spouse, enter amount that joint occupantpaid. (A $2,000 limitation on the claim for this item is proratedamong all occupants who helped pay for the item.)

Amount allowed for line b. (auto-calc) Computed as the lesser of“Amount you paid” and a ceiling of $2,000 times your percentageof the amount paid by you and joint occupants combined. This isthe amount that will appear on line 2b of the official printout.

c Exterior doors. Enter amount you paid, including qualified storm doorsinstalled with the exterior doors.

d Metal roof with pigmented coatings that meet the Energy Star pro-gram requirements and is specifically and primarily designed toreduce heat gain in your home. Enter amount you paid for metalroofs with appropriate pigmentation.

3 Add lines 2a through 2d. (auto-calc) Normally computed as indicated, butzero if the answer to line 1 is No.

4 Multiply line 3 by 10% (.10). (auto-calc) Computed as indicated.

Lines 2a, 2c, and 2d for joint filers. If you occupied your home jointly withsomeone other than your spouse, enter amount that joint occupant paid foritems in lines 2a, 2c, and 2d. The previously entered joint occupant amountfor line 2b, subject to a prorated limitation, is used along with the entry forthis line in a later calculation of line 7 for the joint occupants alone.

5 Residential energy property costs. Energy-efficient equipment is reportedhere. See IRS instructions for specific efficiency criteria for each entry. Youmay use a manufacturer’s certification to determine whether an item meetsthe requirements. Enter amounts you paid for the following items, includingamounts for on-site preparation, assembly, or original installation of theequipment:

a Energy efficient building property. This category includes qualifyingheat pumps, central air conditioning, and hot water heaters. See IRSinstructions for specific efficiency requirements.


someone other than your spouse, enter amount that joint occupantpaid. (A $300 limitation on the claim for this item is prorated amongall occupants who helped pay for the item.)

Amount allowed for line a. (auto-calc) Computed as the lesser of“Amount you paid” and a ceiling of $300 times your percentage ofthe amount paid by you and joint occupants combined. This is theamount that will appear on line 5a of the official printout.


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b Qualified natural gas, propane, or oil furnace or hot water boiler.This category includes furnaces and hot water boilers with an an-nual fuel utilization rate of 95 or more.



Amount allowed for line b. (auto-calc) Computed as the lesser of“Amount you paid” and a ceiling of $150 times your percentage ofthe amount paid by you and joint occupants combined. This is theamount that will appear on line 5b of the official printout.

c Advanced main air circulating fan used in a natural gas, propane, oroil furnace. To qualify, annual electricity use must be no more than2% of the total annual site energy use of the furnace.



Amount allowed for line b. (auto-calc) Computed as the lesser of“Amount you paid” and a ceiling of $50 times your percentage ofthe amount paid by you and joint occupants combined. This is theamount that will appear on line 2b of the official printout.

6 Add lines 5a through 5c. (auto-calc) Normally computed as indicated, butzero if the answer to line 1 is No.


Line 7 for joint occupants. (auto-calc) Based on joint occupant entries for lines2a through 2d and 5a through 5c, the total for line 7 that would result on thejoint occupants’ Form 5695 is computed, reflecting the same type of prora-tioning as used for amounts you paid for lines 2b and 5a through 5c, butbased on joint occupant amounts.

If filing jointly and spouse had a separate main home… If filing jointly butspouse had a separate main home, you must prepare a Form 5695 for thespouse’s separate home through line 8 only, and enter here the amount online 8 of that form. (If you use the software to prepare the second Form5695, you must do so on a separate return with no entries on Form 1040other than names and filing status, then manually enter here the result on line8.)

8 Smaller of line 7 or $500. (auto-calc) Computed as the sum of the precedingamount plus the lesser of line 7 and $500 (or just your percentage of $500if joint occupants are involved). (Your percentage is line 7 divided by the sumof line 7 and “Line 7 for joint occupants.”)

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9 Amount from Form 1040, line 46. (auto-calc) Taken from Form 1040 as indi-cated, this is total tax before credits.

10 Total credits from Form 1040, lines 47 through 51. (auto-calc) Taken fromForm 1040 as indicated, this is total of credits claimed before the credit com-puted on this form.

11 Subtract line 10 from line 9. (auto-calc) Computed as indicated, this is thetax balance that the credit computed on this form is allowed to reduce.

12 NONBUSINESS ENERGY PROPERTY CREDIT. (auto-calc) Computed as thesmaller of line 8 or line 11, this credit is posted to the corresponding part ofForm 1040, line 52.

PART II, RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDIT. Credit for al-ternative energy sources is claimed here. Only improvements to a U.S. resi-dence you use as your home qualify for this credit, but the home need not beyour main home for the solar credits. For all entries in this part, you can in-clude labor costs for onsite preparation, assembly, or original installation al-locable to the property claimed as well as piping and wiring to connect theproperty to the home.

13 Qualified solar electric property costs. This is property that uses solar en-ergy to generate electricity to your home, including solar panels or other roofsystems.

Amount you paid. Enter amount you paid for the qualifying property.Amount joint occupants paid. If you occupied your home jointly with

someone other than your spouse, enter amount that joint occupantpaid. (A $6,667 limitation on the claim for this property is proratedamong all occupants who helped pay for the property.)

Amount allowed for line 13. (auto-calc) If there is no amount for jointoccupants, taken as “Amount you paid,” with no limit yet applied.Otherwise, computed as the lesser of “Amount you paid” and aceiling of $6,667 times your percentage of the amount paid by youand joint occupants combined. This is the amount that will appearon line 13 of the official printout.


15 Maximum credit amount. (auto-calc) Always computed as $2,000.

16 Smaller of line 14 or line 15. (auto-calc) Computed as indicated.

17 Qualified solar water heating property costs. This is property that uses atleast half solar energy to heat water for your home, including solar panels orother roof systems. See IRS instructions for the certification that is requiredto qualify.


someone other than your spouse, enter amount that joint occupant


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paid. (A $6,667 limitation on the claim for this property is proratedamong all occupants who helped pay for the property.)

Amount allowed for line 17. (auto-calc) If there is no amount for jointoccupants, taken as “Amount you paid.” Otherwise, computed asthe lesser of “Amount you paid” and a ceiling of $6,667 times yourpercentage of the amount paid by you and joint occupants com-bined. This is the amount that will appear on line 17 of the officialprintout.


19 Maximum credit amount. (auto-calc) Always computed as $2,000.


21 Qualified fuel cell property costs. This is property is a system including afuel cell stack that electrochemically converts fuel into electicity for your mainhome. Unlike other credits in this part of the form, the home must be youmain home for fuel cell property. See IRS instructions for other requirements.

Kilowatt capacity of the property. Enter killowatt capacity in ½-kilowatt increments. Kilowatt capacity less than ½-kilowatt doesnot qualify for the credit. CAUTION for e-file returns: The IRS doesnot recognize the fractional part of this entry, so you will not beable to claim this credit on an e-file return unless your minimum ca-pacity ia 1 kilowatt.


someone other than your spouse, enter amount that joint occupantpaid. (A $1,667 limitation for each ½-kilowatt capacity is proratedamong all occupants who helped pay for the property.)

Amount allowed for line 21. (auto-calc) If there is no amount for jointoccupants, taken as “Amount you paid.” Otherwise, computed asthe lesser of “Amount you paid” and a ceiling of $1,667 for each½-KW capacity times your percentage of the amount paid by youand joint occupants combined. This is the amount that will appearon line 21 of the official printout.


23 Kilowatt capacity above times $1,000. (auto-calc) Computed as your entryfor “Kilowatt capacity of the property” times $1,000.


If filing jointly and had more than one home… If filing jointly and you orspouse used more than one residence as a home, you must prepare a Form5695 for the other home(s) through line 25 only, and enter here the total forline 25 for the other home(s). (If you use the software to prepare the otherForms 5695, you must do so on separate returns with no entries on Form1040 other than names and filing status, then manually enter here the resultson line 25.)

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25 Add lines 16, 20, and 24. (auto-calc) Computed as the sum of the indicatedlines plus your entry on the preceding line.

26 Amount from Form 1040, line 46. (auto-calc) Taken from Form 1040 as in-dicated, this is total tax before credits.

27 Form 1040 filers: Personal credits. Unlike the credit in Part I, the credit inPart II is taken after credits on lines 53 and 54 of Form 1040, to include allpersonal credits, even though this credit is reported on line 52:

Credits on Form 1040, lines 47 through 51. (auto-calc) Taken fromForm 1040 as indicated.

Credit on Form 1040, line 53. (auto-calc) Taken from Form 1040 asindicated, this is the child tax credit.

Credit on Form 1040, line 54. (auto-calc) Taken from Form 1040 asindicated, this is the sum of credits on Forms 8396 (Mortgage Inter-est Credit), 8839 (Qualified Adoption Credit), and 8859 (D.C. First-time Homebuyer Credit).

Amount on line 12 of this form. (auto-calc) Taken as the credit result-ing for Part I of this form.

27 Form 1040 filers: Credits from Form 1040, lines 47 through 51, 53, and 54,plus the amount on line 12 of this form. (auto-calc) Computed as the sum ofthe preceding four amounts.

28 Subtract line 27 from line 26. (auto-calc) Computed as indicated, but noless than zero.

29 RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDIT. (auto-calc) Com-puted as the smaller of line 25 or line 28, this credit is posted to the corre-sponding part of Form 1040, line 52.

30 Credit carryforward to 2007. (auto-calc) Computed as line 25 less line 29,but no less than zero.

PART III, CURRENT YEAR RESIDENTIAL ENERGY CREDITS. Credit for alter-native energy sources is claimed here. Only improvements to your homequalify for this credit, but the home need not be your main home.

31 Add lines 12 and 29. (auto-calc) Computed as indicated, this total creditappears on line 52 of Form 1040.



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*Form 5884 / Work Opportunity CreditPurpose. This form is used by employers to claim credit for first-year wagesto certain targeted groups. Form 5884 is accessible through the Road Map atline 1b of Form 3800.


*Form 6198 / At-Risk LimitationsPurpose. This form is used to figure the amount of deductions or losses youcan claim for investments in which you are not at risk for the entire amountof your investment. Examples include investments that are financed by non-recourse loans, protected by stop-loss agreements or guarantees, financed byloans from certain related parties, financed by loans from persons who havean interest in the activity, financed by cash or property which itself is fi-nanced in one of the preceding ways. You are generally not allowed to de-duct a net loss any more than the amount you have at risk, as reported onForm 6198. Only activities identified by the IRS as “at-risk activities” aresubject to the at-risk limitations, but the IRS definitions are so broad thatmost activities carried on as a trade or business or for the production of in-come are subject to these limitations when financed in a way that makes younot fully at risk for the loans. A separate Form 6198 is used for each separateactivity for which you have a net loss for which you are not fully at-risk, andthe activity may have amounts reported on a number of different forms fordifferent aspects of the activity. As a result, Form 6198 is not tied to anyparticular form or schedule but is instead a stand-alone form, so no results onthis form are posted to any other form or schedule. Nevertheless, Form 6198is accessible through the Road Map from some of the forms that may haveamounts not at risk: Schedule C (below line 32b), Schedule E (below line 27),Schedule F (below line 37b), and Form 4835 (below line 33b).


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Form 6251 / Alternative Minimum TaxWhy a minimum tax? The alternative minimum tax (AMT) was originally de-signed to prevent high-income taxpayers from totally avoiding taxes throughsuch tax shelters as accelerated depreciation, installment sales, and largeitemized deductions, but it now affects many others.

Fully automatic only for some taxpayers. Form 6251 is automatically gener-ated and completed when a minimum tax exists based on your adjusted grossincome, exemptions, itemized deductions, and filing status, or a minimum taxlimitation exists on your credit from Schedule R or Form 2441. However, thisform is required under many more circumstances than those which generateit automatically, so you MUST access it yourself if you have any tax prefer-ences not automatically posted to Form 6251. Note that you may have acredit for prior-year minimum tax if you paid AMT in 2005 or had a carryfor-ward of credit on a 2005 Form 8801 (Credit for Prior Year Minimum Tax).Form 6251 is accessible through the Road Map at line 45 of Form 1040.

CAUTION: The tax laws for the alternative minimum tax are quite complexand subject to many special cases. You may therefore have to make adjust-ments to the automatically calculated lines, and determine entries for severallines that are not completed automatically. See IRS Instructions for Form6251 for detailed instructions, especially those concerning what to enter onlines 7 through 14.

PART I, ADJUSTMENTS AND PREFERENCES. This is where favorable taxtreatment throughout the return is identified, and the benefits of them areadded back to income before the alternative minimum tax is computed. Ad-justments typically involve itemized deductions claimed, and preferences typi-cally involve the excess over some nominal deduction. The official IRS in-structions are indispensable to completing these lines.

AGI on Form 1040, line 38. (auto-calc) From Form 1040 as indicated.less Amount on Form 8914, line 2. (auto-calc) Taken from the lineabove line 42 of Form 1040, this is the part of claimed exemptionsattributable to the housing of Katrina victims.

plus Other adjustment (see instructions). Enter any write-in amountincluded in Form 1040, line 43, such as a capital construction funddeduction for commercial fishermen. See line 26 for other adjust-ments, such as a negative adjustment for alcohol fuel credit.

1 If filing Schedule A, amount on Form 1040, line 41. Otherwise, Form1040, line 38 (less Form 8914, line 6). (auto-calc) Computed as theAGI on Form 1040 less “Amount on Form 8914, line 6” plus thepreceding adjustment and also, if Schedule A is filed, less the item-ized deduction on Form 1040, line 40.

2 Medical and dental expenses. (auto-calc) Computed as the lesser of2-1/2% of AGI or line 4 of Schedule A ONLY if itemized deductionswere used on Form 1040 instead of the standard deduction.


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Amount from Schedule A, line 9. (auto-calc) Taken as line 9 ofSchedule A ONLY if itemized deductions were used on Form 1040instead of the standard deduction. Otherwise, zero.

Excluded taxes. You must enter here any generation-skipping taxeson income distributions that were included in line 9 of Schedule A.

3 Taxes. If itemized deductions were used on Form 1040 instead of thestandard deduction, computed as line 9 of Schedule A less theabove entry for excluded taxes. Otherwise, zero.

Mortgage interest on Schedule A not qualified. Enter here any inter-est deducted on line 10, 11 or 12 of Schedule A that is for homemortgages taken out after 6/30/82 and NOT used to buy, build, orimprove your main home or a qualified second home.

4 Certain home mortgage interest. (auto-calc) Automatically the sameas the above entry if Schedule A is used in the return, but zero oth-erwise.

5 Miscellaneous itemized deductions. (auto-calc) Taken as line 26 ofSchedule A ONLY if itemized deductions were used on Form 1040instead of the standard deduction.

6 If 1040, line 38 is over prescribed limits, line 11 of worksheet forSchedule A, line 28. (auto-calc) This amount, posted from the lineabove line 28 of Schedule A, is the amount of deductions disal-lowed on Schedule A because of high-income limitations. (Limita-tions apply when AGI exceeds $75,250 if married filing separatelyand $150.500 otherwise.)

Refunds on Form 1040, line 10. (auto-calc) Taken from Form 1040 asindicated.

Refunds on Form 1040, line 21 (itemize). List any other refunds thatmust be included in line 7 in a supporting statement for this line, in-cluding state and local refunds of personal or real property taxes,etc., that have been reported as income on line 21 of Form 1040.

7 Tax refund from Form 1040, line 10 or line 21. (auto-calc) Computed asthe sum of the preceding two amounts.

8 Investment interest expense. If you file a Form 4952 (built into thePremium Level) to report investment interest with this return, youmay need to enter an adjustment here. See the official IRS instruc-tions for Form 6251 for details.

9 Depletion. See IRS instructions for this line before making an entry.

10 Net operating loss deduction in Form 1040, line 21. Enter as a posi-tive number any net operating loss deduction you claimed in line 21of Form 1040.

11 Interest from specified private activity bonds. (auto-calc line, sup-ported by Schedule B and Forms 8814) This special interest shouldhave been identified by you on a Form 1099-INT Worksheet forSchedule B (or Form 8814 if paid to your child and you elect to re-

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port child’s interest and dividends). Note that interest from GO Zonebonds are not a preference item and should not have been includedin your entries for this line on the Form 1099-INT Worksheets.

Full Section 1202 exclusion taken on Schedule D. (auto-calc line,supported by Schedule D) Taken from Schedule D, this is the gainexcluded under section 1202. It is the sum of exclusions claimed onGain/Loss Worksheets for line 8 of Schedule D (Type 2 and Type 3).

12 Qualified small business stock. (auto-calc) Computed as 7% of thesec. 1202 exclusion taken on Schedule D.

13 Exercise of incentive stock options. Enter the excess of AMT incomeover regular tax income. Contrary to the rules for the regular tax,some income may be recognized when an incentive stock option isgranted or exercised under AMT rules. See IRS instructions for details.

14 Estates and trusts. Enter the amount identified as code A in box 12of the Schedule K-1 (Form 1041) you receive.

15 Electing large partnerships. Enter the amount from box 6 of theSchedule K-1 (Form 1065-B) you receive.

16 Disposition of property. Enter the difference between AMT and regulartax gain or loss. Only gain or loss reported on Schedule D, Form 4797,or Section B of Form 4684 need be recomputed under AMT rules.

17 Depreciation on assets placed in service after 1986. (not applicableto depreciation for employee expenses that are already reflected inline 5) This entry is the difference between depreciation taken for2006 compared with depreciation figured under the less acceleratedmethods defined by the IRS, and can be positive in early years ofdepreciation but negative in later years. You must refigure all depre-ciation not reflected in other lines of Form 6251, including deprecia-tion allocable to inventory costs. See the IRS Instructions for Form6251 for details. (Do not recompute depreciation by AMT rules forany part of the cost you treated as a Sec. 179 expense deduction.)Exception: New York Liberty Zone property and Gulf OpportunityZone property for which you claim the special depreciation allow-ance is generally not refigured for the AMT. See the IRS Instructionsfor line 17 of Form 6251 for details.

Read IRS instructions for line 17 carefully. The IRS instructions define whatdepreciation methods you must compare to the methods you actually used.For example, whereas residential rental property or nonresidential real prop-erty may generally be depreciated using straight-line depreciation over 27-1/2, 31-1/2, or 39 years depending on the date placed in service, you mustcompare it to straight-line depreciation over 40 years for this line. For prop-erty placed in service after 1998, only property depreciated using 200% de-clining balance method needs to be reported on line 8, comparing it to 150%declining balance using the same convention and recovery period as the ac-tual deduction.


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18 Passive activities. Enter the difference between AMT and regular taxincome or loss. See IRS instructions for details.

Read IRS instructions for line 18 carefully. This entry can involve returns fromseveral past years because it involves recomputing the entire return underAMT rules, which often results in different unallowed losses on Form 8582,and therefore different year-to-year carryovers of unallowed loss, for eachyear. You may therefore need to keep a special AMT copy of your return foreach year recomputed under AMT rules, using carryovers from the previousyear's AMT return. The entry for this line is the difference between theamount reported on the AMT return and the amount reported on the regularreturn. Note that differences relating to Schedule D and Form 4797 are re-ported at line 9, not here. This line is used to report differences from Sched-ules C, C-EZ, E, F, and Form 4835.

19 Loss limitations. See the IRS instructions for this line for the varietyof calculations that can be required for this line.

20 Circulation costs. See the IRS instructions.21 Long-term contracts. See the IRS instructions.22 Mining costs. See the IRS instructions.23 Research and experimental costs. See the IRS instructions.24 Income from certain installment sales before January 1, 1987. Your

will rarely enter an amount here. This line applies only to certain in-stallment sales in a short 4-1/2 month period from August 17, 1986through December 31, 1986. See IRS instructions for details. Anyamount you enter here is subtracted from the total when computingline 28.

25 Intangible drilling costs preference. See the IRS instructions. 26 Other adjustments. Several other adjustments apply for which the

IRS has provided no specific line. These include adjustments forthose who depreciate post-1986 property using pre-1987 rules un-der transitional provisions of the law, AMT patronage dividend ad-justment, an adjustment for certified pollution control facilities andtax shelter farm activities, and a negative adjustment alcohol fuelcredit included in income. See IRS instructions for details, includingincome-based related adjustments.

Total Alternative Tax NOL carryovers. This entry for ATNOL carryovers(carryforwards and carrybacks) requires you to recompute your netoperating losses from prior years with alternative minimum tax andpreference items removed.

Gulf Opportunity Zone part of the above. This entry provides for a sus-pension of the usual limit to 90% of current-year AMTI income. Itapplies only to carrybacks from tax year 2006 or later, not carry-forwards from 2004 or earlier, because the zone (related to Hurri-canes Katrina, Rita, and Wilma) was not defined until 2005 (by theGulf Opportunity Zone Act of 2005).

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27 Alternative minimum tax Net Operating Loss deduction. (auto-calc)If your entry for the Gulf Opportunity Zone part is zero, computedas the “Total ATNOL carryovers” but limited to no more than 90%of the sum of lines 1 through 26 (with lines 6, 7, and 24 subtractedinstead of added) plus the domestic production activities deductionon Form 1040, line 35. However, if there is an entry on the GulfOpportunity zone line, the limitation is considerably more complex,as detailed in the IRS instructions for Form 6251, but performedautomatically by Tax Preparer. (The effect of the complex instruc-tions is to modify the percentage used for the limitation from 90%to anywhere from 90% to 100% depending on the proportion ofATNOL carryover that is from the Gulf Opportunity Zone.)

28 ALTERNATIVE MINIMUM TAXABLE INCOME. (auto-calc) Nominallycomputed as the sum of lines 1 through 26 (with lines 6, 7, and 24subtracted instead of added) less line 27. However, an additionalamount is included for married taxpayers filing separately: 25% ofthe amount by which the nominal amount exceeds $200,100, up toa maximum additional amount of $31,275.

PART II, EXEMPTION AMOUNTS AND ALTERNATIVE MINIMUM TAX. The al-ternative minimum tax to be used on Form 1040 is computed here.

YOUR earned income. (auto-calc) Computed from amounts through-out the return for you alone, this and the next entry are used in thecalculations only if the taxpayer is a child under age 18.

Adjustment for special businesses. You may have to enter an allow-ance for personal services rendered, per IRS Instructions for line 29.

Your age on Form 1040. (auto-calc) From our Form 1040.Both parents deceased by year-end? If this return is being completed

for a child under age 18, answer Yes if neither of the taxpayer'sparents were alive on the last day of the tax year.

Used exemption worksheet for child? (auto-calc) Answered Yes if yourage is under 18 and at least one parent was alive at year-end.

29 Exemption amount. (auto-calc) This amount is normally computed asa nominal exemption ($31,275 if married filing separately, $42,500if single or head-of-household, $62,550 if married filing jointly orqualifying widow(er)) less 25% of the amount by which alternateminimum taxable income on line 28 exceeds a threshold ($75,000 ifmarried filing separately, $112,500 if single or head-of-household,$150,000 if married filing jointly or qualifying widow(er)). However,if the answer to the preceding question is Yes, the IRS’s ExemptionWorksheet--line 29 (for computing a minor child's AMT exemption)is used instead, which can result in a lower amount than normal.

30 Subtract line 29 from line 28. (auto-calc) As indicated, but no lessthan zero

Information for Part III calculations. Because of the complexities of capitalgains taxes, the following information is required before the amount for line


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31 can be computed. If these numbers show that Part III is required, it isautomatically completed for you and the result is used for line 31. The fol-lowing set of lines are relevant to Form 6251 only if you had net long-termcapital gains such that Schedule D is used to compute the tax at line 44 ofForm 1040. If no Schedule D has been created for this return, all results onthese lines will be zero. Several lines from Schedule D and the Schedule DTax Worksheet are relevant here, but you may have to make an adjustmentfor purposes of the AMT. You may have an adjustment if the basis of prop-erty sold is different under the AMT, or any carryover from 2005 is different.If so, you must complete Schedule D using the amounts proper for the AMTso that you can determine the adjustments to make here. For each of theSchedule D amounts there are 3 lines below: (1) the auto-calc amount fromSchedule D of the current return, (2) your entry for an adjustment to reflectany difference when Schedule D is refigured for the AMT, (3) the auto-calcSchedule D amount refigured for the AMT:

Qualified dividends on Form 1040, line 9b. (auto-calc) Taken from Form1040 as indicated, no adjustment is necessary for the AMT.

Lesser of Schedule D line 15 or 16. (auto-calc) Taken from ScheduleD as indicated, this is the net long-term capital gain on Schedule D.

Adjustment if refigured for AMT. Enter any adjustment required if netlong-term capital gains are treated differently for AMT purposesthan on the original Schedule D.

Schedule D line 15 or 16 as refigured. (auto-calc) Computed as theamount on Schedule D plus the above adjustment.

Unrecaptured sec 1250 gain for Schedule D, line 19. (auto-calc)Taken from Schedule D as indicated, this is the unrecaptured sec-tion 1250 gain that is taxed at no more than 25%.

Adjustment if refigured for AMT. Enter any adjustment required if anysale of section 1250 property is treated differently for AMT pur-poses than it is on the unadjusted Schedule D.

Schedule D, line 19 as refigured. (auto-calc) Computed as the amounton Schedule D plus the above adjustment.

Part III required for line 31 calculation? (auto-calc) Answered Yes if there arequalified dividends (Form 1040, line 9b) or there is a net gain for Schedule Dline 15 or 16 as refigured.

If Yes and the return has no Schedule D, itemize here. (Road Map line, sup-ported by Schedule D.) You will create a Schedule D for the return by itemiz-ing at this line so that the unadjusted amounts for this form can be deter-mined. Amounts from the Schedule D Tax Worksheet may need to be ad-justed for the AMT in the following lines.

Line 10 of Schedule D Tax Worksheet. (auto-calc) Taken from thecurrent Schedule D Tax Worksheet, as indicated.

Adjustment if refigured for AMT. Enter any adjustment required forthe AMT.

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Line 10 of Schedule D Tax Worksheet as refigured. (auto-calc) Com-puted as the amount on the current Schedule D Tax Worksheet plusthe above adjustment.

Line 13 of Schedule D Tax Worksheet. (auto-calc) Taken from thecurrent Schedule D Tax Worksheet, as indicated.

Adjustment if refigured for AMT. Enter any adjustment required forthe AMT.

Line 13 of Schedule D Tax Worksheet as refigured. (auto-calc) Com-puted as the amount on the current Schedule D Tax Worksheet plusthe above adjustment.

Part II continued (lines 31 through 35). Once the above Schedule D amountshave been defined, line 31 can be computed, as follows:

31 Usually, multiply line 30 by 26%. (auto-calc) The computation of taxis much more complex than in the past because of the capital gainstax. The tax is figured in one of the following three ways:• If the answer to “Part III required for line 31 calculation” is NO

and line 30 is $175,000 or less ($87,500 or less if married filingseparately), then line 31 is computed as 26% of line 30.

• If the answer to “Part III required for line 31 calculation” is NOand line 30 is more than $175,000 ($87,500 if married filingseparately), then line 31 is computed as 28% of line 30 less$3,500 ($1,750 if married filing separately).

• If the answer to “Part III required for line 31 calculation” is YES,line 31 is figured in Part III of this form using the refiguredamounts for Schedule D.

32 Alternative minimum tax foreign tax credit. This entry is NOT gener-ally the same as line 45 of Form 1040. You must manually prepareForm 1116 (built into the software at the Standard and PremiumLevels) in a different manner from that used to compute line 45 ofForm 1040. See the IRS instructions for Form 6251 for details.

33 Tentative minimum tax. (auto-calc) Computed as line 31 less line 32,this result is used in figuring limitations on Form 3800.

Tax on Form 1040, line 44. (auto-calc) This is the regular tax beforecredits, taken from Form 1040 as indicated.

Is this tax from Schedule J. (auto-calc) If the tax on Form 1040, line44, was figured using Schedule J, the amount for line 34 of Form6251 is refigured, below.

If Yes, line 44 refigured. (auto-calc) Taken from the line below line 4of Schedule J when the preceding answer Yes; otherwise, zero. Thetax that appears here is the regular tax that would be computed forForm 1040 line 44 if Schedule J were not used to compute the tax.

Tax from Form 4972. (auto-calc) Taken from the Form 4972 part ofline 44 of form 1040.

Foreign tax credit from Form 1040. (auto-calc) Taken from line 47 ofForm 1040. (Note that you no longer have to refigure this tax creditfor returns that use Schedule J.)


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34 Tax from Form 1040, as adjusted. (auto-calc) Computed Form 1040line 44 less the part from Form 4972, or the refigured amount forForm 1040 line 44 from Schedule J, less any foreign tax credit,above.

35 ALTERNATIVE MINIMUM TAX. (auto-calc) Computed as line 33 lessline 34, but no less than zero.


PART III, TAX COMPUTATION USING MAXIMUM CAPITAL GAINS RATES. Ifthe return includes net long-term capital gains on Schedule D (as refigured forthe AMT) or qualified dividends on Form 1040 line 9b, the tax computationfor Form 6251 may involve the capital gains tax, and the computation of line31 of Form 6251 must be computed in this part of the form. The computa-tion is complex because there are several different rates involved dependingon taxable income and the classification of the transaction. This part of Form6251 is fully automatic. The result at line 55 is used for line 31 of Form6251 in place of the simpler calculations.


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Form 6252

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Form 6252 / Installment Sale IncomeWho is it for? This form is used to report the sale of qualifying property forwhich you did not receive full payment in the year of sale. By filing the formyou defer taxation on some of the gain to a later year. You qualify for the in-stallment method by meeting two requirements:

A At least one payment from the sale is received in a tax year AFTERthe year of sale.

B The property sold or disposed of is either personal property that is notconsidered inventory or real property.

If you meet these requirements you may elect to use the installment methodby filing this form. If you do not make the election you must be sure to reportthe gain on Form 4797 or Schedule D, whichever applies. Form 6252 is ac-cessible through the Road Map above lines 4 and 11 of Schedule D, and atlines 4, 10, and 15 of Form 4797.

How to handle more than five sales. Five copies of Form 6252 are built intothe software for reporting up to five separate installment sales. If you havemore than five to report, use the following procedure:

Step 1. Remove all copies of Form 6252 attached to this return usingthe file manager's REMOVE function detailed in Chapter 9.

Step 2. Prepare ALL copies of Form 6252 separately from this return bypreparing them for dummy returns with up to five Forms 6252each.

Step 3. Enter the totals from all copies of Form 6252 prepared for thedummy returns on the lines of Schedule D and Form 4797 that arenoted in the section titled "Posting of results from Form 6252" afterthe details for line 37, below.

Step 1 is critical because any entries you make on Schedules D and Form4797 in Step 3 will be overridden by any remaining Form 6252 upon the finalrecalculation of the return.

TYPE OF PROPERTY. The first few entries describe the property to the soft-ware so that it can properly automate the form.

Copy number (1 through 5). (auto-calc) The copy you chose is displayedhere. Five copies are built into the software. A separate copy ofForm 6252 must be prepared for each separate sale for which youelect the installment method.

Main home? If Yes, the remaining entries in this section are ignored andyou are allowed to enter the excluded gain on line 15. (See our de-tails for Schedule D for more information on the allowed exclusion,which can be as high as $500,000 for married taxpayers and$250,000 for all others.)

Qualified small business stock (sec. 1202)? Certain sales of small busi-ness stock are eligible for an exclusion of up to 50% of their gain.See our details for Schedule D for detailed qualifications.


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Collectibles gain? If Yes, the gain is ineligible for the lowest tax rateson capital gains, and is instead subject to the 28% rate rules.

Business property? Answer Yes for property used in your trade orbusiness. If Yes, the results of this form are posted to Form 4797.

Investment property? If you answered Yes to this or the precedingquestion, be sure to answer the below participation questions aswell so that any gains or losses are properly handled under the pas-sive loss rules.

Gain is for Form 4797? Automatically Yes if you answered Yes to“Business property?” or you have identified a gain in Part III of Form4797 as destined for this copy of Form 6252. Automatically No ifyou answered Yes to the main home, small business stock, or col-lectibles question. Otherwise, answer Yes yourself for sales thatmust be reported on Form 4797 instead of Schedule D.

Gain is for Schedule D. (auto-calc) Automatically the opposite of thepreceding answer.

Material participant? Automatically Yes if you answered Yes to themain home, small business stock, or collectibles question. Other-wise, see our instructions for Form 8582 to determine whether youcan answer Yes. If not, any gain reported this year will be used onForm 8582 to offset passive losses. CAUTION: You must answerNo for ALL sales of rental real estate and you must answer Yes forALL sales of portfolio assets, regardless of the level of participation.

Significant participant? If you answered No above, you must also an-swer this question. See our instructions for Form 8582 to determinewhether a Yes answer is appropriate here.

Active rental real estate? Answer Yes if the property is rental real es-tate and you have significantly participated in making managementdecisions or arranging for others to provide needed services to rent-ers. This answer controls to which section of Form 8582 any cur-rent-year gain will be posted.

GENERAL INFORMATION. The next few entries describe the sale to the IRS.1 Description of Property. Describe in 35 characters or less.2a Date acquired. Enter date acquired here in the standard mm/dd/yy

format, or, if the property is inherited, enter INHERITED.2b Date sold. Enter the date sold here in the same mm/dd/yy format.

Sold in the current tax year? (auto-calc) Automatically Yes if yourentry for “Date sold” (line 2b) lies in the current tax year. Other-wise, No.

Held more than 5 years? (auto-calc) Automatically Yes if your dateentry for “Date sold” is more than five years after “Date acquired.”

Exception to long-term test? You should answer Yes here only if theautomatic computation for the next line is improper because of aspecial exception. For example, the sale of business stock and busi-ness livestock follow different rules, and the holding period to qual-ify as long-term is two years rather than one year for cattle and

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Form 6252

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horses used as livestock in a business. Do not answer Yes for in-herited property, because, if you properly entered INHERITED on line2a, the software will determine that the property is a long-termholding, which is appropriate for inherited property no matter whenacquired.

Treated as LONG term. (auto-calc) Normally Yes if line 2b is morethan one year later than line 2a, or INHERITED was entered on line2a, but reversed if your answer to the preceding question is Yes.

% of gain to exclude per sec. 1202. You can make an entry here onlyif you answered Yes to the qualified business stock question, yourentry for line 2b is at least 5 years later than your entry for line 2a,and the date on line 2a is 8/11/93 or later. You are then qualifiedfor an exclusion of as much as 50% of the total gain on the sale.You may be qualified for as much as 60% for empowerment zonebusiness stock if acquired after December 21, 2000. See IRS In-structions for Schedule D for more information.

% of gain subject to 28% rule? (auto-calc) There are now only twosituations where the 28% rules apply: collectibles gain and gain onthe sale of sec. 1202 stock to the extent of the exclusion taken.Therefore, if you answered Yes to “Qualified small business stock(sec. 1202),” your preceding entry appears here. If you answeredYes to “Collectibles gain,” 100% appears here. Otherwise, theamount for this line is zero.

3 Sold to related party after May 14, 1980? If you answer Yes, youmust complete Part III for the first three years of the installment pe-riod (including the year of sale) and any year in which you receiveda payment.

4 If 3 is yes, was the property a marketable security? If you answerYes, you must complete Part III of this form EVERY year of the in-stallment period, whether a payment was received or not.

PART I, GROSS PROFIT AND CONTRACT PRICE. This part should be com-pleted ONLY for the tax year of the sale:

5 Selling price including debt. Enter the total amount you will receive,including cash, face amount of the installment obligation, and fairmarket value of any other property or debt, including mortgages andother indebtedness.

6 Mortgage and other debt assumed. Enter only the amount of mort-gages or other indebtedness that the buyer assumes from the selleror takes the property subject to.

7 Subtract line 6 from line 5. (auto-calc) As indicated.8 Cost or other basis. Enter the original cost plus buying expenses plus

improvements less previously allowed casualty losses and credits forelectric vehicles, diesel-powered highway vehicles, enhanced oil re-covery, or disabled access.

9 Depreciation allowable. Enter all depreciation or amortization allowedor allowable from date of purchase until date of sale. Include any


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deduction you took under section 179 and add back any downwardbasis adjustment you made for investment tax credit. But subtractout any section 179 or 280F recapture that you had to include inincome in any prior year.

10 Adjusted basis. (auto-calc) Line 8 less line 9.11 Commission and other expenses of sale. Enter expenses incurred in

selling the property, including sales commissions, advertising ex-penses, and legal fees.

12 Income recapture from Part III of Form 4797. (auto-calc) Amountsyou identified in Part III of Form 4797 for line 12 of this copy ofForm 6252 are posted here (for Section 1245 and 1250 property).

13 Add lines 10, 11, and 12. (auto-calc) As indicated.14 Subtract line 13 from line 5. (auto-calc) Computed as indicated. If

zero or less, there is no gain to report and you should not file Form6252. Instead, report the entire sale on Form 4797 or Schedule D.

Section 1202 exclusion. (auto-calc) Computed as line 14 times thepercentage shown above line 3 as the percentage to exclude undersec. 1202. (This line applies only to qualified small business stock.)

15 If main home, excluded gain. If you answered Yes to the “Mainhome?” question, your entry is accepted here. Otherwise, the pre-ceding sec. 1202 amount is used here and “Sec 1202 excln” isprinted beside line 15 on the official printout for the IRS.

16 GROSS PROFIT. (auto-calc) Line 14 less line 15.17 Subtract line 13 from line 6. (auto-calc) Line 6 less line 13, but no

less than zero.18 CONTRACT PRICE. (auto-calc) Line 7 plus line 17.

PART II, INSTALLMENT SALE INCOME. This part must be completed for theyear of sale AND any year in which a payment is received.

Gross profit percentage. (auto-calc line if sold in current tax year.) Ifthis form is prepared for property sold this year, this line is com-puted as 100% times line 16 divided by line 18; otherwise youmust enter the percentage (from 0 to 100.0) yourself based on theForm 6252 for the year of sale.

19 Gross profit ratio. (auto-calc) Gross profit percentage expressed as aratio (0 to 1.0). Even though the IRS labels this line as a percent-age, all of the IRS's published examples show it as a decimal.Therefore, the decimal representation is used for the printout ofForm 6252.

20 For year of sale only: line 17. (auto-calc) Automatically equal to line17 for a sale in the current tax year.

21 Payments received during year. Include cash and the fair marketvalue of property received, reflecting all principal payments but notstated or unstated interest. Before October 23, 2004, a note orother debt was considered a payment (and therefore not eligible forinstallment sale treatment) if it was payable on demand or readilytradable and issued by a corporation or governmental entity. After

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October 22, 2004, a note or other debt is considered a payment(and therefore not eligible for installment sale treatment) if it is pay-able on demand or readily tradable whether or not issued by a cor-poration or governmental entity. Enter here any such amount con-sidered a payment.

22 Add lines 20 and 21. (auto-calc) Computed as indicated.23 Payments received in prior years. Enter all amounts received prior to

the current tax year, including cash and the fair market value ofproperty received, reflecting all principal payments but not stated orunstated interest.

24 INSTALLMENT SALE INCOME. (auto-calc) Computed as line 22times the percentage on line 19.

Amount from Form 4797 for line 25. (auto-calc) Amounts you identi-fied in Part III of Form 4797 for line 25 of this copy of Form 6252are posted here (for Section 1252, 1254, and 1255 property).

Prior-year recapture carryover. Enter here the amount by which lastyear's recapture (line 25 of last year's Form 6252) was limited bylast year's installment sale income (line 24 of last year's Form6252).

25 Part of line 24 that is recaptured as ordinary income. (auto-calc lineif sold in current tax year.) If in the year of sale, this line is thesmaller of line 24 and the amount from Form 4797, above. If afterthe year of sale, it is the smaller of line 24 and the preceding car-ryover.

Carryover to Part III or next year. (auto-calc) This is the amount bywhich this year's recapture exceeds line 24, and is therefore carriedover for use in Part III line 36, if applicable, or next year's line 25.

26 Subtract line 25 from line 24. (auto-calc) Computed as indicated. Thisresult is posted to Schedule D or Form 4797, depending on youranswer to “Gain is for 4797?” as explained in “Posting of resultsfrom Form 6252” at the end of these details for Form 6252.

PART III, RELATED PARTY INSTALLMENT SALE INCOME. This part is appli-cable only if your answer to Question 3 on this form was Yes. (Do NOT com-plete this part for the year the LAST installment payment is received.)

27 Name of related party. Identify the party in 35 characters or less.Address of related party. Supply the street address, city, state, ZIPcode in 35 characters or less, using a supporting statement for thisline if you need more room.

Taxpayer ID number of related party. Enter the number in the SSNor EIN format, whichever applies.

28 Did related party resell or dispose of property during this tax year?Enter Yes if applicable.

29 If 28 is Yes, answer Yes to any following condition that applies. Ifthe answer to line 28 is Yes, you must answer the following ques-tions. If you answered Yes to line 28 but cannot answer Yes to at


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least one of the following five questions, you MUST complete therest of this form.

a Second disposition was more than two years after the first. Youcan answer Yes ONLY if the property is other than marketable secu-rities.If so, enter date of disposition. Enter the date (in the standardmonth/day/year format) ONLY if you answered Yes to the precedingquestion.

b First disposition was sale or exchange of stock to the issuing cor-poration? Answer Yes if applicable.

c Second disposition was an involuntary conversion? Answer YesONLY if the threat of conversion occurred after the first disposition.

d Second disposition occurred after death of original seller orbuyer? Answer Yes if applicable.

e Tax avoidance was not a principal purpose for either disposition?Answer Yes ONLY if you can establish to the satisfaction of the IRSthat tax avoidance was not a principal purpose for either disposition.Explain a Yes answer in a supporting statement for this line.

You need to complete the remaining lines only if your answer at line 28 isYes and you qualify for none of the preceding five exceptions.

30 Selling price of property sold by related party. Enter the selling priceless the cost of improvements made by the related person while therelated person held the property.

31 Contract price for year of first sale. (auto-calc line if sold in currenttax year.) Equal to line 18 if sold this year. Otherwise, enter theamount yourself based on the Form 6252 for the year of sale.

32 Smaller of line 30 or 31. (auto-calc) As indicated.Amount for line 33 not in lines 22 and 23. If you completed Part II ofthis form, the amount on line 33 is automatically the sum of lines22 and 23. But if you did not have to complete Part II, enter herethe FMV of property you received before 2006 from the sale, in-cluding allocable installment income and any other deemed pay-ments from prior years, but excluding interest whether stated ornot.

33 Total payments received by end of this tax year. (auto-calc) Thepreceding entry plus line 22 and line 23.

34 Subtract line 33 from line 32. (auto-calc) As indicated.35 Multiply line 34 by percentage on line 19. (auto-calc) Computed as

indicated.Part of line 35 to be recaptured as ordinary income. (auto-calc) Ifsale in current year, the recapture from Form 4797 for line 25 thatis not included in line 25, above, appears here.

Prior-year recapture carryover. Enter here the amount by which lastyear's recapture (line 36 of last year's Form 6252) was limited bylast year's installment sale income (line 35 of last year's Form6252).

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36 Part of line 35 that is recaptured as ordinary income. (auto-calc lineif sold in current tax year.) Taken as the smaller of line 35 and eitherthe amount from Form 4797 for line 25 that is NOT included in line25 if the year of sale, or the prior-year carryover if not.

Carryover to next year. (auto-calc) This is the amount by which thisyear's recapture exceeds line 35, and is therefore carried over forconsideration in next year's line 36.

37 Subtract line 36 from line 35. (auto-calc) As indicated. This resultmay be posted to either Schedule D or Form 4797. See “Post of re-sults from Form 6252” on the next page.

SUMMARY AND ALLOCATION. The results are automatically transferred tothe appropriate forms and lines based on the answers in the first two screensof this form.

Passive activity gains for Form 8582. Current-year gains are posted to Form8582 to reduce any passive losses in accordance with your answers to thematerial participation, significant participation, and active rental real estatequestions:

Gain for Form 8582 line 1a. (auto-calc) If the property is either businessor investment property, and is also active rental real estate, com-puted as the sum of all gains and recapture to be reported this year(lines 25, 26, 35, and 36). Otherwise, zero.

Gain for Form 8582 line 3a. (auto-calc) If the gain is either business orinvestment property, the property is not active rental real estate,you are not a material participant, and either you are not a signifi-cant participant or the overall net significant participation gain forthe return is zero, computed as the sum of all gains and recaptureto be reported this year (lines 25, 26, 35, and 36). Otherwise, zero.

Significant participation net for Form 8582. (auto-calc) If the gain is ei-ther business or investment property, the property is not activerental real estate, you are not a material participant, but you are asignificant participant, computed as the sum of all gains and recap-ture to be reported this year (lines 25, 26, 35, and 36). Otherwise,zero. This amount is used in Form 8582 to help determine theoverall net significant participation gain for the return.

Allocation to Schedule D and Form 4797. Ordinary and long-term gains are re-ported on either Schedule D or Form 4797.

Short-term gain for Schedule D, line 4(f), (auto-calc) If treated as ashort-term holding and the gain is for Schedule D, computed as thegain on lines 26 and 37. Otherwise, zero.

Long--term gain for Schedule D, line 11(f), (auto-calc) If treated as along-term holding and the gain is for Schedule D, computed as thegain on lines 26 and 37. Otherwise, zero.

Regular part of the above, (auto-calc) Computed as the part of thepreceding gain not subject to 28% rate rules.


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28% rate gain for Schedule D, (auto-calc) Computed as the precedingamount times the percentage shown above line 3 as the “% of gainsubject to 28% rule.” This result is used in Schedule D for tax cal-culations, using the highest capital gains rate for this gain.

Long--term gain for Form 4797, line 4(g), (auto-calc) If treated as a long-term holding and the gain is for Form 4797, computed as the gainon lines 26 and 37. Otherwise, zero.

Short-term gain for Form 4797, line 10, (auto-calc) If treated as a short-term holding and the gain is for Form 4797, computed as the gainon lines 26 and 37. Otherwise, zero.

Recapture for Form 4797, line 15, (auto-calc) Computed as the sum oflines 25 and 36.

Current-year Unrecaptured Sec. 1250 Gain. The amount of unrecaptured sec.1250 gain for the sale to be allocated to the current year is determined here.

From original sale (Form 4797, Part III). If the property reported on thisform was sold this year and the gain is section 1250 gain, you mustreport the gain in Part III of Form 4797, using a worksheet for line26. You must then allocate (on screen 8 of Form 4797) the unre-captured sec. 1250 gain computed on that worksheet to this copyof Form 6252. The amount will then appear here automatically. Onthe other hand, if you sold the property in a prior year, you must en-ter the unrecaptured section 1250 gain on the sale here.

Amount allocated to prior years. If the property was sold in a prioryear, enter here the part of the preceding total that you previouslyallocated in prior tax returns. (You are not allowed to make an entryhere if the property was sold in the current year.)

Remainder still unrecaptured. (auto-calc) Computed as the unrecap-tured section 1250 gain realized on the original sale less the partallocated to prior years. This is the amount that remains to be allo-cated to a return.

Amount allocated to this year. (auto-calc) Computed as the lesser ofthe preceding remainder and the previously described “Long-termgain for Form 4797, line 4.” That is, each year’s installment pay-ment is treated as unrecaptured section 1250 gain until this specialgain is all used up, in accordance with the IRS instructions for theirUnrecaptured Section 1250 Worksheet. (However, this was not al-ways the case in the past, as detailed in the IRS Instructions forSchedule D. Otherwise we could have computed the “Amount allo-cated to prior years” automatically.)

Carryover to next year. (auto-calc) Computed as the remainder still un-recaptured less the amount allocated to this year. This is theamount still remaining unrecaptured after the current return is filed.


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Forms 6478, 6765, 6781, and 8271

2-400

*Form 6478 / Credit for Alcohol Used as FuelPurpose. This form is used to claim credit for alcohol used as fuel. Three dif-ferent credits are integrated into this form: the alcohol mixture credit, the al-cohol credit, and the small ethanol producer credit. Form 6478 is accessiblethrough the Road Map at the 6478 line for line 55c of Form 1040.* Included in Premium Level software ONLY. This form is only built into thePremium Level version of Tax Preparer, fully integrated and automated likeother forms in the software. It is detailed in the separate Premium Level Sup-plement 2007.

*Form 6765 / Credit for Increasing ResearchPurpose. This form is used to claim credit for investment in technological re-search over and above what was invested in the prior year. Form 6765 is ac-cessible through the Road Map at 1d of Form 3800.* Included in Premium Level software ONLY. This form is only built into thePremium Level version of Tax Preparer, fully integrated and automated likeother forms in the software. It is detailed in the separate Premium Level Sup-plement 2007.

*Form 6781 / Gains and Losses from Section 1256 Con-tracts and StraddlesPurpose. This form is used to report gains and losses from individuals’ in-vestment in futures contracts and non-equity options, and from commoditydealers’ equity options and security contracts. Form 6781 is accessiblethrough the Road Map from the Form 6781 lines above lines 4 and 11 ofSchedule D.* Included in Premium Level software ONLY. This form is only built into thePremium Level version of Tax Preparer, fully integrated and automated likeother forms in the software. It is detailed in the separate Premium Level Sup-plement 2007.

*Form 8271 / Investor Reporting of Tax Shelter Registra-tion NumberPurpose. This form is used to report the registration number of any tax shel-ters for which you are reporting any transactions on your return for the year..For Form 1040 software, Form 8271 is accessible through the Road Mapabove line 27 in Part II of Schedule E.* Included in Premium Level software ONLY. This form is only built into thePremium Level version of Tax Preparer, and is detailed in the separate Pre-mium Level Supplement 2007.


Form 8283

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Form 8283 / Noncash Charitable ContributionsWho is it for? This form is used to report information that the IRS requireswhen your deduction for all noncash gifts on Schedule A exceeds $500. Theform is not computational, and has no results for Schedule A. Rather, it is aform to help the IRS in auditing noncash transactions and assessing the va-lidity of claims for charitable deductions. If you have questions about what isdeductible and how much detail you should provide on this form, see IRSPub. 526 (Charitable Contributions), IRS Pub. 561 (Determining the Value ofDonated Property), and the IRS instructions for Form 8283. Form 8283 isaccessible through the Road Map below line 16 of Schedule A.

SECTION A--Items for which you claimed a deduction of $5,000 or less. Also,publicly traded securities of any value. Report all smaller contributions here.Part I is supported by our Section A Donated Property Worksheet at line 1,which follows the format of the chart in Section A, Part I of Form 8283. PartII contains a series of questions for special items among the properties youlist. Since the screens for this form are quite explicit, there is no need for de-tail here. But we do recommend that you use a copy of the official form andits instructions for guidance.

SECTION B--APPRAISAL SUMMARY. Items for which you claimed a deductionof more than $5,000 per item or group (except publicly traded securities). Re-port all larger contributions here. The property in this section must usually besupported by a written appraisal, and the appraiser must sign a legal state-ment on this form. Part I is supported by our Section B Donated PropertyWorksheet at line 5, which follows the format of the chart in Section B, Part Iof Form 8283. Part II contains a statement that the taxpayer (donor) mustsign concerning items in Part I that have a value of $500 or less. Part III con-tains a statement that the appraiser must sign. And Part IV contains astatement that the donee must sign to acknowledge receipt of the property.


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Forms 8332, 8379, and 8396

2-402

*Form 8332 / Release of Claim to Exemption for Child ofDivorced or Separated ParentsPurpose. This form is used to justify a dependent exemption by a noncusto-dial parent (at line 6c of Form 1040). The noncustodial parent must file thisform, signed by the custodial parent, each and very year he or she claims theexemption. (The noncustodial parent who claims the exemption must stillmeet all other requirements for an exemption; only the custody requirement isexcepted by this signed release.) Form 8332 is accessible through the RoadMap below line 6d of our Form 1040.


*Form 8379 / Injured Spouse Claim and AllocationPurpose. This form is used by joint filers so that one of the filers can ensurethat his or her part of any refund is not applied to liabilities of the otherspouse. Liabilities that apply include past-due Federal debt, child support, ali-mony, or state income tax. Form 8379 is accessible only from the FormsMenu, and does not affect any results on the return.

* Included in Premium Level software ONLY. This form is only built into thePremium Level version of Tax Preparer, and detailed in the separate PremiumLevel Supplement 2007.

*Form 8396 / Mortgage Interest CreditPurpose. This form is used to figure a credit for mortgage interest for thosewho were issued a qualified Mortgage Credit Certificate (MCC) by their stateor local government agency. The certificate is issued to low-income home-buyers under a program to help them afford home ownership. The federalcredit is a form of mortgage subsidy, which gives the homebuyer a substan-tial credit for interest paid during the year. The credit is nominally the creditrate on the certificate (from 10% to 50%) times the interest paid for the taxyear. However, the credit is limited to $2,000 if the rate on the certificateexceeds 20%. (You are subject to a recapture of the credit when you sell thehome. The recapture is figured on Form 8828, which is also built into thesoftware.) Form 8396 is accessible through the Road Map at line 51a ofForm 1040 as well as our special line above line 10 of Schedule A.



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Form 8582 / Passive Activity Loss LimitationsPassive loss limitations. The passive loss limitations created by the Tax Re-form Act of 1986 apply to income and loss from a number of popular invest-ments, including rental property and limited partnerships. They prevent youfrom deducting losses from passive activities to the extent that they exceedgains from passive activities in the same year. You eventually get to deductthe unallowed losses, however, through carryforward to years with passivegains or reclassification as nonpassive losses in the year of sale.

Fully automatic for most liable taxpayers. This form is automatically gener-ated and completed upon final recalculation when any passive losses are re-ported on the return, unless you chose to block its auto-creation. This meansthat returns that have a Schedule C, D, E, F, or Form 4797 will have a Form8582 if ANY passive losses are claimed. Although the form is automatic, youwill have to access this form yourself to supply additional information on pas-sive activities reported on forms that are NOT built into the software.

Material vs. significant participation. You are required to classify your activi-ties on most income and loss worksheets throughout the return as passive ornonpassive. The instructions for making the determination, however, havenever been clear, and have changed in subtle ways over the years as the IRShas tried to clarify the rules in a number of temporary regulations. You canclassify certain activities as nonpassive activities only if you "materially par-ticipate" in the operation of the business. You generally qualify if you partici-pate more than 500 hours in the year, but you should refer to IRS Pub. 925(Passive Activity and At-Risk Rules) for details. If you cannot satisfy the re-quirements for material participation, you may fall under the rules for "signifi-cant participation." You are tentatively considered to be a significant partici-pant if you participated in the activity for more than 100 hours but no morethan 500 hours during the tax year. If the net of ALL significant participationactivities throughout the return taken together is a gain, no amounts fromthese activities should be used in Form 8582, so the benefit of offsettingpassive gains against passive losses from other activities is not available. Ifthe net is a loss, all amounts will be used in Form 8582, so the limitations onpassive losses apply. As a result, significant participation has all the limita-tions on losses that no participation has, but none of the benefits that allowpassive gains to offset losses from other passive activities. However, an es-cape clause introduced in 1988 makes this classification relatively rare inpractice: If the aggregate number of hours of participation for ALL significantparticipation activities on the return COMBINED is more than 500 hours, thenthe participation will be considered as material participation for ALL such ac-tivities rather than significant participation. See IRS Pub. 925 (Passive Activ-ity and At-Risk Rules) for further details and restrictions.

How unallowed losses are carried over to future years. The passive loss ruleseffectively block you from deducting passive losses that exceed passive gainsas they arise. They instead defer the deductions until passive gains are real-

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ized or you sell the property. The carryovers of unallowed losses to futureyears is automated by the software through its "translate" feature. But if youenter the carryovers yourself instead of using the "translate" feature, youmust make the entries on the forms to which they apply, NOT directly onForm 8582. (For example, you would enter prior unallowed loss for activerental real estate directly on Schedule E on the line labeled "Prior loss for8582 line 1c.") Form 8582 is accessible through the Road Map at the linesfor "loss unallowed in 2006" that appear on all forms and schedules that itsupports (including Schedules C, D, E, F, and Forms 4797 and 6252). HINT:Even though the software does not require you to complete any of the IRSWorksheets for Form 8582, you may want to keep a property-by-property re-cord of losses allowed and unallowed over the years by producing "QuickPrint" printouts of the various worksheets that the software provides in sup-port of Schedules D, E, Form 4797, etc., because this type of printout showsboth all your entries and the unallowed loss attributed to each property. Foran accurate record, however, you must produce the printouts only after thereturn is complete.

How unallowed losses are allowed when you sell. If your sale does not con-stitute an entire disposition of the property, the handling of the gains andlosses for the year is the same as if you had not sold any portion of the prop-erty. But if your sale does represent an entire disposition, the previously un-allowed losses are then allowed in one of two ways:

If the net of all gain and loss for the activity is an overall gain for theyear, all gains and losses retain their passive classification and youmust report them as you normally would. Accordingly, you reportunallowed losses on the forms and schedules from which theyarose, as "prior passive unallowed loss." The losses will be allowedthrough Form 8582, however, because they are offset by passivegains from the same activity.

If the net of all gain and loss for the activity is an overall loss for theyear, all gains and losses are reclassified as nonpassive and youmust report all gains and losses as nonpassive gains and losses onthe same forms and schedules as you normally would use. Thelosses will be allowed without involving Form 8582 because theyare nonpassive. However, you must generally change several entriesto effect the reclassification, as follows. Remove any remaining un-allowed losses for the activity from the "prior unallowed loss" lineson the forms and schedules themselves. Reenter those losses asnonpassive losses on the worksheets that support them. Identifyamounts on all worksheets for the activity as nonpassive, eitherthrough changing the answer to the relevant question or actuallymoving entries to different lines.

For Gain/Loss Worksheets that support Schedule D and Form 4797,you must remove this activity's contribution to the "prior unal-lowed" entries on those forms, then return to the worksheets them-selves and change your entry for "Entire interest sold" to Yes.


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For Rental/Royalty Worksheets for Part I of Schedule E, you must re-move this activity's contribution to the "prior unallowed" entriesabove line 23 of Schedule E, then return to the worksheets them-selves and change your entry for "Qualifies as nonpassive" to Yesand move the amounts on the "prior unallowed" line to line 18a, b,c, or d, identified as "Sale (prior loss)."

For the Partnership and S Corps Worksheets for Part II of Schedule E,you must remove this activity's contribution to the "prior unal-lowed" entries between lines 28a and 28b of Schedule E, then re-turn to the worksheets themselves and move your entries for"PASSIVE loss on K-1" and "PRIOR-year unallowed loss" to line i("NONPASSIVE loss"), and move your entries for line h ("PASSIVEincome") to line k (NONPASSIVE income).

For the Estates and Trusts Worksheets for Part III of Schedule E, youmust remove this activity's contribution to the "prior unallowed" en-tries between lines 33a and 33b of Schedule E, then return to theworksheets themselves and move your entries for "PASSIVE loss onK-1" and "PRIOR-year unallowed loss" to line e ("NONPASSIVEloss"), and move your entries for line d ("PASSIVE income") to line f(NONPASSIVE income).

SIGNIFICANT PARTICIPATION SUMMARY. The appropriate handling of sig-nificant participation activities cannot be determined until ALL such activitiesin the return have been reported, because the handling depends on the resultfor the final question in this section: "Net gain for ALL significant participationactivities?" If the answer is Yes, then all significant participation activitiesmust be reported as nonpassive throughout the return. But if the answer isNo, all significant participation activities must be reported as passive, and thelosses will therefore be limited by the passive loss rules.

Significant participation net on Schedules C, D, E, and F, and Forms4797, 4835, and 6252. (auto-calc lines) Posted automatically from theindicated forms and schedules.

Other significant participation net. Enter any significant participationnet for forms NOT built into the software and for Part III of Form4797 (for which the significant participation rules are not auto-mated).

Significant participation net on entire return. (auto-calc) Computed asthe sum of the above eight lines.

Net gain for ALL significant participation activities? (auto-calc) Auto-matically Yes unless the above result is a loss.

The answer to the last question is posted to all of the above forms andschedules so that the significant participation amounts are properly handled,including their posting back to Form 8582 as passive activity amounts whenappropriate.

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ACTIVE RENTAL REAL ESTATE. Entries from forms and schedules that arebuilt into the software are posted here automatically, but you must enter anyapplicable gains and losses from other forms here yourself:

Transfers from Schedule E, Form, Form 4835, and Form 6252 for lines1a, 1b, and 1c. (auto-calc lines) Gains and losses and passive losscarryovers throughout the return identified as related to active rentalreal estate are posted to these lines.

Other Active Rental Real Estate. (Supported by the Passive ActivityWorksheet, Figure 2-35.) The first two lines are supported by thesame set of worksheets, described next. You must enter any car-ryover of prior unallowed loss for this property on the third line aswell as the worksheet.

The automatic entries are summed with the worksheet entries and carried tolines 1a through 1d of Part I of this form (described later).

PASSIVE ACTIVITIES. All other passive activities are reported here. Most ofthe entries are automatic, from numerous sources, but you must enter your-self any gains and losses and prior unallowed loss from passive activities onforms not built into this software:

Transfers from Schedules C, D, E, and F, and Forms 4797, 4835, and6252 for lines 3a, 3b, 3c. (auto-calc lines) Several screens full of pas-sive amounts appear here from the forms and schedules that arebuilt into the software.

Other Passive Activities. (Supported by the Passive Activity Worksheet,Figure 2-35.) The first two lines are supported by the same set ofworksheets, described next. You must enter any carryover of priorunallowed loss for this property on the third line as well as theworksheet.

The automatic entries are summed with the above manual entries and carriedto lines 3a through 3d of Part I of this form.

Passive ActivityWorksheet, Figure 2-35. Passive ActivityWorksheet. Thisworksheet is usedONLY for reportingpassive gains andlosses that are NOTreported in the formsbuilt into this soft-ware:

Name of activity. Identify the activity in 25 characters or less.Form or Schedule to Report On. Identify the form to which this entry

applies. (Keep in mind that this identification is for record-keepingonly, and does not cause any automatic transfers.)

PASSIVE ACTIVITY WORKSHEETPASSIVE ACTIVITY WORKSHEETPASSIVE ACTIVITY WORKSHEETPASSIVE ACTIVITY WORKSHEET Name of acti Name of acti Name of acti Name of activvvvity.....ity.....ity.....ity..... Form or Sched to R Form or Sched to R Form or Sched to R Form or Sched to Reeeeport Onport Onport Onport On Net income or loss... 0 Net income or loss... 0 Net income or loss... 0 Net income or loss... 0 a. Gain................. a. Gain................. a. Gain................. a. Gain.................▒ 0▒ 0▒ 0▒ 0 b. Loss................. b. Loss................. b. Loss................. b. Loss.................▒ 0▒ 0▒ 0▒ 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 PRIOR-year unallowed loss 0 Net elsewhere for same activty Net elsewhere for same activty Net elsewhere for same activty Net elsewhere for same activty Total loss subj. to lim Total loss subj. to lim Total loss subj. to lim Total loss subj. to limiiiitationtationtationtation▒ 0▒ 0▒ 0▒ 0 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582 Unallowed THIS yr on 8582▒ 0▒ 0▒ 0▒ 0

Figure 2-35. Passive Activity Worksheet


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Net income or loss. Enter income as a positive and loss as a negative.Enter here only amounts for the current year's transactions. Unusedcarryovers from prior years are NOT entered on the worksheet.

a Gain. (auto-calc) The same as the above entry for net income whenthat entry is positive; otherwise, zero.

b Loss. (auto-calc) The above entry for net income (expressed as a posi-tive number) when that entry is negative; otherwise, zero.

PRIOR-year unallowed loss. Enter the unallowed loss last year for thisactivity. If more than one activity is reported directly on these Form8582 worksheets, you must allocate that total unallowed lossamong all activities in these worksheets.

Net elsewhere for the same activity. If other transactions for the samepassive activity appear elsewhere on the return, you must enter thenet gain or loss from all such other transactions here in order for theallocation of unallowed losses among the various worksheets to beperformed in strict conformance with the IRS rules. If the sum ofthe net on this line plus the net shown above for this particulartransaction is an overall gain, all losses for this worksheet are al-lowed in full (and more of the total disallowance on Form 8582 isallocated to other passive activities).

Total loss subject to limitation. (auto-calc) If the sum of the net on thisworksheet (before disallowances) plus the net elsewhere for thesame activity is an overall gain, or the net on this worksheet is not aloss, the result here is zero. Otherwise the net loss on this work-sheet (before disallowances) appears here as a positive amount, foruse in Form 8582 to allocate unallowed losses among activities.

Unallowed THIS year on Form 8582. (auto-calc lines) Computed usingthe math on the IRS worksheets without requiring you to completeany IRS worksheets yourself, this result is assured of full accuracyONLY when you view the worksheet after the final recalculation ofthe return.

CAUTION: Because the forms to which these worksheets relate are not builtinto the software, you must reflect the amounts "Unallowed THIS year" onthose forms yourself.

PART I, 2006 PASSIVE ACTIVITY LOSSES. The entries from all of the preced-ing sections are consolidated here into two sections.

Rental Real Estate (Active). Gains and losses for rental real estate in whichyou actively participated are summarized first:

1a Activities with net income. (auto-calc) The sum of all gains for line1a from all sources.

1b Activities with net loss. (auto-calc) The sum of all losses for line 1bfrom all sources.

1c Prior year unallowed losses. (auto-calc) The sum of all prior unal-lowed losses for line 1c from all sources.

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1c Combine lines 1a, 1b, and 1c. (auto-calc) Computed as the gain online 1a less the losses on lines 1b and 1c.

Commercial Revitalization Deductions From Rental Real Estate Activities.Deductions in this category are exempt from the AGI phaseout of the$25,000 special allowance for Rental Real Estate. Enter qualifying deductionsas follows:

2a Commercial revitalization deductions. Enter the total of all current-year deductions that are qualified.

2b Prior year unallowed commercial revitalization deductions. Enterthe deductions unallowed in the prior year.

2c Add lines 2a and 3b. (auto-calc) Computed as indicated.

Other Passive Activities. Gains and losses for all other passive activities aresummarized next:

3a Activities with net income. (auto-calc) The sum of all gains for line3a from all sources.

3b Activities with net loss. (auto-calc) The sum of all losses for line 3bfrom all sources.

3c Prior year unallowed losses. (auto-calc) The sum of all prior unal-lowed losses for line 3c from all sources.

3d Combine lines 3a, 3b, and 3c. (auto-calc) Computed as the gain online 3a less the losses on lines 3b and 3c.

4 Combine lines 1d, 2c, and 3d. (auto-calc) Computed as indicated, this is thecombined net gain or loss from all passive activities throughout the return.

PART II, SPECIAL ALLOWANCE FOR RENTAL REAL ESTATE. A special excep-tion to the passive loss rules is provided for rental real estate in which youactively participate. However, married taxpayers filing separately who livedtogether anytime during the year are NOT eligible. (Be sure to properly an-swer the “Lived apart?” question in the first screen of our Form 1040 forproper treatment if married filing separately.) Up to $25,000 of rental lossesare exempt from the limitations, but the amount exempted decreases as AGIincreases, as detailed below:

5 Smaller of loss on line 1d or loss on line 4. (auto-calc) As indicated.6 Enter $150,000 (unless married filing separately). (auto-calc)

$150,000 for most filers, but $75,000 for MFS filers if answeredYes to "Lived apart from spouse all year" on Form 1040, and zerootherwise.

Modified AGI as computed. (auto-calc) Computed from Form 1040as AGI (line 38) with the following modifications:plus passive net losses included in the above AGI,less taxable social security benefits (Form 1040, line 20b),plus deduction for half of self-employment tax (Form 1040, line 27),plus your and spouse's IRA deductions (Form 1040, line 32),plus any exclusion of interest for Series EE U.S. Savings Bonds(Schedule B, line 3),plus exclusion of adoption benefits (Form 8829, line 30),


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plus student loan interest deduction (Form 1040, line 33),plus tuition and fees deduction (included in Form 1040, line 35),plus domestic production activities deduction (included in Form1040, line 35).

Other adjustment to AGI. Enter any other adjustments described inthe IRS instructions, such as an overall loss from a publicly tradedpartnership (PTP), nonpassive real estate loss for real estate profes-sionals, and deductions for plans other than IRAs.

7 Modified adjusted gross income. (auto-calc) Computed as the modi-fied AGI as computed plus the above adjustment.

8 Subtract line 7 from line 6. (auto-calc) As indicated.9 Multiply line 8 by 50%. (auto-calc) Computed as half of line 7, but no

more than $25,000 for most taxpayers. For MFS filers the limit is$12,500 if you lived apart the entire year and zero otherwise.

10 Smaller of line 5 or line 9. (auto-calc) As indicated.The effect of the special allowance for most taxpayers is to exempt the first$25,000 of losses from the passive loss rule, subject to a reduction of theallowance to zero as income rises from $100,000 to $150,000. But the al-lowance is halved for MFS filers who lived apart the whole year, and NO al-lowance is allowed for MFS files who lived together anytime during the year.CAUTION: The software is unusually sophisticated in automating this form; ifyou think you need to override a calculation, it is probably because you areunaware of a subtlety of the law that the software takes into account.

PART III, SPECIAL ALLOWANCE FOR COMMERCIAL REVITALIZATIONDEDUCTIONS FROM RENTAL REAL ESTATE ACTIVITIES. Commercial revi-talization deductions are eligible for the same kind of allowance as given inPart II, but without the phaseout of the allowance as AGI increases. How-ever, it is integrated with Part II so that no more than $25,000 is allowed forthe two parts combined.

11 $25,000 reduced by line 10. (auto-calc) Computed as indicated formost filers, but the $25,000 figure is reduced to $12,500 for MFSfilers who answered Yes to "Lived apart from spouse all year" onForm 1040, and zero otherwise.

12 Enter the loss from line 4. (auto-calc) Taken from line 4 as indicated.13 Reduce line 12 by the amount on line 10. (auto-calc) Computed as

line 12 less line 10.14 Smallest of line 2c, line 11, or line 13. (auto-calc) As indicated.

PART IV, TOTAL LOSSES ALLOWED. This section is fully automatic, based onthe results in Parts I, II, and III.

15 Income on lines 1a and 3a. (auto-calc) If line 4 shows a net loss,then the income on lines 1a and 3a appears here, because thesegains offset a corresponding amount of losses.

16 TOTAL LOSSES ALLOWED from all passive activities for 2006. (auto-calc) If line 4 shows a loss, then the sum of lines 10, 14, and 15appears here. Otherwise all losses reported here appear (the sum of

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lines 1b, 1c, 2a, 2b, 3b, and 3c) because all losses are offset bygains and therefore allowed. (The IRS form states that this line isalways the sum of lines 10, 14, and 15, but that result would over-state the amount of losses claimed and allowed when gains exceedlosses.)

The result on line 16 is the amount of loss allowed for the year from all pas-sive activities combined.

Total of unallowed losses. (auto-calc) If line 4 is less than zero (that is,shows an overall passive loss throughout the return), then this line is com-puted by adding line 4 and line 15, setting it to zero if it is greater than zero,then entering the resulting loss here as a positive amount. This is the sum ofall unallowed amounts for 2006 that must be allocated among the variousforms and schedules that have passive activity losses, which is done in thenext section.

SUMMARY OF LOSS ALLOCATION. Losses that are unallowed because of thepassive loss limitations are not applied arbitrarily among your activities. TheIRS requires that you apply them in a particular pro rata manner, and has de-signed a set of worksheets to help you do this. The software, however, per-forms the allocations for you by implementing the worksheets internally. Youcan see how the allocation was applied by viewing this last section of Form8582 on the screen. All lines in this section are posted automatically to theproper forms and schedules except for the following:

Unallowed commercial revitalization deductions. (auto-calc) This is theamount of disallowance attributable to deductions you entered onlines 2a and 2b of Form 8582. You should use this disallowance todetermine the amount to enter on the appropriate form.

Unallowed elsewhere, active rental real estate. (auto-calc) This is theamount of disallowance attributable to activities for which you en-tered data directly on the Passive Activity Worksheets in the "OtherActive Rental Real Estate" section of Form 8582 yourself, and aretherefore destined for forms NOT built into the software.

Unallowed elsewhere, all others. (auto-calc) This is the amount of dis-allowance attributable to activities for which you entered data di-rectly on the Passive Activity Worksheets in the "Other Passive Ac-tivities" section of Form 8582 yourself, for forms not built into thesoftware.

CAUTION-W/S ERROR on return is. (auto-calc) Any remaining amounthere indicates that somewhere in the return the worksheets do notagree with the totals on Form 8582. The usual error is a failure toenter a prior unallowed loss on a worksheet. All prior unallowedlosses appearing on lines 1c and 3c of Form 8582 must be properlyallocated among all the worksheets in the return. This means thatyou must create worksheets yourself for any prior unallowed lossfor an activity with no current income or loss on the same form, sothat the sum of all prior unallowed losses on all worksheetsthroughout the return matches the totals on Form 8582.


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IRS WORKSHEETS 1 THROUGH 7. The IRS provides these worksheets to helpyou determine the proper allocation of unallowed losses among activities.However, Tax Preparer performs accurate allocations without the need forthese manually-prepared worksheets through its sophisticated mathematicalapproach to the passive activity regulations. Therefore, these worksheets aretotally unnecessary for an accurate return with this software unless you re-port the amounts on forms not built into the software or claim commercial re-vitalization deductions. In the past, the IRS did not require you to file theworksheets with your return, so the omission of the worksheets was not anissue. But now the IRS instructs you to file these worksheets with your re-turn. In order to help you satisfy this new requirement, we have built themanually-prepared worksheets into the software. You must complete them inorder and take note of the totals we transfer to the worksheet pages to guideyou in your efforts.

To omit or not to omit. You can control whether or not these worksheets areincluded with the printout or e-file output of the complete return through youranswer to the question “Omit worksheets from printouts?” which appears onscreen 10 above the access to Worksheet 1. Although the IRS now instructsyou to file these worksheets with your paper return, they are still consideredoptional for an e-file return.

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*Form 8586 / Low-Income Housing CreditPurpose. This form is used to claim credit for placing in service a new quali-fied low-income housing building. The credit is claimed over a 10-year period,amounting to as much as 70% of the building’s qualified basis over that time.(in current dollars). Form 8586 is accessible through the Road Map at line 1eof Form 3800.


*Form 8594 / Asset Acquisition Statement Under Section1060Purpose. This form is used to satisfy a reporting requirement when there is atransfer of a group of assets that make up a trade or business and the pur-chaser’s basis in such assets is determined wholly by the amount paid for theassets. In this context, a group of assets makes up a trade or business ifgoodwill or going concern value could attach to such assets. Form 8594must be filed by both the purchaser and the seller with their returns for theyear in which the sale occurred. It must also be filed in any subsequent yearin which there is a change in the purchaser’s cost of the assets or a changein the amount realized by the seller. Although Form 8594 is generally filedwith the tax return of the individuals or entities involved, it is not tied to anyform in the return and does not affect any calculations. It is therefore acces-sible only from the Forms Menu and not through the Road Map.



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Form 8606 / Nondeductible IRAsWho is it for? This form is REQUIRED if any of the following apply for 2006:! you made any nondeductible IRA contributions during 2006 (or during

2007 for 2006),! you received IRA distributions and have made nondeductible contribu-

tions in the past,! you converted any traditional IRAs to Roth IRAs,! you recharacterized any Roth IRAs or Roth IRA contributions, or! you received anpy distribution from a Roth IRA.In addition, it is to your benefit to complete Form 8606 even when it is notrequired in order to keep track of changes in basis, which you will need toknow when future distributions are received, and to see the limits on yourRoth IRA contributions. (Een if you are not required to file a Form 1040, youmay still have to file Form 8606 if you received any distributions during theyear.)

Automatically created for excess IRA contributions. Unless you chose toblock its auto-creation through the Control Form, Form 8606 is automaticallycreated for the relevant spouse based on entries on Form 1040 when:! A distribution was entered on line 15a and the age at year-end for the

corresponding spouse is under 60.5.! The distribution entered on line 15a exceeds the taxable amount shown

on line 15b.! The IRA contribution entered above line 32 is more than the allowed de-

duction included in the total shown at line 32.Form 5329, where penalties are figured on taxable amounts from Form 8606,is automatically created under the same conditions. (You must complete Form8606 before you complete Form 5329.) CAUTION: Even though this form isautomatically generated, you will have to access it to report the current valueand past basis of your IRA accounts. Form 8606 is accessible through theRoad Map at line 15b and several special access lines on Form 5329.

Relief for victims of Hurricanes Katrina, Rita, and Wilma. The Katrina Emer-gency Tax Relief Act of 2005 and Gulf Opportunity Zone Act of 2005 pro-vides special relief from taxation and penalties on withdrawals made after thehurricances. “Qualified hurricance distributions” are defined as distributionsmade after the relevant hurricane hit for victims whose main home was in theaffected disaster area on August 28, 2005 for Katrina, September 23 forRita, or October 23 for Wilma. Taxation on the distributions can be spreadover 3 years, and the 10% penalty on early withdrawals is waived. You willhave to file Form 8915, Qualified Hurricane Retirement Plan Distributions andRepayments (not built into the software) to receive the relief. See our latersection titled “SPECIAL HURRICANE INFORMATION” for information on theentries you must make on Form 8606 and Form 8915 in order for the propertaxable amount to be reflected in line 15b of Form 1040.

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IDENTIFYING INFORMATION. A separate Form 8606 is available for eachspouse.

Social security number for this copy. (auto-calc) The social security en-tered on Form 1040 for the spouse whose copy you chose whenyou entered Form 8606.

Is this spouse's copy (vs. you)? (auto-calc) This answer is also auto-matic based on your choice when you entered.

Are you Filing this Form by Itself? If you answer Yes, you must signand date this form before filing.

Home address (mailing). (auto-calc lines) If you answered Yes to thepreceding question, the street address, city, state, and ZIP code en-tered on Form 1040 appear here automatically. (Even though youmay not need to file Form 1040, you still must complete the Tax-payer Information and Filing Status sections so that information re-quired in the calculations of Form 8606 is available.)

Reconciliation of IRA distributions with Form 1040. The amount reported onForm 1040 line 15a is reconciled here with the amount to the used on Form8606.

IRA distributions on Form 1040 for THIS copy. (auto-calc) Taken fromline 15a of Form 1040 for the proper spouse, this amount is used inapplying limitations on line 1 of this form. (Each spouse's amounts arereported in the 1099-R Worksheets that support line 15a.)

ITEMIZE for any entries below. There are a number of special distribu-tions that must be reported on Form 1040 line 15a yet are not report-able on Form 8606. However, you must identify them to the IRS sothat they do not consider your Form 8606 to be inconsistent withyour Form 1040. You must therefore show all exclusions in the fol-lowing lines. For each of these exceptions you must report details andthe amount to be excluded in a supporting statement for the line. Theamounts will then be excluded from distributions for the purposes ofForm 8606 and the explanations will be printed with the return, cross-referenced on the official Form 8606 near the Part I title:Returned contributions in the above (itemize). If any contributionsyou made to an IRA in 2006 were returned to you (with any relatedearnings) by the due date (including extensions) of your return, thereturned contributions are treated as if they never made. Enter anysuch returned contributions that are included in Form 1040 line 15ain a supporting statement for this line, explaining the situation.

Recharacterizations. If you converted a traditional, SEP, or SIMPLEIRA to a Roth IRA in 2006, then later recharacterized any of it back,the part recharacterized back is treated as if it the original conver-sion and later recharacterization never occurred. Therefore, if Form1040 line 15a includes an amount for this recharacterization, youmust enter the amount transferred back to the Roth IRA in a sup-porting statement for this line, explaining the conversion and rechar-acterization.


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Distributions incident to divorce. The transfer of any or all of yourtraditional, SEP, or SIMPLE IRA to your spouse under a divorce orseparation agreement is not taxable to either of you. Therefore, ifForm 1040 line 15a include a distribution for such a transfer, youmust report this amount in a supporting statement for this line.

Other exclusions (except rollovers). Report any other allowed exclu-sions from amounts reported on Form 1040 line 15a in a supportingstatement for this line, including qualified charitable distributions de-scribed in the below shaded box. Be sure to include “qualified RothIRA distributions” as defined on page 2 of the IRS Instructions forForm 8606, but note that NO Roth IRA distributions received lessthan 5 years after you started a Roth IRA account are qualified. (Donot include rollovers because they are deducted later automatically.)

Net reportable IRA distributions. (auto-calc) Computed as the “IRA dis-tributions on Form 1040 for THIS copy” less the preceding exclusions,this is the net amount to be considered for Form 8606.

NEW: Qualified charitable distributions. Thanks to the Pension ProtectionAct of 2006, taxpayers of age 70½ and older are allowed to make a nontax-able transfer of up to $100,000 from their IRA to a qualified charity in 2006and 2007. Details will be provided in IRS Pub. 590 for 2006 returns (not yetreleased by the IRS when this manual was last revised). In the meantime, seeIRS instructions for lines 15a and 15b of Form 1040, Exception 3. If quali-fied, you must report any allowed exclusion in a supporting statement for theline “Other exclusions (except rollovers)” above. (Distributions from Roth IRAsdo not apply because they are not normally taxable.)

Roth IRA part of the above for Part III. Your entry is limited to the precedingresult for “Net reportable IRA distributions.” The taxable part of Roth IRA dis-tributions is figured in Part III. CAUTION: If any Roth IRA distributions arenontaxable because they are “qualified Roth IRA distributions” in the IRSsense, you must enter those distributions on the above line “Other exclusions(except rollovers)” to prevent them from being classified as taxable.

Traditional, SEP, and SIMPLE IRA converted to Roth IRA. The taxable part ofthe conversion is figured in Part II of Form 8606.

Traditional, SEP, and SIMPLE IRA distribution for Part I. (auto-calc) Com-puted as the “Net reportable IRA distributions” less the Roth IRA part and thepart converted to Roth IRAs, this amount is used in Part I of Form 8606 asthe total distributions from traditional, SEP, and SIMPLE IRAs.

Rollover on Form 1040 for THIS copy. (auto-calc) Taken from the worksheetsthat support line 15a, this is the part of the IRA distribution that is not tax-able because it was used for a timely rollover into another IRA.

Roth IRA part of the above. Enter the part of the total for Roth IRAs.Traditional, SEP, and SIMPLE IRA part. (auto-calc) Computed as the to-

tal rollover for IRAs less the Roth IRA part.

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Special instructions for qualified hurricane distributions. In order for theproper taxable amount for your IRAs to appear on Form 1040, line 15b, ifyou received a “qualified hurricane distribution” (defined in the previousshaded paragraph), you must follow these steps:! Report the qualified hurricane distribution on a 1099-R Worksheet for

Form 1040, line 15a. Be sure to identifify the distribution as an IRA dis-tribution.

! Complete Part I of Form 8915, and report the amounts from lines 3(b)and 4(b) of Form 8915 on the appropriate lines of “SPECIAL HURRICANEINFORMATION” (below).

! Complete the rest of Form 8606, and report the results from lines 15band 25b of Form 8606 on lines 22 and 23 of Form 8606. CAUTION: Donot include the amounts entered on Form 8606, above, on line 24 ofForm 8915. (IRS releases of Form 8915 prior to February 9, 2007 failedto make this point clear on the form, leading to the potential for doubletaxation of the distributions!)

! Complete the rest of Form 8915, and report the result from line 34 ofForm 8915 on the last screen of our Form 8606 (under SUMMARY OFPARTS I to III). This step is critical for the taxable amount figured onForm 8915 to be reflected in Form 1040, line 15b.

The result will generally be a lower taxable amount for Form 1040, line 15b,than would result without identifying the distributions as “qualified hurricanedistributions.”

SPECIAL HURRICANE INFORMATION. The following information is requiredto benefit from the relief offered for hurricane victims. Be sure to follow thespecial instructions in the above shaded box.

For Traditional, SEP, and SIMPLE IRAs:Total distributions before rollovers. (auto-calc) Taken from “Traditional,

SEP, and SIMPLE IRA distributions” on screen 1.Qualified hurricane distributions. Enter “qualified hurricane distribu-

tions” from your traditional IRA included in the preceding total. Thisshould be the same amount you report on line 3(b) of Form 8915.

Amount repaid by end of year. You will not be taxed or penalized onqualified hurricane distributions you return by December 31, 2006.

For Roth IRAs:Total distributions before rollovers. (auto-calc) Taken from “Roth IRA

part of the above for Part III” on screen 1.Qualified hurricane distributions. Enter “qualified hurricane distribu-

tions” from your Roth IRA included in the preceding total. Thisshould be the same amount you report on line 4(b) of Form 8915.

Amount repaid by end of year. You will not be taxed or penalized onqualified hurricane distributions you return by December 31, 2006.

Your entries on the above lines affect the automatic calculations for lines 6,7, 15b, 19, and 25b.


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PART I, NONDEDUCTIBLE CONTRIBUTIONS TO TRADITIONAL IRAs ANDDISTRIBUTIONS FROM TRADITIONAL, SEP, AND SIMPLE IRAs. This part isused to figure the nondeductible contributions to, taxable distributions from,and basis in your IRA. In spite of the IRS label for this part, you must supplyall information in this part concerning value and basis in order for the RothIRA part of the form to be properly computed. In particular, Parts I and II ofForm 8606 interact even though the wording on Form 8606 does not makethis clear.

The first few lines are provided to give you some visibility of the calcula-tions when you perform tax planning for future tax years:

Tax year for this return. (auto-calc) Taken from your entry for tax yearon the Control Form.

Your and spouse’s age at the end of the tax year. (auto-calc lines)Taken from your entries for ages on our Form 1040, age now af-fects the maximum contribution. For 2006, the maximum contribu-tions is raised by $1,000 for taxpayers age 50 or more by year-end.

Your and spouse’s initial maximum contribution. (auto-calc lines) Theinitial maximum (before the $1,000 bonus for age) is $4,000through 2007 and $5,000 starting 2008, not including the extra$1,000 increments for age noted above.

Maximum for THIS Form 8606 copy. (auto-calc) Taken as the maximumfor the spouse whose Form 8606 is being viewed.

The next few lines summarize the contributions and allowed deduction forthose contributions on Form 1040, in order to compute the allowed non-deductible contributions already entered:

Your earned income limitation. (auto-calc) Wages on Form 1040, plusnet self-employment income if a gain, for you.

Spouse earned income limitation. (auto-calc) Wages on Form 1040,plus net self-employment income if a gain, for spouse.

IRA contribution entered on Form 1040. (auto-calc) Taken from thecontribution you entered on Form 1040 for the proper spouse.

IRA deduction claimed on Form 1040. (auto-calc) Taken as the part ofline 32 of Form 1040 that applies to the spouse for this copy.

Additional contributed. Enter here the amount that you voluntarilychoose to contribute and not deduct, even though it would be al-lowed as a deduction on Form 1040. Note that you cannot makecontributions to an IRA if you reach age 70-1/2 by year-end, andthe software ensures this based on your age entries on our Form1040. CAUTION: If line 32 of Form 1040 does not increase whenyou increase the contributions you enter above line 32, no voluntarycontributions are allowed and your entry for this line should be zero.

1 Nondeductible contributions to traditional IRAs for 2006. (auto-calc)Computed as the contribution on 1040 less the deduction on 1040plus the additional contributed above (unless you reached age 70-1/2 by year-end), but subject to the usual maximums for traditionalIRAs and the limitation to earned income.

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Part made before conversion to a Roth IRA. Many of the rules in-volving Roth IRAs depend critically on timing. You must thereforeidentify the nondeductible contributions made before a conversionreported in Part II so that the basis at line 15 properly computed.

2 Total basis in traditional IRAs. This is your basis based on 2005 andprior years. Your basis will generally be zero if you made no nonde-ductible contributions to your traditional IRA in the past. Enter zeroif this is the first year you are required to file Form 8606. (If youfiled Form 8606 last year using Tax Preparer and you started thecurrent return by translating the prior-year return with tax year onthe Control Form still set to 2005, this entry will already be cor-rect.) Otherwise, if any Form 8606 was filed for the taxpayer after2000, enter line 14 of the last Form 8606 files. If none was filed af-ter 2000, but was filed after 1992, enter line 12 of the last Form8606 filed. If none filed after 1992, but was filed after 1988, enterhere line 14 of the last Form 8606 filed. If the last Form 8606 wasfiled in 1988, enter the sum of lines 7 and 16 of that form. If thelast Form 8606 filed was in 1987, enter the sum of lines 4 and 13of that form. (Amounts from Forms 8606 prior to 1987 are notrelevant.) This is the total of all past nondeductible IRA contribu-tions (less nontaxable distributions received).

3 Add lines 1 and 2. (auto-calc) As indicated.4 Contributions included in line 1 made during January 1, 2007 through

April 16, 2007. If all contributions in excess of your deductibleamount were made in 2007, line 4 could be the same as line 1.

5 Subtract line 4 from line 3. (auto-calc) As indicated if there are anyIRA distributions this year for this spouse. Otherwise, zero.

Distributions for THIS copy. (auto-calc) Taken from “Traditional, SEP,and SIMPLE IRA distribution for Part I” on screen 1.Rollover part of the above. (auto-calc) Taken from the “Traditional,SEP, and SIMPLE part” of “Rollovers on Form 1040 of THIS copy”shown on screen 1.Outstanding rollovers. Enter here all remaining rollovers in theabove distributions that were NOT yet rolled over by the end of thetax year, yet ARE rolled over within the maximum allowed 60-dayperiod to another traditional IRA. This amount is included in line 6,below.Part rolled over by 12/31. (auto-calc) Taken as the total rollover lessthe outstanding rollovers, this is the part of the rollover that WASrolled over by the end of the tax year.

Distributions without rollovers. (auto-calc) Computed as “Distribu-tions for THIS copy” less “Rollover part of the above,” this amountis used for line 7, below.Hurricane adjustment for line 7. (auto-calc) From the “For Tradi-tional, SEP, and SIMPLE IRAs” section of screen 2, computed as


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“Amount repaid by end of year.” This adjustment in added to thepreceding amount in computing line 7.

Value of ALL Traditional, SEP, and SIMPLE IRAs on 12/31/06 (after allrecharacterizations). Enter the year-end value of all Traditional,SEP, and SIMPLE IRAs combined, after any recharacterizations, forthe spouse to whom this copy of Form 8606 applies. If you havemore than one traditional IRA account you should list the separateaccounts in a supporting statement for this line. You should receivethe information you need for this line from your trustees by1/31/2007.Hurricane adjustment for line 6. (auto-calc) From the “For Tradi-tional, SEP, and SIMPLE IRAs” section of screen 2, computed as“Amount repaid before 3/1/06” minus “Amount repaid by end ofyear.” This adjustment in added to the preceding amount plus “Out-standing rollovers” in computing line 6.

6 Value of ALL your IRAs plus outstanding rollovers. (auto-calc) Com-puted as “Value of ALL Traditional, SEP, and SIMPLE IRAs on12/31/05” plus “Outstanding rollovers” plus “Hurricane adjustmentfor line 6.”

7 IRA distributions received in 2006. (auto-calc) Normally computed as“Distributions without rollovers” plus “Hurricane adjustment for line7.” However, if IRA contributions for the year exceed the alloweddeduction on Form 1040, the IRA has a value at year-end, and thereis either a distribution from the traditional IRA (excluding rollovers)or there is a conversion to a Roth IRA, special computations apply.See IRS Pub. 590 for details on computations that may differ fromthe IRS Instructions for Form 8606.

8 Conversions to Roth in 2006. (auto-calc) Unless the special calculationapplies, taken from line 16 of Part II of this form, this is the totalconversions to Roth in 2006 after any recharacterizations.

9 Add lines 6, 7, and 8. (auto-calc) Compuuted as indicated unless thespecial calculation applies.

10 Divide line 5 by line 9 (to 5 places). (auto-calc) Computed as indi-cated to 5 decimal places, unless a special computation applies.

11 Multiply line 8 by line 10. (auto-calc) Computed as indicated, unlessa special computation applies. This is the nontaxable part of distri-butions you converted to Roth IRAs.

12 Multiply line 7 by line 10. (auto-calc) Computed as indicated, unlessa special computation applies. This is the nontaxable part of distri-butions you did NOT convert to Roth IRAs.

13 Nontaxable part of all distributions for 2006. (auto-calc) Normallycomputed as the sum of lines 11 and 12, this is the nontaxable partof all of the distributions.

14 TOTAL BASIS IN TRADITIONAL IRAs. (auto-calc) Normally computedas line 3 less line 13, this is your basis in traditional IRAs for 2006and earlier years.

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15a Subtract line 12 from line 7. (auto-calc) Normally computed as indi-cated, this is the amount taxable this year if there are no qualifiedhurricane distributions.

15b Part for Form 8915, line 22. (auto-calc) Computed as line 15a timesthe ratio of “Qualified hurricane distributions” entered on screen 2for traditional, SEP, and SIMPLE IRAs, divided by line 7. This is thepart of line 15a attributable to qualified hurricane distributions,which must be reported on Form 8915, line 13, as indicated. Thisamount is taxed throgh Form 8915 rather than Form 8606.CAUTION: If this amount is nonzero, you must prepare Form 8915and enter the result from Form 8915, line 34, in the “SUMMARYOF PARTS I to III” on the last screen of Form 8606.

15c TAXABLE AMOUNT. (auto-calc) Computed as line 15a less line 15b.The result on line 15c is reflected in line 15b of Form 1040. Any entries youmake on the 1099-R Worksheet for taxable amount are overridden by thetaxable amounts computed on Form 8606.

PART II, CONVERSIONS FROM TRADITIONAL, SEP, or SIMPLE IRAs TOROTH IRAs. This part is used to figure the taxable conversions from tradi-tional (and SEP and SIMPLE) IRAs to Roth IRAs.

Distributions converted in 2006. (auto-calc) Taken from your earlierentry for “Traditional/SEP/SIMPLE converted to Roth.”

Modified AGI for Roth IRA. (auto-calc) Computed as AGI on line 38 ofForm 1040 less any amount included in that AGI from line 18, be-low, plus any foreign income and housing exclusions and deductionstaken, plus excluded interest on line 3 of Schedule B, plus excludedadoption benefits, plus any deductions reflected in net AGI for IRAs,student loans, tuition and fees, and domestic production activities.CAUTION: If AGI includes any minimum required distributions forconversions, you must use the Override Key to access this line andreduce the automatically computed result by the amount of thoseminimum required distributions. (In order for your override to be ac-curate, you should refrain from overriding this line until AGI is com-plete and final for the return.)

TIP: Recharacterization required. (auto-calc) Answered Yes if the pre-ceding modified AGI exceeds $100,000 or your filing status is mar-ried filing separately and you did NOT live apart from spouse allyear. If Yes, you are not allowed to convert any part of your tradi-tional IRAs to Roth IRAs. In addition, irrespective of the answer thatappears here, you cannot convert an inherited IRA to a Roth IRAunless you inherited it from your spouse. You also cannot convert aSIMPLE IRA to a Roth IRA during the first 2 years of participation.You must therefore recharacterize your converted amounts back toa traditional IRA or face penalties for violating the rules.

Recharacterizations. You are generally allowed to correct a disal-lowed conversion by making a transfer back to the traditional IRAbefore the due date of your return (including extensions). Enter the


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amount you want to recharacterize in a supporting statement forthis line, explaining the details of the recharacterization by breakingyour entry into its components: the part that is the original contribu-tion and the part that is earnings, and identify any part that is nowdeductible.

16 Conversions to Roth IRAs in 2006. (auto-calc) Computed as the dis-tributions converted less the above recharacterizations, this is thenet converted to Roth IRAs during the tax year.

Excess contribution for Form 5329, line 23. (auto-calc) This is theamount on line 16 if the answer to the “Recharacterization required”is Yes.

17 Basis in amount in line 16. (auto-calc) Unless you converted all ofyour traditional, SEP, and SIMPLE IRAs to Roth IRAs, this is gener-ally a prorated share of the basis you have in these IRAs.

18 TAXABLE AMOUNT. (auto-calc) Computed as line 16 less line 17,but no less than zero.

The result on line 18 is reflected in line 15b of Form 1040.

PART III, DISTRIBUTIONS FROM ROTH IRAs. This part is used to figure thetaxable part of distributions from Roth IRAs. In addition, we have added linesthat compute your Contribution Limit and distributions subject to penalty asan aid in automating Form 5329.

Data on prior Forms 8606 to complete Part III. Part III of the current Form8606 and certain parts of Form 5329 depend on a number of amounts fromyour prior Forms 8606, so those amounts are entered here. HINT: All of theamounts from prior Forms 8606 are automatically translated from the prior-year return as long as the prior-year return had a Form 8606 and the tax yearfor the return was retained at 2005.

From your 1998 Form 8606. Unless already translated, enter the following:1998 Form 8606, line 14c. This is the amount converted to Roth in 1998.1998 Form 8606, line 15. (auto-calc) Computed as line 14c, above, less line

16, below. This is your basis in the amount on line 14c.1998 Form 8606, line 16. This is the taxable amount of conversions in

1998, which was eligible for the 4-year spread.1998 Form 8606, line 20.

From your 1999 Form 8606. Unless already translated, enter the following:1999 Form 8606, line 15.1999 Form 8606, line 16.1999 Form 8606, line 17.1999 Form 8606, line 18d.1999 Form 8606, line 19. (auto-calc) Computed as line 17 less line 18d.1999 Form 8606, line 25.

From your 2000 Form 8606. Unless already translated, enter the following:2000 Form 8606, line 15.2000 Form 8606, line 16.2000 Form 8606, line 17.2000 Form 8606, line 18d.2000 Form 8606, line 19. (auto-calc) Computed as line 17 less line 18d.2000 Form 8606, line 25.

From your 2001 Form 8606. Unless already translated, enter the following:

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2001 Form 8606, line 17.2001 Form 8606, line 18.2001 Form 8606, line 19.2001 Form 8606, line 20.2001 Form 8606, line 21. (auto-calc) Computed as line 19 less line 20.2001 Form 8606, line 22.

From your 2002 Form 8606. Unless already translated, enter the following:2002 Form 8606, line 17.2002 Form 8606, line 18.2002 Form 8606, line 19.2002 Form 8606, line 20.2002 Form 8606, line 21. (auto-calc) Computed as line 19 less line 20.2002 Form 8606, line 22.

From your 2003 Form 8606. Unless already translated, enter the following:2003 Form 8606, line 17.2003 Form 8606, line 18.2003 Form 8606, line 19.2003 Form 8606, line 20.2003 Form 8606, line 21. (auto-calc) Computed as line 19 less line 20.2003 Form 8606, line 22.

From your 2004 Form 8606. Unless already translated, enter the following:2004 Form 8606, line 17.2004 Form 8606, line 18.2004 Form 8606, line 19.2004 Form 8606, line 22.2004 Form 8606, line 23 refigured. (auto-calc) Computed as line 19 less

line 22, this is the 2004 line 23 without any reduction for qualified first-time homebuyer expenses.

2004 Form 8606, line 24.From your 2005 Form 8606. Unless already translated, enter the following:

2005 Form 8606, line 17.2005 Form 8606, line 18.2005 Form 8606, line 19.2005 Form 8606, line 22.2005 Form 8606, line 23. (auto-calc) Computed as line 19 less line 22, this

is the 2005 line 23 without any reduction for qualified first-time home-buyer expenses.

2005 Form 8606, line 24.

PART III, DISTRIBUTIONS FROM ROTH IRAs (continued). While much of thispart is automatic, you must generally supply additional information on RothIRA contributions, past and present, and recharacterizations made.

Distributions without rollovers. (auto-calc) Computed from amountsshown on screen 1 as “Roth IRA part of above for III” less the RothIRA part of “Rollover on Form 1040 for THIS copy.” CAUTION: Thisresult is assumed to stem from nonqualified distributions exclu-sively. If any distributions are qualified, and therefore nontaxable ir-respective of basis, et al., you must enter those distributions on theline “Other exclusions (except rollovers)” on screen 1 to preventthem from appearing here. (Note that all distributions receivedwithin 5 years of starting a Roth IRA account are nonqualified andare therefore appropriate for this line.)


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Hurricane adjustment for line 19. (auto-calc) From the “For RothIRAs” section of screen 2, computed as “Amount repaid by end ofyear” minus “Amount repaid before 3/1/06.”

19 Nonqualified distributions from Roth IRAs in 2006. (auto-calc) Computedas the above “Distributions without rollovers” plus “Hurricane adjustment forline 19, this is the total nonqualified Roth IRA distributions.

Qualified first-time homebuyer expenses. A qualified first-time homebuyerdistribution is not taxable if you made a contribution to a Roth IRA in 1998:

First-time homebuyer expenses. Enter the amount of any distributionfor qualified first-time homebuyer expenses.

Roth IRA contribution in 1998, 1999, 2000, or 2001? Answer Yes if youmade any contribution to a Roth IRA in any of the cited years, in-cluding conversions.

20 Qualified first-time homebuyer expenses. (auto-calc) Computed as yourentry for “First-time homebuyer expenses” if the preceding answer is Yes, butlimited to no more than $10,000. Otherwise, zero.

21 Subtract line 20 from line 19. (auto-calc) Computed as indicated.

Basis in contributions to Roth IRAs from your 1999, 2000, 2001, 2002, 2003,2004, or 2005 Form 8606. (auto-calc) Computed from the preceding 1999,2000, 2001, 2002, 2003, 2004, and 2005 entries, this is the cumulativecontributions less distributions from the most recent Form 8606 for whichthere is a Roth IRA distribution reported. CAUTION: No amount from the1998 Form 8606 is included here. If 1998 was the last year you had an IRAdistribution, use the next line instead.

OR.. your entry for 1998 to 2005. If you entered all amounts from prior Forms8606 on our screens for “Prior data required to complete Part III,” you willhave to make an entry here for only one case: If you have no distributions in1999 through 2005, but did in 1998, enter line 19c less line 18 of the 1998Form 8606 (but no less than zero). If you had no prior Form 8606, enter herethe total contributed to the Roth IRA in prior years.

Basis in prior Roth IRA contributions. (auto-calc) Computed as the greater ofthe preceding two amounts when line 19 is nonzero. Otherwise, Part III of Form8606 is not used and this line is zero. This amount represents only the part ofthe current line 22 that can be determined from prior Forms 8606.

Actual 2006 Roth contributions. Enter all Roth contributions made in 2006,not including rollovers nor amounts converted from a traditional IRA.

Modified AGI for Roth IRA. (auto-calc) Computed like modified AGI inPart II.

Maximum 2006 contributions allowed. (auto-calc) Computed based onthe preceding modified AGI using the Maximum Roth IRA Contribu-tion Worksheet in the IRS Instructions for Form 8606.

Excess withdrawn in time. If your actual contributions exceeds theamount allowed, you have an excess contribution subject to pen-alty. However, you can avoid the penalty by withdrawing the ex-

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cess contribution and any earnings on it within 60 days of the con-tribution.

Roth IRA contributions for 2006. (auto-calc) Computed as the actual contribu-tion less the excess withdrawn in time.

Recharacterizations. Instead of withdrawing the excess, you can avoid apenalty by recharacterizing it as a traditional IRA by the due date of your re-turn (including extensions). You can also recharacterize a 2006 contributionto a traditional IRA as a Roth IRA. Enter the first kind of recharacterization asa positive number, and the second kind as a negative number. You shouldexplain any recharactizations in a supporting statement for this line.

Excess contributions for 5329 line 23. (auto-calc) Computed as the amount bywhich “Actual 2006 Roth contributions” plus line 18c exceeds “Excess with-drawn in time” plus “Maximum 2006 contributions allowed,” if any. Thisamount is used at line 23 of Form 5329 for computing the penalty on excessRoth IRA contributions.

Contributions credit for 5329 line 19. (auto-calc) This is the converse of thepreceding line, computed as the amount by which “Excess withdrawn intime” plus “Maximum 2006 contributions allowed” exceeds “Actual 2006Roth contributions” plus line 18c, if any. This amount is used at line 19 ofForm 5329 for computing the penalty on excess Roth IRA contributions.

Prior Roth IRA contributions. Enter all Roth contributions made in prior years,not including rollovers, amounts converted to Roth IRAs, Roth IRA contribu-tions that were later recharacterized, and contributions returned to you. HINT:While it won’t hurt to complete all below lines, you only need to completelines for years after the last year you received a distribution from your RothIRA. Therefore, if you reported a Roth IRA distribution on Form 8606 for2005, you don’t need to complete any of these lines.

Regular contributions for 2005. Enter Roth contributions made in 2005excluding the special amounts underlined above.




Regular contributions for 2001. Enter Roth contributions made in 2001,excluding the special amounts underlined above.


Regular contributions for 1999. Enter Roth contributions made in 1999,excluding the special amounts underlined above..


22 Basis in Roth IRA contributions. (auto-calc) Computed as the sum of the“Basis in prior Roth IRA contributions,” “Actual 2006 Roth IRA contribu-


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tions," and any of the preceding amounts that are required in accordancewith the IRS worksheet for Basis in Regular Roth IRA Contributions—Line 22.

23 Subtract line 22 from line 21. (auto-calc) Computed as indicated, but noless than zero.

Basis in conversions to Roth IRAs from 1998 through 2005 from prior Forms8606. (auto-calc) Based on amounts you entered earlier from the 1998,1999, 2000, 2001, 2002, 2003, 2004, and 2005 Form 8606 for the appro-priate spouse, this is the basis in Roth conversions as of the end of tax year2005 computed in accordance with the IRS instructions for line 24.

Basis in conversions to Roth IRAs in 2006 (line 16). (auto-calc) Taken from line16 of the current Form 8606.

24 Basis in Roth IRA conversions. (auto-calc) Computed as the sum of thepreceding two amounts, this is the basis in all current and prior conversions.

25a Subtract line 24 from line 23. (auto-calc) Computed as indicated, this isthe amount taxable this year if there are no qualified hurricane distributions.

25b Part for Form 8915, line 23. (auto-calc) Computed as line 25a times the ra-tio of “Qualified hurricane distributions” entered on screen 2 for Roth IRAs,divided by line 21. This is the part of line 25a attributable to qualified hurri-cane distributions, which must be reported on Form 8915, line 23, as indi-cated. This amount is taxed throgh Form 8915 rather than Form 8606.CAUTION: If this amount is nonzero, you must enter the result from Form8915, line 34, in the “SUMMARY OF PARTS I to III” on the last screen ofForm 8606.

25c TAXABLE AMOUNT. (auto-calc) Computed as line 25a less line 25b, thisresult is reflected in line 15b of Form 1040.

III Summary and Allocation:.

Net Roth IRA distribution for 2006. (auto-calc) Taken as line 21 of the currentForm 8606. Unless there is a reduction in the following line, this entireamount is subject to the 10% penalty tax on early distributions. Roth IRA dis-tributions are considered early withdrawals if received less than 5 years aftertheir creation. However, since Roth IRAs have been in existence for less than5 years, they are currently subject to penalty with few exceptions.

Allocation to 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, or 2006 basis.(auto-calc) Any part of the above distribution that is allocable to the amounton your 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, or 2006 basisis exempted from the penalty because it represents your basis in past conver-sions. The computation of this allocation, however, is quite involved. Theprocedure is described in general terms in the IRS 2006 Instructions for Form5329 and in IRS Pub. 590. However, the software performs this computationautomatically based on amounts from your 1998 through 2006 Forms 8606.

Early distribution for 5329, line 1. (auto-calc) Computed as the “Net Roth IRAdistribution for 2006” less the preceding allocation, this is the part of the dis-tribution that is subject to the penalty on early distributions, and is reflected

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in Part I of Form 5329. (No Roth IRA can meet the 5-year waiting period re-quired for withdrawals because Roth IRAs did not exist before 1998, so RothIRA distributions are subject to the early distribution penalty for taxpayers ofany age. Once the 5-year waiting period is reached, however, the penaltywill apply only to those who received the distribution before age 59-1/2.However, see Part I of Form 5329 for exceptions you may be able to claim.)

For Roth IRA basis, see below. The IRS’s Roth IRA Basis Worksheet is alsobuilt into the software. It reflects the transactions in Parts II and III of thisform, and is shown in the summary at the end of this form.

SUMMARY OF PARTS I to III. The taxable amounts and basis computationsare summarized here.

Total on Form 8606 for 1040, line 15b. (auto-calc) Computed as the sumof lines 15, 18, and 23.

Amount on Form 8915, line 34. Enter the indicated amount for thespouse associated with this copy of Form 8606. Form 8915 (notbuilt into the software) is used to figure the taxable part of qualifieddistributions for victims of Hurricane Katrina, Rita, or Wilma. Thetaxable amount you enter here from Form 8915 is for distributionssubtracted from Form 8606 at lines 15b and/or 25b based on yourentries on our “SPECIAL HURRICANE INFO” screen.

TOTAL TAXABLE for 1040, line 15b. (auto-calc) Computed as the sum ofthe preceding two amounts, this is the amount posted to line 15b ofForm 1040 for this spouse.

TOTAL BASIS in Traditional IRAs. (auto-calc) Taken from line 14.Basis in Roth IRA contributions. (auto-calc) Based on the IRS’s RothIRA Basis Worksheet, this is the basis in contributions for nextyear’s Form 8606.

Basis in Roth IRA conversions. (auto-calc) Based on the IRS’s RothIRA Basis Worksheet, this is the basis in conversions for next year’sForm 8606.

TOTAL BASIS in Roth IRAs. (auto-calc) Computed as the sum of thepreceding two amounts.



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*Form 8611 / Recapture of Low-Income Housing CreditPurpose. This form is used to figure a recapture tax for previously claimedlow-income housing credit. The credit is subject to recapture when, within 15years of the date placed in service, your ownership in the building changes,the basis of the building decreases, or the building fails to meet the minimumset-aside requirements. However, you can often avoid the current payment ofthe recapture tax by posting a bond through Form 8693. Five independentcopies of Form 8611 are accessible through the Road Map at the LIHCR lineabove line 63 Form 1040.


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Form 8615 / Tax for Children Under Age 18Who is it for? This form is used with a child's tax return to compute tax forchildren under 18 years of age who have unearned income (such as taxableinterest and dividends) of more than $1,700. Its purpose is to tax the child'sunearned income in excess of $1,700 at the parent's tax rate, in order tocounter a favorite tax shelter for parents. It is used at line 44 of From 1040in place of any tax calculated from the tax tables or tax rate schedules. (Theparent can sometimes avoid filing a return for the child by reporting thechild's investment income on the parent's own return through a Form 8814for each child. However, a higher overall tax may result when Form 8814 isused, as warned in the details in this manual for line 44a of Form 1040.)Form 8615 is accessible through the Road Map above line 44 of Form 1040at the line labeled “Form 8615, line 18.”

Age threshold rises to 18. Starting with tax year 2006, children under age 18must use Form 8615, not just children under 14, when investment incomeexceeds the threshold for the year ($1,700 for tax year 2006). As a result,children age 14 through 17 may now be liable for a higher tax when the par-ent’s tax bracket is higher than the child’s. Parents who had planned to sell achild’s portfolio when the child reaches age 14 will now have to wait untilage 18 to benefit from their child’s lower tax bracket.

You can ESTIMATE amounts in order to file on time. Because informationfrom the returns of the parent and all children may not be available to you be-fore the due date of the return, the IRS allows you to estimate some of theentries for this form as long as the estimates are reasonable. All entries forwhich such an estimate is allowed are followed by the question:”ESTIMATED?” When you are using an estimate for such an entry, you mustanswer Yes to this question that follows it so that the word “ESTIMATED”will appear next to the estimated entry on the official printout of Form 8615.

PARENT INFORMATION. Certain information about one parent must be sup-plied here. If the parents file jointly, you must enter the name and SSN for thefirst parent listed on the joint Form 1040. If the parents are married but fileseparately, you must enter name, SSN, and other data for the parent with thehighest income. Otherwise, you must generally enter all information for theparent who had custody of the child for most of the year, but there are ex-ceptions. See IRS Instructions for Form 8615 and IRS Pub. 929 for details.

Both parents deceased by year-end. Answer Yes only if NEITHER par-ent was alive at the end of the tax year. You are not liable for thistax if neither parent was alive.

A Parent's first name and initial. Enter in 15 characters or less.Parent's last name. Enter last name in 25 characters or less.Name in e-file format. (auto-calc) The name is displayed here in e-fileformat, with a < symbol to flag the last name and any suffix like Jr.Suffixes like 3rd are changed to Roman numerals and first name is


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shortened to an initial when necessary to keep the name no longerthan 35 characters, all in accordance with IRS e-file specifications.

Name control (for e-file). The name control is displayed in accordancewith IRS e-file specifications. This is usually the first four charactersof the last name.

B Parent's Social Security Number. Enter social security number ap-pearing on the parent's Form 1040.

C Parent's filing status: (1=Single, 2=MFJ, 3=MFS, 4=HofH, 5=QW). Enter filing status the

parent used for 2006.ESTIMATED? Answer Yes if you are not sure of the parent’s filingstatus, and will not be sure before the due date of this return.

Is parent dependent of another? Answer Yes ONLY if the relevant par-ent was a dependent on someone else’s return.

Parent's taxable income. Normally, you would enter here line 43 ofparent's Form 1040, but no less than zero. However, if the parentfiles Form 2555 or 2555-EZ, you must enter line 7 of the parent’sForeign Earned Income Tax Worksheet, which is Form 1040, line 43raised by any foreign earned income or housing exclusion taken.

ESTIMATED? Answer Yes if estimating the parent’s taxable incomebecause you will not know it before the due date of this return.

Gain taxed under section 644 in above. If the parent's income includesa gain taxed to a trust under section 644, enter here the gain thatwas taxed under section 644(a)(2)(A).

Trust realized gain after 8/5/97? If the answer is Yes, the entries onlines that refer to section 644 are ignored, because the former pro-vision for adding this amount to parent’s income is repealed afterSept. 5, 1997.

Taxable amount for line 6. (auto-calc) If the preceding answer is Yes,this line is just "Parent’s taxable income." But if the answer is No,your entry for "Gain taxed under section 644," above, is included inparent’s taxable income at line 6, and the code "Sec 644" will ap-pear next to line 6 on the official printout of Form 8615.

Tax imposed under I.R.S. section 644 tax. Enter here the tax that wasimposed on the section 644 gain entered above for line 6. This en-try is ignored if the section 644 gain was realized after 8/5/97.Otherwise it is included in line 10 and the code "Sec 644" will ap-pear next to line 10 on the official printout of Form 8615.

Tax on Forms 8814 (Form 1040, line 44a). Enter the total from line 8 ofall Forms 8814 combined for the parent, as reported on the parent’sForm 1040, line 44a.

Tax on Form 4972 (Form 1040, line 44b). Enter the total on the parent’sForm 4972, as reported on the parent’s Form 1040, line 44b.

PART I, CHILD'S NET INVESTMENT INCOME. Liability for the tax and theamount of income to be taxed are computed here:

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Income on Form 1040, line 22. (auto-calc) This is total income beforeadjustments on Form 1040.

+ Net operating loss deduction. Enter the amount of NOL deductionyou claimed on line 21 of Form 1040.

+ Exclusions and deductions from Form 2555. (auto-calc) Computedas the foreign earned income exclusion from Form 2555 entered atline 21 of Form 1040, but taken as a positive here, plus the foreignhousing deduction from Form 2555 entered above line 36.

- Child’s Form 1040, lines 7, 12, 18, self-employment on Schedule E.(auto-calc) Computed from amounts throughout the return, this isthe child’s earned income. (This is the conventional earned incomefor the child, not the unconventional one used in the IRS worksheetfor Form 8615, line 1, in IRS Pub. 929. We use the conventionalearned income but modify the IRS worksheet to ensure the sameresult as the IRS without their unduly complex mathematics.)

- Deduction on Form 1040, line 30. (auto-calc) Taken from Form1040, as indicated, this is the penalty for early withdrawal of sav-ings.

- Taxable disability trust distribution. For the purposes of Form8615, eaned income includes any taxable distribution from a quali-fied disability trust. See IRS instructions for Form 8615, line1.

- Other reduction to line 1. You will rarely need to make an entry herebecause the software uses the IRS worksheet in IRS Pub. 929 (TaxRules for Children and Dependents) rather than the simplified work-sheet that appears in the IRS instructions for Form 8615. Any entryyou make here is subtracted from the income on Form 1040, so anincrease of income must be entered as a negative number here.

1 Child's investment income. (auto-calc) Computed as the income online 22 of Form 1040 plus the NOL deduction and two foreign ex-clusions, less the above four amounts considered earned income forthe purposes of Form 8615. (This result is identical to that of theIRS’s Alternate Worksheet for Form 8615, line 1, in Pub. 929, eventhough we use a simpler method to get there.)

Amount on Schedule A, line 28. (auto-calc) Taken from line 40 ofForm 1040 if itemized deductions are used; otherwise zero.

Part related to investment income. You must identify the part of theabove Schedule A deduction that is directly connected with theproduction of the investment income shown on the return.

Part related to capital gains, etc. You must identify the part of theabove Schedule A deduction that is directly connected with theproduction of the net capital on the return.

Part related to qualified dividends. You must identify the part of theabove Schedule A deduction that is directly connected with theproduction of dividend income reported on Form 1040 line 9b.


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2 If DID NOT itemize, $1,700. (auto-calc) Computed as the greater of$1,700, or $850 plus the investment part of the Schedule A deduc-tion (which can be no greater than Schedule A, line 28).

3 Subtract line 2 from line 1. (auto-calc) As indicated.Child's age. (auto-calc) Taken from your entry on our Form 1040. Anentry for age greater than zero MUST be made on our Form 1040 inorder for this form to compute a tax.

Liable for Form 8615 tax? (auto-calc) Answered Yes when the age onour Form 1040 is greater than zero but less than 18, the result on line3 is greater than zero, and at least one parent is alive at year-end.

4 Child's taxable income. (auto-calc) Normally taken from line 43 ofForm 1040. However, if the child files Form 2555 or 2555-EZ, theamount on line 7 of the child’s Foreign Earned Income Tax Wor-sheet (shown on screen 2 of Form 1040, page 2) is used instead.

5 Smaller of line 3 or line 4. (auto-calc) Computed as indicated, this isthe amount of the child’s income that is subject to taxation at theparent’s tax rate.

If the result on line 5 is zero, the tax computed on this form will be the sameas the regular tax computed without using this form. Nevertheless, the IRSinstructs you to attach the form to the return anyway, completed through line5, to demonstrate that you are not liable for additional tax.

Information for Capital Gains Tax. Because the law for capital gains tax iscomplex, several numbers from the Schedule D of the parent and all childrenof the parent are required to compute the tax on this form. All required en-tries are consolidated into this section. Each of the following lines of Sched-ule D is shown in 3 parts: the child’s amount (automatically taken from theSchedule D for this return), the parent’s amount, and the sum of the amountfor all other children of the parent:

Schedule D, line 7. This is the short-term net income or loss shown onSchedule D.

Schedule D, line 15. This is the long-term net income or loss.Capital gains. (auto-calc lines) Computed as Schedule D line 15 less

the loss, if any, on Schedule D line 7, this is the net gain taxable atcapital gains rates.

Schedule D, line 18. This is the net income or loss for sales of collecti-bles, which are subject to the 28% rate rules.

Schedule D, line 19. This is the unrecaptured sec. 1250 gain (the partof the capital gain on depreciable real property that stems from de-preciation), and is subject to up to 25% tax under the law.

Form 4952, line 4g and 4e (*). These are amounts on Form 4952 forthose with lump-sum distributions who make elections to treatsome capital gains as regular income so that they can use it in de-termining deductible investment interest. (* When an election ismade at line 4e of Form 4952, use the lower elected amountprinted on the dotted line for Form 4952, line 4e.)

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Qualified dividends. This is the amount on line 9b of each person’sForm 1040.

The application of these amounts in the ensuing tax calculations is not directbecause the $1,700 exclusion makes a complex allocation necessary. IRSPub. 929 contains worksheets for handling this complexity, but the softwarehandles it automatically based on the above entries and those below line 7.

PART II, TENTATIVE TAX BASED ON THE TAX RATE OF THE PARENT. Thissection uses the previously entered amounts from the parent's return and thereturns of all other children of the parent who have to file a Form 8615. As aresult, the parent's return must be completed first, then each child's returnmust be completed through line 43 of their Forms 1040, then each child'sForm 8615 must be completed through line 5, then the sum of line 5amounts from all children's Forms 8615 are entered on each child's Form8615. Then, and only then, can each child's return be completed.

6 Parent's taxable income. (auto-calc) Taken from "Taxable income forline 6" computed previously.

7 Form 8615, line 5, of all other children. Enter line 5 of Form 8615 forall other children of the parent who also must file a Form 8615.

% of others’ capital gains in line 7. Enter the percentage (0 to 100) ofnet capital gains for all other children combined that is considered,by IRS logic, included in line 7, above. This percentage is 100 timesthe sum of net capital gains in line 5 for all other children divided bythe sum of net capital gains for all other children. (Net capital gain isthe lesser of the gain on line 15 or gain on line 16 of Schedule D. Itis computed from the previously-entered information from ScheduleD as the lesser of line 15 or the sum of lines 7 and 15, but no lessthan zero.) If you prepare the returns for the other children usingTax Preparer, you can determine this ratio by dividing the sum ofnumbers on the line below line 5 for all other children by the sum ofnet capital gains. Otherwise you must use the IRS worksheets inPub. 929 as described here below line 5. (This and the followingpercentages are used along with previously entered informationfrom the Schedule D of others in computing the tax at line 9.)

% of others’ qualified dividends in line 7. Enter the percentage (0 to100) of the sum of the referenced amount for all other childrencombined that is allocable to line 7. If there is only one other child,this percentage is the same as the preceding one. Otherwise youmust compute the percentage using the complex procedure de-scribed in IRS Pub. 929.

ESTIMATED? Answer Yes if you are estimating Form 8615, line 5 of allother children and did not know it before the due date of this return.

* Child’s capital gains, etc., in line 5. (auto-calc) Based on a percentagecomputed from the preceding entries from Schedule D and amountson lines 1 through 5, this is the part of line 5 considered by the IRSto be attributable to capital gains.


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* Child’s qualified dividends, in line 5. (auto-calc) Based on a percent-age computed from the preceding entries from Schedule D andamounts on lines 1 through 5, this is the part of line 5 consideredby the IRS to be attributable to qualified dividends.

8 Add lines 5, 6, and 7. (auto-calc) As indicated.Parent’s tax on line 8 using Schedule D. (auto-calc) If line 8 includesany long-term capital gains, the tax computation on Schedule D isshown here based on the information supplied from Schedules D ofthe parent and all children plus the above percentages. Note thatthe computation using Schedule D is performed in a special way asdetailed in IRS Pub. 929, not an obvious way for a normal return.

Parent’s tax on line 8 using Schedule J. If line 8 includes any farm in-come and Schedule J is used to compute the tax, enter the resultingtax here. Your entry here will override the tax that is otherwisecomputed automatically. (You can use Tax Preparer to determinethis amount by preparing a return reflecting the amounts on line 8and using Schedule J for that return. However, you will have tohave available the returns of everyone involved for the prior 3 yearsin order to complete Schedule J!)

9 Tax on line 8 based on parent's filing status. (auto-calc) Computed asthe lesser of the result from the tax rate schedules, Schedule D, oryour entry for tax using Schedule J.

Schedule D or J used to figure the tax in line 9? (auto-calc) AnsweredYes if the tax from Schedule D or Schedule J was used for line 9.

Tax on parent’s Schedule D. (auto-calc) If the parent’s return in-cludes any long-term capital gains or qualified dividends, the tax onthe parent’s Schedule D is shown here based on the informationsupplied previously.

Tax on parent’s Schedule J. If the parent used Schedule J on his orher return, enter the amount of tax from Schedule J here.

10 Parent's tax from Form 1040, etc. (auto-calc) The tax on the parent'sincome is computed using the parent's filing status, using themethod that gives the lowest tax, and then adding the previouslyentered section 644 tax, if appropriate.

Schedule D or J used to figure the tax in line 10? (auto-calc) An-swered Yes if the tax from Schedule D or J was used for line 10.

11 Subtract line 10 from line 9. (auto-calc) As indicated.12a Add lines 5 and 7. (auto-calc) As indicated.12b Divide line 5 by line 12a. (auto-calc) As indicated.13 Multiply line 11 by line 12b. (auto-calc) As indicated.

PART III, FIGURE CHILD'S TAX. The rest of the form is automatic.14 Subtract line 5 from line 4. (auto-calc) As indicated.

Child’s tax on line 14 using Schedule D. (auto-calc) If line 14 includesany long-term capital gains or qualified dividends, a tax computedusing Schedule D is shown here based on the information supplied

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from the child’s return and the above percentages. This computa-tion uses Schedule D in a special way as detailed in IRS Pub. 929.

Child’s tax on line 14 using Schedule J. If the child used Schedule Jon his or her return, enter the recomputed amount based on line 14.

15 Tax on line 14 based on child's filing status. (auto-calc) As indicated,using the method that results in the lowest tax.


16 Add lines 13 and 15. (auto-calc) As indicated.Child’s tax on line 4 using Schedule D. (auto-calc) If line 4 includesany long-term capital gains or qualified dividends, the tax shown onSchedule D is shown here based on the information supplied fromthe child’s return.

Child’s tax on line 4 using Schedule J. If the child used Schedule J onhis or her return, enter the amount based on line 4.

17 Tax on line 4 based on child's filing status. (auto-calc) As indicated,the method that results in the lowest tax is used.


18 LARGER of line 16 and 17. (auto-calc) As indicated.The tax at line 18 is posted to screen 2 of our Form 1040, then modified bythe child’s Foreign Earned Income Tax Worksheet, if applicable. The result onour Form 1040 for “Form 8615 tax as adjusted” is then used in place of anyother tax at line 44 of Form 1040.

CAUTION for amended returns: If the parent's or any of the children's re-turns are amended, all of the children's returns will have to be amended too iftheir amended Forms 8615 differ from their original Forms 8615.



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*Form 8801 / Credit for Prior Year Minimum Tax

Purpose. This form is used to figure a credit for the AMT paid in the prioryear to the extent that the AMT was for deferral items and the current-yeartentative minimum tax is less than the current-year regular tax. Form 8801 isaccessible through the Road Map at line 55b of Form 1040.


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Form 8812 / Additional Child Tax CreditFor eligible taxpayers: automatically generated. The Child Tax Credit at line53 of Form 1040 is limited by tax after certain credits because, unlike theEarned Income Credit, it is a nonrefundable credit. Form 8812, on the otherhand, is used to gain back some or all of the eliminated credit. Most taxpayerscan benefit from this form when the credit on Form 1040 has been limited.Even though it is accessible from line 68 of Form 1040, there is rarely a need toaccess it because this form is automatically generated when it is applicable andis fully automatic for most taxpayers. Unless you need to make an adjustmenton one of the few entry lines on this form, you need not ever view this form.

TAXABLE EARNED INCOME (IRS Pub. 972). Taxable 2006 earned income forline 4a of this form is computed in this section using a worksheet provided inIRS Pub. 972. It is fully automatic for most taxpayers and is not detailed here.You may need to make an entry for (a) line 5a and/or line 5b of the worksheet ifyou file Form 2555, or (b) the special adjustment above line 8 of the worksheetif you are clergy who received housing benefits or an employee who receivedmeals and lodging. See the chart in the IRS instructions for Form 8812 as wellas the worksheet in Pub. 972 for details. (Note that earned income in this con-text is not the same as earned income computed for other forms, so a strict ad-herence to the IRS publication is required, which the software ensures.)

I ALL FILERS. Even filers with less than 3 qualifying children may be eligiblefor a credit on this form, as computed in this part of Form 8812.

1 Line 1 of the Child Tax Credit Worksheet. (auto-calc) The worksheetreferenced in the line label is a worksheet in IRS 1040 Instructions.However, we use the more complete worksheet in IRS Pub. 972,which takes into account high AGI and foreign and U.S. possessionincome exclusions. The number you see here may therefore be lessthan the amount from line 3 of the Child Tax Credit Worksheet inthe IRS 1040 instructions, which is just $1,000 times the numberof qualifying children less any advance payment before offset. Seeour details for line 53 of Form 1040 for more information.

2 Amount from Form 1040, line 53. (auto-calc) Taken from Form 1040 asindicated, this is the Child Tax Credit on line 53 of Form 1040.

3 Subtract line 2 from line 1. (auto-calc) Computed as indicated. If theresult is zero, you are provided NO credit on this form.

4a Your total earned income. (auto-calc) The IRS label for this line be-lies the complexity of its calculation. Two results are possible:• If you elected to use combat pay in EIC calculations and a credit

appears on Form 1040, line 66a, the amount computed in thepreceding section for taxable earned income (line 8 of the work-sheet in Pub. 972) is used for this line.

• If you did not elect to use combat pay in EIC calculations or nocredit appears on Form 1040, line 66a, the amount computed inthe preceding section for taxable earned income (line 8 of the


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worksheet in Pub. 972) plus the nontaxable combat pay you en-tered on our Form 1040 (below line 22) is used for this line. (Non-taxable combat pay is entered in our special section CERTAINNONTAXABLE INCOME, which follows line 22 of Form 1040.You must enter as nontaxable combat pay in that section of Form1040 the amount reported in box 14 of Form W-2 as code Q.)

4b Nontaxable combat pay. (auto-calc) Nontaxable combat pay appearshere as a flag to the IRS only if it is included in line 4a (for the rea-son explained above).

5 Is line 4 more than $11,300? (auto-calc) If so, the excess of line 4 over$11,300 appears below this line. Otherwise, lines 5 and 6 are bothzero.

6 Multiply line 5 by 15% (auto-calc) Computed as indicated.Smaller of line 3 or line 6. (auto-calc) Computed as indicated, this isyour credit if you have fewer than 3 qualifying children.

Do you have 3 or more qualifying children? (auto-calc) Determined fromthe Dependent Worksheets you completed for line 6c of Form 1040.

If the answer to the last question is Yes and line 6 exceeds line 3, you mustcontinue to line 7. Otherwise your credit is the smaller of line 3 or line 6,which will appear on line 13, and lines 7 through 12 will be left blank.

II FILERS WITH 3 OR MORE QUALIFYING CHILDREN.Social security tax withheld on W-2. (auto-calc) Taken from the W-2Worksheets you completed for line 7 of Form 1040.

Medicare tax withheld on W-2. (auto-calc) Taken from the W-2Worksheets you completed for line 7 of Form 1040.

7 Social security and Medicare tax withheld from your pay. (auto-calc)Computed as “Social security tax withheld on W-2” plus “Medicaretax withheld on W-2.”

Form 1040 lines 27 and 59. (auto-calc) Computed as indicated.Uncollected social security and Medicare tax included in line 63 of

Form 1040. (auto-calc) Taken from the line above line 63 of Form1040 identified as UT.

8 Form 1040: line 27, 59, and part of 63 (auto-calc) Computed as thesum of the preceding two amounts.

9 Add lines 7 and 8. (auto-calc) Computed as indicated.10 Form 1040: lines 66a and 67. (auto-calc) Computed as indicated.11 Subtract line 10 from line 9. (auto-calc) Computed as indicated.12 Larger of line 6 or line 11. (auto-calc) Computed as indicated.

III YOUR ADDITIONAL CHILD TAX CREDIT. The results in Part I or II arecombined here:

13 ADDITIONAL CHILD TAX CREDIT. (auto-calc) If Part II is used, thesmaller of line 3 or 12 appears here. Otherwise, the smaller of line3 or 6 appears here.


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Form 8814 / Election to Report Child's Interest and DividendsWho is it for? This form is designed for taxpayers who have children with in-terest and dividend income only and who prefer to report that income on theirown return rather than filing a return for each child. To qualify to report thechild's income this way the child:

A must be under age 18 on January 1, 2007,B must be required to file a 2006 return,C must have had income only from interest and dividends, including

capital gain distributions and Alaska Permanent Fund dividends,D must have had less than $8,500 gross income for 2006,E must have had no estimated tax payments for 2006,F must have had no tax overpayment on the 2005 return to be applied

to the 2006 estimated tax, andG must have had no federal income tax withheld from any income.

Other restrictions apply, as detailed later. A separate Form 8814 must becompleted for each child for whom the parent elects to report income in hisor her own return. Fifteen copies of Form 8814 are built into the software toreport the income for up to 15 qualifying children. All 15 copies of Form8814 are accessible through the Road Map at line 44a of Form 1040.

Age threshold rises to 18. Starting with tax year 2006, parents can report ontheir own return income received by their children under age 18, not justchildren under 14. While this change eases the burden of filing returns formore of their children than before, it can also increase the tax bite for moreof their children.

ELIGIBILITY. Information about the child and your relationship with him orher is collected here.

A Child’s first name and initial. Enter in 15 characters or less.Child's last name. Enter last name in 25 characters or less.Child’s name in e-file format. (auto-calc) The name is displayed herein e-file format, with a < symbol to flag the last name and any suf-fix like Jr. Furthermore, suffixes like 3rd are changed to Roman nu-merals and first name is shortened to an initial when necessary tokeep the name no longer than 35 characters, all in accordance withIRS e-file specifications.

Child’s e-file name control. The name control is displayed in accor-dance with IRS e-file specifications. This is usually the first fourcharacters of the last name.

B Child's SSN. Enter child's social security number.C Is more than one 8814 filed? Answer Yes if reporting income for more

than one child.If the answer to ANY of the next five questions is Yes, you should NOT fileForm 8814 for this child:

Was child 18 years old or more on 1/1/07?Is child exempt from filing a 2006 return?


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Did child have estimated tax for 2006?Did child apply a 2005 overpayment to 2006 estimated tax?Did child have federal income tax withheld?

The next few questions determine which parent can file Form 8814:Your filing status on Form 1040. (auto-calc) Taken from Form 1040.Are you the custodial parent?Is your spouse the child’s parent?Is your taxable income higher than your spouse’s?

Tentative eligibility to use this form can now be determined. (Complete eligi-bility depends on the makeup of the child’s income, determined later.)

ELIGIBLE for Form 8814 so far? (auto-calc) Yes only if all of the first setof questions is answered No and, from the second set of questions:• If married filing jointly, either you are the custodial parent or

spouse is the child’s parent.• If married filing separately, your taxable income is higher and ei-

ther you are the custodial parent or spouse is the child’s parent.• For any other filing status, you are the custodial parent.Otherwise, the answer is No and this form cannot be used.

CHILD’S INTEREST INCOME. This section of our form is very much like Part Iof Schedule B.

Child's GROSS interest. (Supported by the 1099-INT Worksheet, Figure2-9.) The same worksheet that support line 1 of Schedule B sup-ports this line and the lines that follow it. See our details for Sched-ule B for more information and instructions on completing the work-sheet. (TIP: Because this worksheet is not printed as a part of theofficial return, you do not need to complete a separate worksheetfor each payee as you do on Schedule B.)

. Other tax-exempt for 1b. If the child has any tax-exempt interest notreported on 1099-INT Worksheets, enter that amount here. It willbe included in the amount for Form 8814, line 1b, along with thetax-exempt interest reported on the worksheets.

CHILD’S DIVIDEND INCOME. This section of our form is very much like PartII of Schedule B, complete with the new lines for sections 1202 and 1250.

Child's ORDINARY dividends. (Supported by the 1099-DIV Worksheet,Figure 2-10.) The same worksheet that support line 5 of Schedule Bsupports this line and the lines that follow it. See our details forSchedule B for more information and instructions on completing theworksheet. However, because this worksheet is not printed as apart of the official return, you do not need to complete a separateworksheet for each payee as you do on Schedule B.

. Qualified dividends. (auto-calc, supported by the 1099-DIV Work-sheet) For all qualified children identified on the worksheets, a por-tion of qualified dividends on the worksheets is reflected in lines 9aand 9b of Form 1040 for taxation under a favorable low rate ratherthan the regular tax rate, as detailed for line 9 of this form.

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. Capital gains distributions. (auto-calc, supported by the 1099-DIVWorksheet) For all qualified children identified on the worksheets, aportion of capital gains distributions on the worksheets is reflectedin line 13 of Schedule D for taxation under the capital gains raterather than the regular tax rate, as detailed for line 10 of this form.

Alaska permanent fund dividends. Unlike the 1099-DIV Worksheetfor Schedule B, Alaska permanent fund dividends are reported onthe 1099-DIV Worksheet for Form 8814. However, these dividendsdo not count as investment income for the purposes of the earnedincome credit. Therefore, you must enter here the amount reportedon the worksheets for these type of dividends so that the part ofline 6 of Form 8814 that is attributable to these dividends is re-moved before being added to investment income for the purposes ofthe earned income credit.

FINAL DETERMINATION OF ELIGIBILITY. The child’s income is comparedhere with allowed limits.

Does child have OTHER income? You cannot use Form 8814 for thechild if he or she has ANY income other than the above interest anddividend income.

ELIGIBLE TO USE FORM 8814? (auto-calc) Answered Yes only if ALL ofthe following conditions are met:• The answer to “Eligible for 8814 so far?” was Yes, and• The answer to “Child has OTHER income?” is No, and• Reportable interest and dividends (that is, gross interest and divi-

dends less nominee distributions, tax-exempt interest, nontaxabledistributions, and other adjustments) is less than $8,500, and

• Withholding on 1099-INT is zero, and• Withholding on 1099-DIV is zero.

FOREIGN ACCOUNTS AND TRUSTS. You must answer for the child the samequestions you answer for yourself in Part III of Schedule B. Any Yes answerhere also appears on your Schedule B flagged by “Form 8814” on the officialprintout. Any foreign tax paid shown on the preceding worksheets also ap-pears on your Schedule B for use in your own claim for foreign tax credit.

PART I, CHILD'S INTEREST AND DIVIDEND INCOME TO REPORT ON YOURRETURN. This step is fully automatic based on the prior entries.

1a Child's TAXABLE interest. (auto-calc) Computed from the precedinginterest entries, adjusting gross interest by the adjusting entries inthe same way as Part I of Schedule B.

1b Child's TAX-EXEMPT interest. (auto-calc) Computed as the tax-exempt interest entered on the 1099-INT Worksheet plus any addi-tional entered for “Other tax-exempt for 1b.”

2 Child's ordinary dividends. (auto-calc) Taken from the entries in line1 of the 1099-DIV worksheets, after eliminating nominee amounts.


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3 Capital gain distributions. (auto-calc) Taken from the entries in line2a of the 1099-DIV worksheets, after eliminating nominee amounts.

4 Add lines 1a, 2, and 3. (auto-calc) Computed as indicated.5 Base amount. (auto-calc) Automatically $1,700 for all returns.6 Subtract line 5 from line 4. (auto-calc) Computed as indicated, but no

less than zero. This amount generally counts as investment incomefor the parent’s Form 4952 (Investment Interest Expense Deduc-tion), with the exception of the part attributable to Alaska Perma-nent Fund dividends.

7 Divide line 2b by line 4. (auto-calc) Computed as indicated, carried tofull accuracy even though the display and printout show only thefirst four decimal places. This is the ratio of qualified dividends tototal income for the child.

8 Divide line 3 by line 4. (auto-calc) Computed as indicated, carried tofull accuracy even though the display and printout show only thefirst four decimal places. This is the ratio of capital gain distributionsto total income for the child.

9 Multiply line 6 by line 7. (auto-calc) Computed as indicated, this is theportion of the child’s qualified dividends that is taxable to the par-ent. This result will be reflected in lines 9a and 9b of the parent’sForm 1040 with the amount identified at those lines with the flag“F8814” on the official printout of Form 1040. (If a Schedule B ex-ists for this return, this result will also be posted to Schedule B tobe combined with any other qualified dividends for the parent at line5 of Schedule B.)

10 Multiply line 6 by line 8. (auto-calc) Computed as indicated, this isthe portion of the child’s total capital gains distributions that is tax-able to the parent. This result will be reflected in line 13 of the par-ent’s Schedule D with the amount identified at that line with theflag “Form 8814” on the official printout of Schedule D. (Onlyamounts in box 2a of Form 1099-DIV are reflected here. Amountsin boxes 2b, 2c, and 2d, which identify specific types of capitalgains distributions, are similarly prorated and shown below line 12for posting to other parts of Schedule D.)

11 Add lines 9 and 10. (auto-calc) Computed as indicated, this is the to-tal of taxable amounts that are separately posted (from lines 9 and10) because of the favorable tax treatment they can receive.

12 Subtract line 11 from line 6. (auto-calc) Computed as indicated, thisis the taxable amount subject to the regular tax. It is posted to thecomponent of Form 1040, line 21, labeled “Form 8814,” and isidentified at line 21 on the official printout of Form 1040.

Unrecaptured section 1250 gain for Schedule D, line 19. (auto-calc)Computed analogously to lines 9 and 10, this is the part of capitalgain distributions subject to a 25% tax rate. It is used on ScheduleD in the IRS Unrecaptured Section 1250 Gain Worksheet to deter-mine the amount for Schedule D, line 19.

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Section 1202 gain for Schedule D. (auto-calc) Computed analogouslyto lines 9 and 10, this is the part of capital gain distributions eligiblefor partial exclusion from taxation. See our details for Schedule D,line 13, and the Gain/Loss Worksheet for Schedule D for the elec-tion you can make. This amount is shown on screen 6 of ScheduleD below the amount from line 9, above, for Schedule D, line 13, butis used in calculations only when you make the described electionon the worksheets.

Collectibles (28% rate gain) for Schedule D. (auto-calc) Computedanalogously to lines 9 and 10, this is the part of capital gain distri-butions subject for a 28% tax rate. This amount is shown on screen6 of Schedule D below the amount from line 9, above, for ScheduleD, line 13. It is used on Schedule D in the IRS 28% Rate GainWorksheet to determine the amount for Schedule D, line 18.

PART II, TAX ON 1ST $1,700 OF CHILD'S INTEREST AND DIVIDENDS. Thisstep is also fully automatic based on the prior entries.

13 Amount not taxed. (auto-calc) Automatically $850 for all returns.14 Subtract line 13 from line 4. (auto-calc) Computed as indicated.15 TAX. (auto-calc) Computed as $85 if line 8 is under $850, and oth-

erwise 10% of line 8.The results on line 9 from all Forms 8814 prepared are summed together thenposted to line 44a of Form 1040 for inclusion in total tax liability for the re-turn.



Forms 8815, 8822, and 8824

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*Form 8815 / Exclusion of Interest from Series EE and IU.S. Savings Bonds Issued After 1989Purpose. This form is used to exclude from taxation interest on qualifiedbonds you cashed in to pay for higher education expenses. The only qualifiedbonds are series EE and series I U.S. Savings Bonds issued in your name after1989, and you must have been at least age 24 when the bonds were issued.Furthermore, the exclusion is not available if married filing separately, and isphased out at high income for other filing statuses. The interest is reportedon Form 1099-INT Worksheets for line 1 of Schedule B, and the exclusion ofthat interest is reported at line 3 of Schedule B. Form 8815 is accessiblethrough the Road Map at line 3 of Schedule B.


*Form 8822 / Change of AddressPurpose. This form is used to report a change of address to the IRS at a timewhen you are not filing the return to which it applies. Accordingly, this formis not attached to any return, but is sent by itself to the IRS. (To change youraddress at the time you file you merely use the new address on your return.)Because of its stand-alone nature, Form 8822 is accessible only from theForms Menu, and not through the Road Map.


*Form 8824 / Like-Kind ExchangesPurpose. This form is principally used to report an exchange of business orinvestment property for property of a like kind. (It is also used to report cer-tain conflict-of-interest sales in Part IV of the form.) Although part or all ofthe exchange may be currently tax-free, the basis in the new property is gen-erally lowered so that the exchange is really a form of tax deferral rather thanzero tax. You must use a separate Form 8824 for each separate exchange,and five copies of the form are available in the software. Form 8824 is ac-cessible through the Road Map at various lines on both Schedule D and Form4797.


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Form 8828

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*Form 8828 / Recapture of Federal Mortgage SubsidyPurpose. This form is used to figure the recapture tax you owe if you sell (orotherwise dispose of) a home you financed under a federally subsidized pro-gram within 9 years of the closing date of the loan. In the context of thisform, you have a federally mortgage subsidy if your mortgage loan is charac-terized by either of the following:

Tax-exempt qualified mortgage bond. Your mortgage loan will gener-ally have an interest rate that is below market value if it was fundedfrom a tax-exempt qualified mortgage bond issue. This benefit is aform of federal subsidy.

Mortgage credit certificate (MCC). You can use Form 8396 to claim anannual tax credit if your mortgage loan came with a mortgage creditcertificate (MCC). This benefit is another form of federal subsidy.

Form 8828 is accessible through the Road Map at the FMSR line above line63 Form 1040.



Form 8829

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Form 8829 / Business Use of Your HomeWho is it for? This form is designed for anyone who deducts any expenses onSchedule C for the use of his or her home. The regulations on deductions forhome expenses have been greatly changed in recent years, and the limitationsare complex. Form 8829 ensures the proper application of the limitations andthe proper carryovers to future years. Form 8829 is accessible through theRoad Map at line 30 of Schedule C, with a separate copy of Form 8829 foreach separate copy of Schedule C.

PART I, PART OF YOUR HOME USED FOR BUSINESS. The business use per-centage that is applied to indirect costs in Part II is determined here.

Copy number (1 through 5). (auto-calc) The number for the copy youselected from the Forms Menu, or the Schedule C from which youaccessed this form, appears here automatically. Each copy of Form8829 supports ONLY the Schedule C with the same copy number.

Spouse owns (from Schedule C)? (auto-calc) Taken from the corre-sponding copy of Schedule C.

1 Area used exclusively for business. Enter as indicated, including areaused for storing inventory and area used for day-care even if not ex-clusively used for day care.

2 Total area of home. Enter total area in the same units as used in line 1(such as square feet).

3 Divide line 1 by line 2 (expressed as a percentage). (auto-calc) Com-puted as indicated.

Day-care facilities claimed? If No, lines 4 through 6 are skipped.Facilities ever used for nonbusiness purposes in 2006? If No, lines 4through 6 are skipped.

For day-care NOT all business. The following lines, through line 6, applyONLY to those who answer Yes to BOTH of the above two questions.

Total hours in whole year. (auto-calc) The number of hours in a fullyear (8,760 hours for tax year 2006, which is 365 days at 24hours per day) appears here automatically.

Number of days NOT in business. This entry applies ONLY to a busi-ness that was started or terminated during the tax year. Enter thenumber of days the day-care facility did NOT exist during the year.

Total hours available. (auto-calc) Computed as the total hours in ayear less 24 times the above entry for number of days NOT in busi-ness.

Actual hours of business use. Enter the number of hours the day-carefacility was actually used for business. This entry can be no greaterthan the preceding result for total hours available. (The IRS suggestsyou compute the amount for this entry by figuring the number ofdays the facility is open for daycare use, then multiplying that num-ber by the average hours of use per day.)

4 Multiply days used for daycare during year by hours used per day.(auto-calc) Taken as the preceding entry if you answered Yes,

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above, to both “Day-care facilities claimed?” and “Facilities everused for nonbusiness purposes in 2006?” Otherwise, zero.

5 Total hours available for use during the year. (auto-calc) Taken fromthe preceding result for “Total hours available” if you answered Yes,above, to both “Day-care facilities claimed?” and “Facilities everused for nonbusiness purposes in 2006?” Otherwise, zero.

6 Divide line 4 by line 5 (expressed as a decimal). (auto-calc) Computedas indicated.

7 Business percentage. (auto-calc) Computed as line 3 times line 6 ifyou answered Yes, above, to both “Day-care facilities claimed?” and“Facilities ever used for nonbusiness purposes in 2006?” Otherwise,line 3 alone is used here. This percentage is used in figuring indirectexpenses, defined below, and the depreciation of the business por-tion of your home.

How to handle a change of home during the year. Form 8829 generally as-sumes that you used the same home for the business all year long. However,if you moved during the year and you either use the “Indirect expense”method described below or you claim depreciation on your home, you mustuse a separate Form 8829 for each home. Since only one Form 8829 is builtinto the software for each business, and its result is automatically posted toline 30 of the Schedule C to which it is attached, you can handle this caseonly by removing the Form 8829 for this business and entering the result ofthe Forms 8829 for both homes combined on line 30 of the appropriateSchedule C. (You can complete the multiple Forms 8829 separately on amock return in order to minimize your effort and produce fileable printouts,but you cannot have a Form 8829 for this Schedule C in the return you file.)

PART II, FIGURE YOUR ALLOWABLE DEDUCTION. All expenses in lines 9through 21 are split into direct and indirect expenses. Direct expenses, whichare identified as column (a) expenses, are those that benefit ONLY the busi-ness and not the home. Indirect expenses, which are identified as column (b)expenses, are those that benefit BOTH the business and the home, and musttherefore be prorated between business and personal use. This prorating isperformed at lines 13 and 23 by multiplying the indirect expenses by thebusiness use percentage on line 7, so you must enter the ENTIRE expense onthe "Indirect" lines. However, any indirect cost that relates to the business ina different percentage than that shown on line 7 should be reported on theDirect line instead, entering only the business part of the expense.

Amount from Schedule C, line 29. (auto-calc) This is the tentativeprofit or loss taken from line 29 of the copy of Schedule C with thesame copy number as this form.

Schedule D and Form 4797 net from business use of home. Enter anyamounts on Schedule D or Form 4797 that are derived from thebusiness use of your home.

Amount of gross income NOT from home use. If the business re-ported on Schedule C is not operated exclusively out of your home,


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you must enter the part of gross income (line 7 of Schedule C) thatapplies to the operation of your business from a place of businessother than your home.

8 Schedule C, line 29 (as adjusted). (auto-calc) Computed as ScheduleC, line 29, plus the Schedule D and Form 4797 entry, less theabove entry for gross income not applicable to business use of yourhome.

9 Casualty losses. Enter allowable losses from a specially preparedForm 4684, Sec. A, line 18. See IRS Instructions for Form 8829 fordetails on the special way to use Form 4684 to figure the amountto enter here.

10 Deductible mortgage interest. Enter the mortgage interest that isdeductible on Schedule A for this home. If you file Schedule A andreport only interest for loans that benefit the entire home, and onlythis home, you would generally enter on line 10 or 11 of ScheduleA ONLY the interest NOT deducted on Form 8829. (The amountdeducted on Form 8829 is the direct entry on line 10, or the indi-rect entry on line 10 times line 7.)

11 Real estate taxes. Enter as indicated.12 Add lines 9, 10, & 11. (auto-calc) Computed as indicated separately

for columns (a) and (b).13 Multiply 12(b) by line 7. (auto-calc) Computed as indicated.14 Add line 12(a) and line 13. (auto-calc) Computed as indicated.15 Subtract line 14 from line 8. (auto-calc) Computed as indicated but

no less than zero.16 Excess mortgage interest. Enter the amount of mortgage interest

that is not deductible, and therefore not reported on line 10 above,because of limits on Schedule A for this home. If you file ScheduleA and report only interest for loans that benefit the entire home,and only this home, you would generally enter in the "indirect" partof line 16 ONLY the amount exceeding the limit as shown on theline above line 10 or the line above line 11 of Schedule A.

17 Insurance. Enter as indicated.18 Rent. Enter as indicated.19 Repairs and maintenance. Enter as indicated.20 Utilities. Enter as indicated.21 Other expenses. Enter any rents paid for this home and other eligible

expenses.22 Add lines 16 through 21. (auto-calc) Computed as indicated sepa-

rately for columns (a) and (b).23 Multiply 22(b) by line 7. (auto-calc) Computed as indicated.24 Carryover of operating expense from 2005. Enter the amount of op-

erating expenses disallowed on the prior-year return (line 41 of the2005 Form 8829) due to the limitation on expenses for businessuse of your home.

25 Add line 22(a), 23, and 24. (auto-calc) Computed as indicated.

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26 Allowable operating expense. (auto-calc) Computed as the lesser ofline 15 or line 25.

27 Limit on excess casualty losses and depreciation. (auto-calc) Com-puted as line 15 less line 26.

28 Excess casualty losses. Enter the amount of casualty losses NOTallowed, and therefore not entered on line 9, due to the limits onForm 4684, Sec. A.

29 Depreciation of home from Part III. (auto-calc) Taken from line 41,below.

Carryover of excess casualty losses from 2005 Form 8829, line 42.Enter the amount of excess casualty losses disallowed on the prior-year return due to the limitation on expenses for business use ofyour home.

Carryover of excess depreciation from 2005 Form 8829, line 42. Enterthe amount of excess depreciation disallowed on the prior-year re-turn due to the limitation on expenses for business use of yourhome.

30 Carryover of excess casualty losses and depreciation from 2005Form 8829, line 42. (auto-calc) Computed as the sum of the abovetwo entries.

31 Add lines 28 through 30. (auto-calc) Computed as indicated.32 Allowable excess casualty losses and depreciation. (auto-calc)

Computed as the lesser of line 27 or line 31.33 Add lines 14, 26, and 32. (auto-calc) Computed as indicated.34 Casualty losses included on lines 14 and 32. (auto-calc) The line 14

part is computed as line 9(Direct) plus line 7 times line 9(Indirect).The line 32 part is computed as the ratio line 32 divided by line 31multiplied by the sum of line 28 and the casualty part of line 30.

35 Allowable expenses for business use of your home. (auto-calc)Computed as line 33 less line 34.

PART III, DEPRECIATION OF YOUR HOME. Depreciation for the business useof the home is computed here instead of Form 4562. However, if any of thedepreciation claimed below is for property first placed in service in 2006, youmust complete an unattached copy of Form 4562 reporting that new propertyin addition to figuring the depreciation here.

36 Smaller of your home's adjusted basis or fair market value. Enter asindicated. Use the fair market value of the home on the date youfirst used it for business in this comparison. When determining thehome's basis, do not include any depreciation claimed after the dateyou first used the home for business.

37 Value of land included on line 36. Enter as indicated.38 Basis of building. (auto-calc) Computed as line 36 less line 37, but

no less than zero.39 Business basis of building. (auto-calc) Computed as line 38 multi-

plied by the business use percentage on line 7.


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40 Depreciation percentage (as xx.xxx). (auto-calc ONLY if you itemizethe next line) If you know the proper depreciation rate to use, youcan enter it here and skip the next line. But if you want the soft-ware to figure it for you, skip this line and itemize the next line in-stead. When you return from the worksheet that supports the nextline, the depreciation percentage will be computed and placed herefor you.

Home depreciation (itemize). (Supported by a MACRS/ACRS Worksheetsimilar to Figure 2-24.) This line is supported by a worksheet similarto that used for Form 4562 lines 15, 16, 17, and 19, but omittinglines that relate to section 179 expense and the special depreciationallowance, which do not apply. Refer to the details for theMACRS/ACRS Worksheet for Form 4562 for general informationabout entries for this worksheet. However, the copy of this work-sheet that is accessed at THIS line is special in several ways:• a, Classification of property. If you leave this entry blank (which

we suggest) the software assumes nonresidential real property,which is the proper classification for your home office. If youneed to make an entry for special depreciation rules, refer to thedetails for the MACRS/ACRS Worksheet in our instructions forForm 4562.

• b, Date placed in service. You must enter the date the home of-fice was started (the date placed in business service), not the datethe home was purchased. This is the ONLY entry you should gen-erally have to make on the worksheet for home depreciation, un-less the date precedes 1981. (If you need to enter a date earlierthan January 1, 1981, when ACRS depreciation was created, youmust use the Manual Method, described at line f.)

• c, Depreciation basis. The depreciation basis is set to the busi-ness basis of the building on line 39 of this copy of Form 8829.

• d, Recovery Period. The Recovery Period is restricted to thosethat are allowed for nonresidential real estate. See Table 2-14 forthe minimum allowed periods for various dates placed in service.

• e, Convention. The convention is determined by the softwarebased on the date entered, in accordance with the ACRS rules fornonresidential real estate.

• f, Method. The method is generally set by the software to straight-line depreciation. HINT: If you need to enter a date earlier thanJanuary 1, 1981, when ACRS depreciation was created, youmust use the Manual Method. With the Manual Method you enteryour method on this line with a leading space, and the softwarethen let’s you make any entry you want for the date at line b andthe “Percentage this year” above line g. See our DepreciationWorksheet in Figure 2-26 for help with pre-1981 property.

In addition to the above restrictions, only one worksheet can be ac-cessed at this line because only one home can be depreciated on a

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single Form 8829. (Note that the worksheet is NOT printed withthe official return because the IRS does not require it, since lines 36through 40 of Form 8829 provide adequate information.)

Improvements depreciation (itemize). (Supported by a MACRS/ACRSWorksheet similar to Figure 2-24.) This line is supported by the sameworksheet as the preceding line, but with less restrictions. It is providedfor additions or improvements placed in service AFTER the home wasplaced into business service. For this line you control the method andconvention by your entry at line a of the worksheet, but the IRS stillgenerally requires you the use nonresidential real estate (NR) as theclass. Any worksheet created here IS printed with the official return andreferenced on Form 8829, as required by the IRS, since depreciationclaimed here will alter the calculation of line 41 of Form 8829.

41 Depreciation allowable. (auto-calc) Computed as line 39 times line40 (which is the same as the result for “Home depreciation” if youused the worksheet for that line) plus the above depreciation for im-provements. Note that . This result is used for line 29, above.

Table 2-14. Recovery Periods for Office in Home

PART IV, CARRYOVER OF UNALLOWED EXPENSES TO 2007. Carryovers tothe next tax year are shown here.

42 Operating expenses. (auto-calc) Computed as line 24 less line 26,but no less than zero.

Carryover of excess casualty losses to 2007. (auto-calc) Computedas the casualty part of line 30 less the casualty part of line 31.

Carryover of excess depreciation losses to 2007. (auto-calc) Com-puted as the depreciation part of line 30 less the depreciation partof line 31.

43 Excess casualty losses and depreciation. (auto-calc) Computed asthe sum of the above two lines.

Line 42 will be used for line 24 of next year's Form 8829. Line 43 will beused for line 30 of next year's Form 8829.


Date home placed Minimum allowed placed in business service Recovery Period After May 12, 1993 39 years Jan. 1, 1987 to May 12, 1993 31.5 years May 9, 1985 to Dec. 31, 1986 19 years March 16, 1984 to May 8, 1985 18 years Jan. 1, 1981 to March 15, 1984 15 years

If placed in business service before Jan. 1, 1981, use the Manual Method to report depreciation by a method allowed before ACRS was created by the IRS.


Forms 8834, 8839, 8846, and 8853

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*Form 8834 / Qualified Electric Vehicle CreditPurpose. This form is used to figure and claim a credit for a qualified electricvehicle you first used in the current tax year. To be qualified the vehicle mustbe powered primarily by an electric motor, so hybrid cars like the Honda In-sight and Toyota Prius do not qualify. The vehicle must also have at leastfour wheels and designed for use on public roads. Form 8834 is accessiblethrough the Road Map at the 8834 line for line 55c of Form 1040.


*Form 8839 / Qualified Adoption ExpensesPurpose. This form is used to figure and claim a credit for adopting a child ordisabled person, even if the adoption was not yet final by the end of the taxyear. The form is also used to justify the exclusion of employer-providedbenefits already excluded from the employee’s Form W-2, or to figure theamount that must be added back to income or any additional exclusion for achild with special needs. Form 8839 is accessible through the Road Map atline 54b of Form 1040.


*Form 8846 / Credit for Employer Social Security andMedicare Taxes Paid on Certain Employee TipsPurpose. This form is used to claim a credit for social security and Medicaretax paid on tips on behalf of food service employees, but only to the extentthat the tips are not used to meet Federal minimum wage requirements. Form8846 is accessible through the Road Map at line 1j of Form 3800.


*Form 8853 / Archer MSAs and Long-Term Care Insur-ance ContractsPurpose. This form is used to report contributions to Archer MSAs and figurethe corresponding deduction, and to report taxable distributions and pay-ments from MSAs and long-term care (LTC) insurance contracts. Form 8853is accessible through the Road Map at MSA, MedMSA, and LTC lines above

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line 21 of Form 1040, the Archer MSA part of line 23 of Form 1040, and theMSA and MedMSA lines above line 63 of Form 1040.


*Form 8859 / District of Columbia First-Time HomebuyerCreditPurpose. This form is used to claim a credit for purchasing a home in Wash-ington D.C. You can only claim the credit for the first home you ever buy inWashington D.C. Form 8859 is accessible through the Road Map at line 54cof Form 1040.


*Form 8861 / Welfare-to-Work CreditPurpose. This form is used to claim credit for wages you paid to long-termfamily assistance recipients. Form 8861 is accessible through the Road Mapat line 1c of Form 3800.


*Form 8862 / Information to Claim Earned Income CreditAfter DisallowancePurpose. This form is required in conjunction with a claim for the Earned In-come Credit (From 1040, line 66a) if any earned income credit you claimedsince 1996 was reduced or disallowed by the IRS for any reason other than amath or clerical error. It is not required unless your earned income credit wasreduced or disallowed after 1996. The form is an informational form only andis not used in the calculations of any other form. Accordingly, Form 8862 isaccessible only from the Forms Menu and not through the Road Map.



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Form 8863 / Education Credits(Hope and Lifetime Learning)Purpose. This form is used to claim credits for higher education expenses foryou, your spouse, or your dependents. However, the type of expenses thatqualify are generally limited to tuition only. For both credits! your filing status cannot be married filing separately,! you cannot be claimed on someone else’s return, and! your adjusted gross income (AGI) must be below $55,000 ($110,000 if

married filing jointly).! you cannot take both credits for the same studentThe Hope Credit can now be as much as $1,650 per student for the first 2years of college ($3,300 for schools in the Gulf Opportunity Zone). The Life-time Learning Credit applies to both undergraduate and graduate courses, butthe maximum credit is $2,000 per year regardless of the number of students($4,000 for schools in the Gulf Opportunity Zone). Form 8863 is accessiblethrough the Road Map at line 50 of Form 1040.

Relief for students who attend a school in the core disaster area of HurricaneKatrina. If attending educational institutions in the Gulf Opportunity Zone(selected counties and parishes in Alabama, Lousiana, and Mississippi), alllimits on the credits are raised 100%, effectively doubling the maximumcredit for attendance at those institutions.

PART I, HOPE CREDIT. To claim this credit, complete the Hope Credit Work-sheet that supports line 1 of this form and the rest is automatic. The studentmust meet specific qualifications for you to claim the Hope Credit in addi-tional to the general qualifications that apply to both credits. You may there-fore be able to claim the Lifetime Learning Credit even when the student doesnot qualify you for the Hope Credit. See the IRS Instructions for Form 8863for details.

1 Total qualified expenses in (c). (Supported by the Hope Credit Work-sheet.) Qualified expenses for all worksheets combined appearshere, where the expense is limited on each worksheet to $2,200($4,400 for schools in the GO Zone).

Credits figured in (f). (Supported by the Hope Credit Worksheet.) Only aportion of the expenses is allowed as a credit, as computed in acomplex way on each worksheet. The maximum credit is $1,650per student ($3,300 for schools in the GO Zone).

2 Tentative Hope credit. (auto-calc) Taken as the preceding total for (f).The credit on line 2 can be as high as $1,650 per student when all schoolsare outside the GO Zone to $3,300 per student when all schools are withinthe GO Zone. Unlike the Lifetime Learning Credit, there is no overall limit onthe credit at this point. However, both credits combined are subject tophaseout at high income in Part III.

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PART II, LIFETIME LEARNING CREDIT. To claim this credit, complete the Life-time Learning Credit Worksheet that supports line 3 of this form and the restis automatic. CAUTION: You cannot take the Lifetime Learning Credit for astudent you used to claim the Hope Credit. See the IRS Instructions for Form8863 for general qualifications.

3 Total qualified expenses in (c). (Supported by the Lifetime LearningCredit Worksheet) Qualified expenses for all worksheets combinedappears here without limitation. (Unlike the Hope Credit, no per stu-dent limitations apply to this credit.)

GO Zone part of 3(c). (Supported by the Lifetime Learning Credit Work-sheet) Qualified expenses for students attending schools in the GOZone are separately identified in order to apply more liberal limita-tions at lines 4 and 5, below.

4 Add amounts on line 3, column (c). (auto-calc) Taken as the total ap-pearing on 3(c), above.

5a Smaller of line 4 of $10,000. (auto-calc) Computed as indicated.5b For students attending schools in GO Zone, smaller of $10,000 or

their qualified expenses in line 4. (auto-calc) Computed as thesmaller of 10,000 or the above amount for “GO Zone part of 3(c).”

5c Subtract line 5b from line 5a. (auto-calc) Computed as indicated.6a Multiply line 5b by 40% (.40). (auto-calc) Computed as indicated.6b Multiply line 5c by 20% (.20). (auto-calc) Computed as indicated.6c Tentative lifetime learning credit. (auto-calc) Computed as the sum

of lines 6a and 6b.The credit on line 6c can be as high as $2,000 when all schools are outsidethe GO Zone to $4,000 when all schools are within the GO Zone.

PART III, ALLOWABLE CREDITS. The rest of the form is fully automatic. Thecredits on lines 2 and 6c are combined then subjected to phaseout limita-tions. The phaseout results in:! full credit when AGI is $45,000 or less ($90,000 if married filing jointly)! no credit when AGI is $55,000 or more ($110,000 if married filing

jointly)! partial credit when AGI lies between these two extremes, pro rated over

the $10,000 difference between the two extremes.The credit is then further limited to tax on line 46 of Form 1040 less creditson lines 47 through 49, because this is a nonrefundable credit. The result online 17 is posted to line 50 of Form 1040.


Form 8880

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Form 8880 / Qualified Retirement Savings ContributionsCreditPurpose. This form provides a credit against tax for your contributions to aretirement plan. The credit can amount to as much as $1,000 per taxpayer,but is limited to low-income taxpayers. There is NO credit for those who fileas single, married filing separately, or qualifying widow(er) and have morethan $25,000 of AGI ($37,500 for head of household, $50,000 for marriedfiling jointly), but the credit increases as AGI decreases. Form 8880 is acces-sible through the Road Map at line 51 of Form 1040

Qualifications. Only the following types of contributions or deferrals qualifyfor the credit:! Contributions to traditional IRAs! Contributions to Roth IRAs! Elective deferrals to 401(k) plans! Elective deferrals to 403(b) plans! Elective deferrals to Governmental 457 plans! Elective deferrals to SEP plans! Elective deferrals to SIMPLE plans! Voluntary employee contributions to plans defined in IRS sec. 4974(c)! Contributions to a 501(c)(18)(D) planFurthermore, the taxpayer who made the contribution cannot be a dependenton someone else’s return, cannot be under age 18 at year-end, and cannothave been a student for any 5-month period during the tax year.

Automatically generated for taxpayers with traditional IRAs. If all your quali-fied contributions are to a traditional IRA, the credit is fully automatic basedon your IRA contributions allowed on line 32 of Form 1040, plus any allowedvoluntary contributions you entered on Form 8606. In that case the form isautomatically created and completed for you when you exit the return, with-out any instruction from you. However, contributions to other plans are notgenerally reported on the return, so you must supply information on yourother contributions directly on Form 8880 yourself.

YOUR RETIREMENT ACCOUNTS. The form is completed automatically basedon information you supply for you and spouse for lines 1, 2, and 4 of the form:

Traditional IRA deduction on Form 1040. (auto-calc) Taken from your partof Form 1040, line 32, this is your allowed nontaxable IRA contribution.

Additional contributions on Form 8606, line 1. (auto-calc) Taken fromline 1 of your copy of Form 8606, this is the total of allowed volun-tary (taxable) contributions you made to your IRA.

Roth IRA contributions for 2006. Enter allowed contributions only.Adjustment for Form 8880, line 1a. Enter any adjustment required forthe above amounts, such as a negative entry for rollover contribu-tions included above.

1a TOTAL IRA contributions for line 1a. (auto-calc) Computed as thesum of the above four lines.

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Qualified elective deferrals. Enter deferrals to 401(k), 403(b), gov-ernmental 456, SEP, and SIMPLE plans.

Voluntary 4974(c) contributions. Enter contributions to a qualifiedplan defined in IRC sec. 4974(c).

501(c)(18)(D) contributions. Enter contributions to 501(c)(18)(D) plans.2a TOTAL deferrals and contributions for line 2a. (auto-calc) Computed

as the sum of the above three lines.IRA distributions on Form 1040, line 15a. (auto-calc) Taken from theworksheets you prepared for lines 15a through 16b of Form 1040and identified as IRAs and as yours.

Additional post-2003 distributions. Enter any distributions to you notreflected in the preceding line from any plans of the type listedabove lines 1a and 2a for January 1, 2004 through the due date ofyour return (including extensions). CAUTION: Do NOT follow theIRS instruction to enter amounts for both spouses’ in both columns.Instead, see the entry that follows line 4a.

Adjustment for Form 8880, line 4a. Enter any adjustment required for theabove amounts, such as a negative entry for rollovers or trustee-to-trusteetransfers, loans from your plan, or distributions for excess contributions.

4a TOTAL post-2003 distributions for line 4a. (auto-calc) Computed asthe sum of the above three lines.

Part for years you filed married filing jointly with spouse on this re-turn. If you have filed married filing jointly with the same spouseevery year starting tax year 2004, you would enter the full amountof line 4a here. Otherwise you must enter only distributions re-ceived for years you filed jointly with this spouse. This entry isused later to satisfy the IRS instruction to enter both spouses’amounts in both columns when appropriate.

Born after January 1, 1989? (auto-calc) Based on the entry for yourage on Form 1040, the answer is Yes if you have not reached age18 by January 1, 2007.

Claimed as a dependent on another return? (auto-calc) Taken from youranswer on Form 1040 for “Were you a dependent on another return?”.

Student during 2006? (auto-calc) Taken from your answer on Form1040 for “Were you a student for 5 months or more?”

SPOUSE RETIREMENT ACCOUNTS. This section is identical to the one forYOU, so the instructions are not repeated here. You need not make any en-tries in this section unless married filing jointly.

Remainder of form is automatic. The form is completed for you in accordancewith IRS instructions based on the information you supplied in the first twosections. Any credit resulting at line 14 of this form is posted automatically toline 51 of Form 1040. On the other hand, if there is no credit, the form willbe omitted from official printouts when you choose to print a “complete re-turn” or “all forms prepared.”


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*Form 8885 / Health Coverage Tax Credit

Purpose. This form is used to claim a refundable credit for payments forhealth insurance coverage for certain special taxpayers. To qualify, you mustbe an eligible trade adjustment assistance (TAA) recipient, alternative TAArecipient, or Pension Benefit Guaranty Corporation (PBGC) pension recipient.If qualified, the credit is 65% of your payments, less any advance paymentsreceived. Form 8885 is accessible through the Road Map above line 29 ofForm 1040 and at line 70c of Form 1040. Two copies of Form 8885 areavailable, one for each spouse.


*Form 8889 / Health Savings Accounts (HSAs)

Purpose. This form is used to report contributions to your HSAs (whethermade by you, your employer, or someone else), to figure your HSA deductionfor line 25 of Form 1040, and to report distributions from your HSAs and fig-ure the tax on them for line 63 of Form 1040. Form 8889 is accessiblethrough the Road Map at line 25 of Form 1040 and the line labeled “HSA"above line 63 of Form 1040. Two copies of Form 8889 are available, one foreach spouse.


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Form 8901

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Form 8901 / Information on Qualifying Children Who AreNot DependentsPurpose. This form is used to provide information on children who qualify youfor the Child Tax Credit but are not claimed as your dependents, and there-fore are not identified on Form 1040 (at line 6c). Information on these chil-dren is entered on our Dependents Worksheet for Form 1040, line 6c. TheChild Tax Credit part of that worksheet (screen 2 of the worksheet) sepa-rately identifies qualified dependents and qualified non-dependents. The onlynon-dependents who qualify are those who are

(a) non-dependent because you or spouse can be claimed as a depend-ent by someone else, or

(b) non-dependent because the child is married and files jointly withspouse

and are qualified for the Child Tax Credit in all other respects. For those chil-dren, the information on the child is not printed at line 6c of the official Form1040 (because they are not qualified as dependents), but are printed on Form8901 to show the required information on the child.

Automatically created and completed. Because all relevant information iscontained on the Dependents Worksheets you complete for line 6c of Form1040, Form 8901 is automatically created and completed upon the final re-calculation of the return. In fact, this form is so automated that you cannotmake any entries on the form yourself. It is accessible only from the FormsMenu, but there is no need to access or view it. If you do view it you will seeonly two entries:

Number of non-dependents for Child Tax Credit. (auto-calc, supportedby the Dependents Worksheet for Form 1040, line 6c) Taken fromthe worksheets you prepared for lines 15a through 16b of Form1040 and identified as IRAs and as yours.

Child Tax Credit on Form 1040. (auto-calc, supported by Form 1040)Computed as the sum of lines 53 and 68 of Form 1040, this is thetotal Child Tax Credit, including both the regular credit on line 53and the additional credit on line 68.

If either of these entries is zero, the form is not needed for the return.

Automatically printed. When a child is qualified for the Child Tax Credit butnot for a claim as a dependent, the information on the child is automaticallyomitted from line 6c of the official printed Form 1040 and printed instead onthis automatically generated Form 8901. When you choose to print the com-plete official return, Form 8901 is automatically included in the printout whenapplicable and omitted when not.


Form 8914

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Form 8914 / Exemption Amount for Taxpayers HousingIndividuals Displaced by Hurricane KatrinaPurpose. This form is used to claim extra exemptions for housing Katrina vic-tims rent-free during 2005 (after the hurricane hit) and 2006, and to figurethe total exemptions for Form 1040, including the regular exemptions, whichare subject to phaseout, and the Katrina exemptions, which are not. Themaximum total Katrina exemption allowed for 2005 and 2006 combined is$2,000 ($1,000 if married filing separately). Form 8914 is accessible throughthe Road Map above line 42 of Form 1040.

PART I, INFORMATION ON INDIVIDUALS DISPLACED BY KATRINA FORWHOM YOU PROVIDED HOUSING. To claim this extra exemption for 2006,you must complete the worksheets that support line 1 of this form:

1 ITEMIZE here (4 maximum, 2 if MFS). (Supported by the IndividualDisplaced by Katrina Worksheet.) To claim a credit for tax year2006, you must identify the individuals you housed in at least partof 2006 in the supporting worksheets. To qualify you for an exemp-tion, (a) the individual’s main home on August 28, 2005 must havebeen in the state of Alabama, Florida, Louisiana, or Mississippi, and(b) you must have housed the individual for a period of at least 60consecutive days ending in 2006. If these two requirements aremet, as determined by your entries on lines c and d of the work-sheets, the person will be reflected in the count that appears on thisline.

CAUTION: You cannot claim for 2006 any person you claimed for 2005.

PART II, EXEMPTION AMOUNT. The credit is computed at the rate of $500per person for up to 4 people (2 if married filing separately), but limited to$2,000 ($1,000 if married filing separately) less any amount claimed for2005:

2 MAXIMUM EXEMPTION AMOUNT. (auto-calc) Computed as $2,000for most taxpayers, but $1,000 if married filing separately.

3 Amount on 2005 Form 8914, line 2. This is the extra exemption youclaimed for 2005. (If you translated this return from last year’s re-turn with tax year retained at 2005, the amount for this line will becorrect without a manual entry.)

4 Subtract line 3 from line 2. (auto-calc) Computed as indicated, this isthe maximum extra exemption you can claim for 2006.

5 Multiply $500 by the number of individuals listed in Part I. (auto-calc)Computed as the count on line 1 multiplied by $500.

6 Smaller of line 4 or line 5. (auto-calc) Computed as indicated, this isthe extra exemption for housing Katrina victims, which is posted tothe line above line 42 of our Form 1040. The total amount claimedfor exemptions at Form 1040, line 42, is the sum of the regular ex-emption amount ($3,300 per exemption, but subject to phaseout at

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high income) plus the extra exemption that appears here (which isnot subject to phaseout).

7 Multiply $3,300 by the total number of exemptions on line 6d of Form1040. (auto-calc) Computed as indicated, this is the regular exemp-tion amount before phaseout.

8 Add lines 6 and 7. (auto-calc) Computed as indicated, this is the totalexemption amount, including the extra Katrina amount, beforephaseout. If AGI on Form 1040, line 38, is less than the phaseoutthreshold, this is the total exemption amount for Form 1040, line42. Otherwise, the rest of the form is completed to determine theproper amount for Form 1040 after phaseout. (For 2006, thephaseout threshold is $150,500 if single, $225,750 if married filingjointly or qualifying widow(er), $112,875 if married filing sepa-rately, and $188,150 if head of household.)

Remainder of form fully automatic. The remainder of Form 8914 is used tocompute the complex phaseout of exemptions for high-income taxpayers. Itwill remain blank if the AGI for the return does not exceed the phaseoutthreshold (defined in our instructions for line 8, above). When used, the resulton line 16 will be the total to be used for Form 1040, line 42.

EXEMPTION for Form 1040. line 42. (auto-calc) If AGI exceeds the phaseoutthreshold, the result on line 16 appears here. Otherwise, the result on line 8appears here. This result is used for Form 1040, line 42, in place of the usualexemption amount.



Schedule D Tax Worksheet

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Schedule D Tax WorksheetPurpose. Although this worksheet appears on the Forms Menu like IRS formsand schedules, it is not an IRS form but rather an aid to understanding thecomputation of tax when qualified dividends or capital gains are present onthe return. This worksheet is automatically generated and completed whenapplicable, but is not printed with a complete return for filing with the IRS.This worksheet duplicates the IRS Schedule D Tax Worksheet that appears onthe last page of the IRS Instructions for Schedule D. Although it is not alwaysrequired, this worksheet always provides an accurate computation of taxwhen qualified dividends, capital gain distributions, or capital gains exits onthe return. See IRS 2006 Instructions for Schedule D for details. The Sched-ule D Tax Worksheet is accessible through the Road Map above line 20 ofSchedule D.

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Form 1040-ES

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Form 1040-ES / Estimated Tax for IndividualsPurpose. This form is not a part of the return, but is really just a worksheetfor determining the quarterly estimated tax payments for 2007 that will avoida penalty when you file your return in 2007. Only quarterly vouchers basedon the results of this form are filed with the IRS. Form 1040-ES is accessiblethrough the Road Map at the line below line 73 of Form 1040.

Adjustment lines are key to accuracy. The Form 1040-ES Worksheet isautomated to the extent that the current year's return is used as a startingpoint. It is therefore best to defer entering data here until the current return iscomplete. You can then view Form 1040-ES with a Full-screen Method (RoadMap or Normal) to see what income and deductions are assumed, and tomake the adjusting entries that turn them into next year's prediction.

FILING STATUS AND EXEMPTIONS. Changes in filing status, age claims,blind claims, dependency, special status, and exemptions are entered in thefirst part of this form, but you needn’t make an entry if you don’t expect anyof these items to change.

EARNED INCOME. If there is a change in wages, you must enter it twoplaces: once for social security wages, and once for regular wages. The twowill generally be the same for low-income wage-earners who are not statu-tory employees. Any change in other earned income must be separated intothe regular part and the part for a statutory employee.

UNEARNED INCOME. Unearned income includes capital gains, which affecthow taxes are computed in a rather complex way because of the new taxlaw. As a result, you must estimate not only your change in capital gains,but also how it breaks down into short-term, long-term, 28% rate gains andlosses, and unrecaptured sec. 1250 gain, plus an amount from Form 4952.In all, there are six numbers on Schedule D or its worksheets that must be es-timated!

ADJUSTMENTS TO INCOME AND ITEMIZED DEDUCTIONS. While the re-mainder of the form is mostly automatic, important adjustment lines are dis-persed throughout. In addition, amounts that are typically not repeated insubsequent years, such as adjustment to income for moving expenses, startwith no amounts on Form 1040-ES and are left open for your data entry.

Modifications to estimated tax computations. If you will pay equal amountsin all four quarters, don't expect your withholding to change, and qualify forno special exceptions, you need make no further entries on this form. Theautomatic results are ready for your use on official Form 1040-ES vouchers.But if there are special reasons why you are liable for less payment, or whyyour payments should be unequal, further adjustment lines are provided.

Eligible for farmer/fisherman rules? Most taxpayers are liable for esti-mated tax payments equal to at least 90% of the estimated tax due.But qualifying farmers and fishermen can use a 66-2/3% percentrule instead. If this return is for a farmer or fisherman who is quali-


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fied to use Form 2210-F in place of Form 2210, answer Yes hereand 66-2/3% will be used in line 14a. See our instructions for Form2210 for details on qualifying for Form 2210-F.

After you enter any expected changes in withholding, the requirement tomake estimated tax payments is determined:

Required to make estimated tax payments? (auto-calc) The answer isYes only if•••• the tax that must be pre-paid (line 14c plus your adjustment) ismore than the expected withholding (line 15), AND•••• the expected tax after credits (line 13c) exceeds the expectedwithholding (line 15) by at least $1,000.If you want to make estimated tax payments even though they arenot required, you can override this answer with No and the secondtest will be ignored. If you still have no amount on line 17, becauseof the first test, you can override line 17 as well.

The nominal quarterly payment is computed at line 17. The quarterly pay-ments are then shown, with any amount applied from a 2006 overpayment,indicated by line 75 of Form 1040, applied first in accordance with IRS rules.

Adjustment to 1st, 2nd, 3rd quarters. If your income is expected to beextremely uneven during the year, and you can therefore justify theuse of the annualized installment method in computing penalties onForm 2210, you can adjust the quarterly payments on these lines.You can also make adjustments for late payments on these lines asthe year progresses. (The adjustment to the 4th quarter is automaticbased on the balance remaining to be paid after the other three ad-justments are applied.)

Use IRS vouchers for estimated tax payments. All the information needed forthe IRS Form 1040-ES Vouchers is provided on the last screen of Form 1040-ES, and the vouchers printed by the software. However, you should NOT useour facsimile printouts as vouchers to send with your quarterly payments, be-cause the IRS requires special optically-read forms to be used. You can useactual IRS vouchers, Laser-graphic or Windows-graphic vouchers printed withour Premium Level software, but not the facsimile versions.


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Form 1040X

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Form 1040X / Amended Income Tax ReturnPurpose. This form is not a part of the original return, but is used to accom-pany a return that is amended after it has been filed. When you file anamended return, you must also file with it copies of all forms that havechanged, including Form 1040 and its schedules. Therefore, Form 1040X isreally just a form that summarizes the differences between the original returnand the new return. You can file it only after you have filed your original re-turn. You generally have 3 years from the due date of your original return toamend that return. Form 1040X is not accessible through the Road Map be-cause it supports no other form or schedule. Form 1040X is accessible onlythrough the Forms Menu.

Form 1040X cannot be e-filed. Even if you filed the original return electroni-cally, the IRS does not allow you to file an amended return the same way.You must always file a paper Form 1040X along with any forms for the re-turn that are affected by the changes.

Fully automatic for most taxpayers. When used properly, this form is fullyautomatic and rarely requires an entry on your part. But the following rulesmust be followed:

• Use this Form 1040X ONLY to amend a 2006 return. This copy of Form1040X should NOT be used for other years because it is tied through ourautomation to the Form 1040 return that it amends.

• Access Form 1040X for the first time ONLY when the Form 1040 return isidentical to the one that was filed with the IRS (or as previously adjusted).

• Revise the Form 1040 return ONLY after you have created a Form 1040Xfor the return.

• Review Form 1040X and supply required explanations ONLY after your re-visions to Form 1040 are complete.

If you follow these rules, you will rarely have to access Form 1040X againonce it has been created, except to supply the required explanations for thechanges. If you do NOT follows these rules you may have to manually reen-ter many of the amounts for column A of the form.

How the software works. The IRS Form 1040X is similar to an abbreviatedForm 1040 with three column: for original amount, the change, and the finalamount. When you access Form 1040X for the first time for a return, theamounts for column A are taken from Form 1040 at that time only. Thereaf-ter, when you change Form 1040 only the second and third columns change.As a result, most lines of the form appear on the screen in the format:

A. Original amount (or as previously adjusted). This is the amount thatexisted on Form 1040 at the time you created a Form 1040X forthis return by selecting it from the Forms Menu. Once you havecreated Form 1040X this line will not change, unless you retype theentry yourself. (You may need to retype the entry if you did not


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properly create Form 1040X when the return matched the originalreturn.)

B. Net change. (auto-calc) Computed as column C less column A.C. Correct amount. (auto-calc, supported by Form 1040) Taken from

the current Form 1040. This line will change as you modify the re-turn in order to create a revised return, as will line B.

What you must enter on Form 1040X when the revised return is complete.The main entries that you must make on Form 1040X are explanations forthe changes. If the changes include an increase in number of dependents, youmust complete the Dependents’ Worksheet we provide at line 33 of Form1040X, which is similar to the one used for line 6c of Form 1040. For allother changes you must itemize the line in Part II (on the last screen) providedfor that purpose, and explain all changes, line by line using Form 1040X linenumbers, in a supporting statement for that line. You are also given anotherchance on Form 1040X to elect to give $3 to the Presidential Election Cam-paign Fund, in case you didn’t elect it previously.

Sign and date Form 1040X. When you file an amended return, Form 1040X istechnically the return rather than Form 1040, and you must sign Form 1040Xjust like you signed Form 1040 for the original return. You must then send,with any payment, Form 1040X followed by the revised Form 1040 and anyother forms or schedules that changed.

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Form 8453

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Form 8453 / U.S. Individual Electronic Filing(Included in Standard and Premium Level software ONLY. )

Main form for Electronic Filing. Form 8453 is the main transmittal form for aForm 1040 tax return with which the taxpayer authenticates the electronicreturn, supports the return with any accompanying paper statements, andauthorizes the transmission of the return through a third party. The informa-tion you supply on this form is always filed electronically, but if the properprocedure for PIN signatures is followed, the filing of a paper version may beomitted. When filed, the paper form is signed by you (the Electronic ReturnOriginator (ERO)), by the taxpayer(s), and, when applicable, the Paid Preparer(which may be you as well) and mailed to the IRS in lieu of a paper Form1040.

ONLY for tax professionals. Form 8453 was designed by the IRS for tax pro-fessionals who file returns for others. The professional must apply to and beapproved by the IRS for acceptance into the e-file program. The form is in-cluded in HowardSoft's Standard Level and Premium Level programs, and notonly adds the form to your Tax Preparer software but also produces disk filesfor your returns in a special format for electronic filing. After preparing asmany returns as you like in one session, you can transmit the returns to theIRS using the special transmission software we supply. (Note that e-file isavailable only on CD-ROM for the Windows versions of Tax Preparer. It is notavailable for DOS/Windows 3.1 versions. Call HowardSoft for details.)

Preparing Form 8453. The monetary part of the form is fully automatic, re-quiring no entries by you. However, on Form 8453 you must supply the EFINissued to you by the IRS, your name as the ERO (electronic return originator),and any direct debit information, RAL information, or PIN signatures that ap-ply.

Declaration Control Number (DCN). The DCN is a 14-digit number uniquelyassigned to each return. It is printed at the top of a paper Form 8453 in theformat 00-XXXXXX-XXXXX-4, comprised of double zero, dash, 6-digit EFIN,dash, 3-digit batch number, 2-digit serial number, dash, and the least signifi-cant digit of the year of filing (7 for this 2007 edition). You supply belowonly the EFIN and batch/serial number part of the DCN. The rest is automatic.(Depending on the settings in your transmission software, the batch and se-rial number may be assigned to you after you transmit the return. If so, yourentries for these numbers here are ignored.)

EFIN number. (Mandatory.) This 6-digit number is the Electronic FilingIdentification Number that the IRS assigned you when they ac-cepted you into their e-file program based on your Form 8633 appli-cation. This entry is mandatory because the EFIN is a required partof the electronic file that is transmitted to the IRS. Note that thisentry is also used to automatically format the DCN that appears be-low and any ERO PIN signature you choose to supply later. (For thebest appearance on a printed Form 8453, we recommend that you


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enter a space after each digit of your entry. However, the existenceor absence of spaces has no effect on the validity of the electronicreturn.)

Batch/serial number. The batch and serial number are used to organizeyour returns. The 3-digit batch number identifies the batch of re-turns you choose to transmit in a single session with the transmis-sion software. The 2-digit serial number identifies the particular re-turn within this batch. If you configured the transmission software(EFI 2006) to assign the batch and serial number for you (as werecommend to relieve you of this organizational task), you need notmake an entry here until you receive an acknowledgement from theIRS of its receipt of the return. However, if you choose to assignthe batch and serial number yourself, you must enter here the 3-digit batch and 2-digit serial number before you generate an e-fileoutput for transmission. In either case, if you must file a paper Form8453 you must make an entry here before you print the copy ofForm 8453 to be signed and mailed to the IRS. (For the best ap-pearance on a printed Form 8453, we recommend that you enter aspace after each digit of your entry. However, the existence or ab-sence of spaces has no effect on the validity of the electronic re-turn.)

Declaration Control Number (14-digit). (auto-calc) Taken from the pre-ceding two entries, this is the number that will appear in your elec-tronic file if you chose to assign batch and serial numbers yourself.However, if you configured your EFI 2006 transmission software toassign the numbers for you, this number will be ignored.

Name(s) for paper Form 8453. This section shows how names are formattedfor e-file so that you can confirm that the names have been properly inter-preted, and can abbreviate long first names when required. The formattingstarts with the names that were entered for the return on Form 1040:

Your first name & initial. This and the next several entries come fromForm 1040. You may need to modify the entries for proper e-fileformatting, but you must do so on Form 1040 page 1, not here.Even though each entry allows up to 25 characters to be entered,IRS e-file formatting allows only 35 characters total for the name(s)on the return. This restriction is not particularly severe for a singlefiler, but can cause severe truncation of names for joint filers. Youshould therefore look carefully at the formatting that follows theseentries to see if you need to change an entry in order for the 35-character format to be meaningful. For example, if the last namesare especially long, you may find it necessary to use a single initialin place of the full first name and initial.

Spouse’s first name. See above.Your last name. See above.Spouse’s last name (if different). See above.

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Name(s) for e-file output. The preceding four entries are formatting for e-filein the following lines. You should verify that the first < symbol precedes thelast name of the taxpayer and that another < symbol appears at the end ofthat last name only if it is followed by a suffix (such as III, Jr., etc.) or thename of the spouse (for joint returns). If any of these results are not whatyou expect, check your entries on Form 1040, page 1, then change any entryon Form 1040, page 2 and view Form 8453 again. (This procedure may berequired if you changed the entries on Form 1040, page 1 after the numericalpart of the return was complete.)

Your name in e-file format. (auto-calc) This e-file format is used on allforms for a single filer, and forms that apply only to the primarytaxpayer on joint returns.

Your name control for e-file. (auto-calc) This is a 4-character entryshowing the first four significant characters of the last name, withspaces skipped. The name control and SSN are generally all that theIRS uses to identify a taxpayer.

Spouse’s name in e-file format. (auto-calc) This e-file format is usedonly on joint returns, for forms that apply only to the spouse.

Spouse’s name control for e-file. (auto-calc) This is a 4-character entryshowing the first four significant characters of the last name, withspaces skipped, for the spouse.

Combined names for return ID. (auto-calc) This is the name that identi-fies the entire return. For a joint return the last name of the primarytaxpayer will appear in the middle of this entry bounded on bothsides by the < symbol.

OTHER TAXPAYER INFORMATION. The social security numbers, address,and phone number for the taxpayer(s) are shown next, all from your entrieson Form 1040. If you need to change any of these entries you will need to doso on Form 1040.

Your social security number (SSN). (auto-calc) Formatted with dashes,from Form 1040.

Spouse’s social security number. (auto-calc) Formatted with dashes, anSSN may appear here for either joint or separate married filers.

Present home address (number and street). (auto-calc)City or p.o. (auto-calc) This entry is deciphered from your entry on Form

1040 for city and state. It is assumed that all but the last two char-acters of the entry relates to the city.

State (2-letter code). (auto-calc) This entry is also deciphered from yourentry on Form 1040 for city and state. It is assumed that the lasttwo characters of the entry represent the 2-letter state code.

1=APO/FPO, 2=Stateside, 3=Foreign. You will generally leave this en-try at zero, but can identify special addresses with your entry of 1,2, or 3.

Daytime phone number. (auto-calc) Taken from Form 1040, this num-ber is usually voluntary. However, you will need to supply the phonenumber if the tax on the return is to be paid by direct debit. (You


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will have a chance to change this entry later on this form, in thesection for Direct Debit Info.)

W-2, W-2G, 1099-R INFORMATION IS ENTERED ON FORM 1040. Any FormsW-2, W-2G, and 1099-R received by the taxpayer(s) must be reported in thee-file return, so ALL information from those forms must be entered into theworksheets accessible from Form 1040 lines 7a and 7b, 15a and 16a, andline 21. The information you enter in these worksheets is automatically madea part of the e-file return. While they are not visible on the screen from Form8453, you can get a complete printout of these forms with all their entrieswhen you generate an official printout of Form 8453. The IRS does not allowreturns to be filed electronically if they have more than 50 Forms W-2, 30Forms W-2G, or 20 Forms 1099-R, so the software limits the number ofworksheets to these numbers. (These forms are printed along with the paperForm 8453 only if you so choose in the “Paper printout options” on screen 6,described later.)

CHECKS FOR ELIGIBILITY. A number of preliminary checks are built in andsummarized on screens 4 and 5. If any of the checks fail, an electronic filingfile will not be generated. The requirements upon which these checks arebased are detailed in IRS Pubs. 1345, Handbook for Electronic Filers, and1346, Electronic Return File Specifications and Record Layouts.

CHECK FOR UNALLOWED ENTRIES. (auto-calc lines) To be eligible forelectronic filing a return can have NO entries for any of the linesidentified on the screen in this section. A Yes at any of these lineswill lead to rejection of the return with one exception: a missingspouse SSN is ignored if the filing status for the return is neithermarried filing jointly nor married filing separately.

CHECK FOR NUMBER OF COPIES. (auto-calc lines) The number ofcopies allowed for a number of forms and schedules is restricted.Forms shown on the screen for this section are only forms forwhich multiple copies are allowed on paper returns. Restrictions onthese and all other forms supported by Tax Preparer are shown inTable 2-15 at the end of this chapter.

CHECK FOR EXCESSIVE COUNTS. (auto-calc lines) Some forms arelimited in the number of items that can be reported on the form,such as number of properties on Form 4255, number of tax shelterson Form 8271, etc.

CHECK FOR SPECIAL HANDLING. (auto-calc lines) A need for specialhandling by the IRS can also cause rejection. Just two checks areshown on the screen, but other factors can cause rejection, such asrequesting the IRS to calculate your Earned Income Credit for you.

CONCLUSION OF ELIGIBILITY. This is the final determination for this form.Monetary amounts rounded. (auto-calc) Taken from the entry on the

Control Form. Only rounded returns can be filed electronically.

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May be eligible for e-file. (auto-calc) Answered Yes only if the return isrounded and all of the preceding checks have been passed.

Additional reasons for rejection of a return. Even if a Yes appears at the lasteligibility question, above, the return may be rejected when other checks areperformed later in the filing process. For example, severe restrictions areplaced on supporting statements, as detailed in Table 2-16 (at the end of thischapter), which are checked during Tax Preparer’s generation of the elec-tronic filing file (in a process analogous to the printing of a paper return). Stillmore restrictions are placed on how certain information is entered, and arechecked during the pre-transmission checking by the EFI transmission soft-ware before the actual transmission takes place. The final round of checkingis performed by the IRS, but rejection by the IRS is rare once all of the abovechecks have been passed.


PART I, TAX RETURN INFORMATION. (auto-calc lines) A 5-line summary ofthe Form 1040 tax return appears here, with no manual entries required.

Electronic attachments. The IRS now provides a way for an e-filer to supplysupplementary information about the return to the IRS. While the volume ofinformation you can supply is limited, this addition to the e-file programgreatly increases the flexibility for the preparer.

Preparer Notes. Itemize here to supply voluntary information not re-quired to be attached to the return.

Election Explanations. Itemize here to identify specific elections madeon the return when the IRS requires a supporting statement butthere is no provision for that statement on the associated form. Foreach election, you must cite the election then explain or supplysupporting information.

Regulatory Explanations. Itemize here to cite a particular regulationused to justify an entry when there is no provision for the justifica-tion on the associated form. For each instance, you must cite theregulation then explain or supply supporting information.

Paper attachments. If any situations on the return require a paper attachmentto the return, such as a copy of a certificate or a signed affidavit, you will notbe allowed to sign that return electronically with a PIN signature. You mustfile a signed paper Form 8453 with the required paper attachments, includingthose listed on-screen in this section.

Paper printout options. Our on-screen Form 8453 serves purposes far beyondthe IRS Form 8453, backed by paper printouts when you want them. To printany of the forms cited below you must choose Form 8453 from the PrintMenu for printing official returns, and the forms you choose below will beprinted immediately following the printed Form 8453.


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Print Form(s) W-2 with Form 8453. If you answer Yes, all Form W-2Worksheets you completed will be printed in IRS format.

Print Form(s) W-2G with Form 8453. If you answer Yes, all Form W-2GWorksheets you completed will be printed in IRS format.

Print Form(s) 1099-R with Form 8453. If you answer Yes, all Form 1099-R Worksheets you completed will be printed in IRS format.

Print Form(s) 8879 with Form 8453. If you answer Yes, information youenter later relating to PIN signatures will be printed on an IRS Form8879 (IRS e-file Signature Authorization). If you use PIN signatures,you must keep a signed copy of the printed Form 8879 in your rec-ords. It is not filed with the IRS but provides the verification thatthe taxpayer has approved the transmitted return and, when appro-priate, given the ERO permission to enter PIN(s) for the taxpayer.

Print ACH debit information with Form 8453. If you answer Yes, anypayment information you enter later relating to paying the tax dueby debiting the taxpayer’s bank account will be printed. You canuse this printout to verify the information you enter and keep a pa-per record of it.

BANK INFORMATION. The next two sections relate to the electronic transferof funds between the taxpayer and the IRS.

Direct Deposit Information. This section is relevant only when there is a re-fund shown on line 74a of the final Form 1040 for the return. If relevant, youhave two choices for direct deposit: (a) deposit directly to the taxpayer’sbank account, or (b) deposit into a special account associated with a refundauthorization loan (RAL) or QIK check. For choice (a), you should enter thetaxpayer’s bank information directly on Form 1040 lines 74b through 74d.For choice (b), you need to apply for a RAL for QIK check by completing theRAL or QIK Bank Application that you access by itemizing the following line:

Itemize HERE to apply. (Road Map line, supported by the RAL of QIKBank Application.) If you have purchased e-file Bank Products andregistered it with us, you will be able to complete this application. Ifcomplete and eligible, bank information associated with the bankthat processes the RAL or QIK will be used at lines 73b through 73dof Form 1040. Otherwise, no bank application can be created, andyour entries for the taxpayer’s bank information on screen 11 of thisform will be used at lines 74b through 74d of Form 1040.

Amount to be refund. (auto-calc) Taken from Form 8453, Part I, line 4,this is the refund shown on Form 1040, line 74a.

Direct Deposit used? (auto-calc) If there is no refund for this return,this answer will be No.

Direct Debit (ACH) Information. This section is relevant only when there is anamount due shown on line 76 of the final Form 1040 for the return.

Use Direct Debit if an amount is due? Answer Yes only if the taxpayerauthorizes a Direct Debit from his or her bank account. See the con-

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sents on Forms 8453 and 8879, one of which the taxpayer mustsign.

Amount to be paid (See Form 1040). (auto-calc) Taken from your entryon Form 1040 following line 76.

Requested payment date. Any date up to and including the due date ofthe return is allowed. Use the standard mm/dd/yy format.

Routing transit number. Enter the 9 digit routing number for the bankfrom which the taxpayer’s funds will be withdrawn. (If a checkingaccount, the number is the first set of computer numbers printed atthe bottom of checks for the account.)

Bank account number. Enter full account number, including the bank'sbranch number. (If a checking account, the number is the secondset of numbers printed at the bottom of checks for the account, ex-cluding the last set of numbers that match the check number.)

Account type: 1=Checking, 2=Savings. Enter 1 or 2 to identify thetype of bank account, or 0 if no direct debit is requested.

Daytime phone number (required). While otherwise voluntary, the tax-payer’s phone number is a required entry for Direct Debit. This entryis taken from Form 1040, but you can alter that entry here.

Part II, DECLARATION OF TAXPAYER. The answers for this section are takenfrom the preceding banking information. The taxpayer must verify these an-swers by signing Form 8453 or Form 8879.

6a I consent to direct deposit. (auto-calc) Answered Yes if a Yes ap-pears at “Bank information to be used” in the preceding Direct De-posit section.

6b I do not want direct deposit or am not receiving a refund. (auto-calc)Always answered the opposite of line 6a.

6c I authorize an ACH debit for my payment. (auto-calc) Answered Yesonly if there is an “Amount to be paid” shown in the preceding Di-rect Debit section, and all entries in that section are completed.

Part III, DECLARATION OF ELECTRONIC RETURN ORIGINATOR (ERO) ANDPAID PREPARER. As the person filing the return electronically, you are theElectronic Return Originator. This is the person who transmits the return toNTS or the IRS, and signs Form 8453 as the person preparing the return forelectronic filing, but not necessarily the preparer of the return itself.

ERO’s name (mandatory). Enter the name of the professional who isfiling this return electronically. The name and address of the FIRMfiling the return electronically is completed automatically for the e-file output based on your entries in the program settings forHowardSoft's Tax Preparer, as is the EIN of the firm and SSN of theperson. But the NAME of the specific person within the firm is notavailable for automatic inclusion on Form 8453 (and the form itselfhas no place for this name, but just the signature). You must there-fore enter your name here for every Form 8453 you file.


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Is ERO also the Paid Preparer. Yes is the normal answer here for thosewho use Tax Preparer to prepare the return AND file it electroni-cally. If you answer Yes, do not complete and sign the followingPaid Preparer's section of the form.

Paid Preparer's Use Only. You must complete this section ONLY if youanswered No to the preceding question, indicating that someoneelse prepared for the taxpayer the return that you will file electroni-cally. This section contains the same information as required of theERO (name, address, EIN, phone, etc.).

PIN SIGNATURES. If the taxpayer chooses to sign the return electronically,using a PIN number rather than a physical signature, this section must becompleted. As the person filing the return electronically, you are the Elec-tronic Return Originator (ERO). IMPORTANT: Before the taxpayer supplies aPIN, you must show the taxpayer the Taxpayer Declaration, which followsthe instructions for this section. Furthermore, if the ERO will enter the PINinto the computer instead of the taxpayer, the ERO should have the tax-payer(s) sign an IRS Form 8879 to authorize the ERO to enter the PIN. (See“Paper printout option” in Part I for instructions on printing Form 8879 withthis software.)

ERO’s PIN signature. If the taxpayer chooses to sign the return electronically,the ERO must use a PIN as well in order to avert filing a paper Form 8453.

Using Practitioner PIN Method? Under this method, now available to allERO’s, the ERO verifies the identity of the taxpayers and witnessestheir PIN signatures so that the taxpayers do not have to supplytheir birthdate and prior-year AGI as verification.

ERO’s 5-digit PIN signature. Enter any 5 digits except 00000.ERO’s EFIN/PIN (EFIN+5 digits). (auto-calc) This 11-digit number is

comprised of the 6-digit EFIN of the ERO and the 5-digit PIN he orshe supplied. This is the complete signature required by the IRS.

Taxpayers’ PIN signatures. The taxpayer(s) must read the consents on Form8453 and/or Form 8879 before signing the return electronically through thefollowing PIN entries.

Taxpayer 5-digit PIN signature. Enter any 5 digits except 00000. Seethe Taxpayer Declaration following these instructions before makingan entry here.

Date signed. Enter the date signed in the standard mm/dd/yyyy for-mat.

Did taxpayer enter above PIN? If you must answer No because theERO entered the PIN into the computer, the ERO must keep a copyof a signed Form 8879 on file to verify authorization to do so.

Taxpayer date of birth. Enter the date of birth in the standardmm/dd/yyyy format.

Taxpayer prior-year AGI. Enter the AGI from the taxpayer’s tax year2005 return as filed (not as amended later).

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Taxpayer prior-year PIN. A taxpayer who e-filed his or her return lastyear can now use the PIN used last year as a means of identificationrather than prior-year AGI. You must enter the prior-year 5-digit PINhere only if you did not enter or do not know the prior-year AGI.

Spouse’s 5-digit PIN signature. Enter any 5 digits except 00000. Seethe Taxpayer Declaration following these instructions before makingan entry here.

Did spouse enter above PIN? If you must answer No because theERO entered the PIN into the computer, the ERO must keep a copyof a signed Form 8879 on file to verify authorization to do so.

Spouse’s date of birth. Enter the date of birth in the standardmm/dd/yyyy format.

Spouse’s prior-year AGI. If the spouse filed a separate return for taxyear 2005 or was not married to this taxpayer, enter the AGI fromthe spouse’s tax year 2005 return as filed (not as amended later).

Spouse’s prior-year PIN. A spouse who e-filed his or her return lastyear can now use the PIN used last year as a means of identificationrather than prior-year AGI. You must enter the prior-year 5-digit PINhere only if you did not enter or do not know the prior-year AGI.

IRS PIN Authorization Code. (auto-calc) This number will be:0 if no PIN was entered,1 if the taxpayers entered all PINs,2 if the ERO entered taxpayer’s PIN only,3 if the ERO entered spouse’s PIN only, and4 if the ERO entered both PINs.

Must a paper Form 8453 still be filed? (auto-calc) A Yes answer willappear here if either the PIN information is incomplete or a paper at-tachment is required for this return as shown in Part I.

If not, must a paper Form 8879 be signed? (auto-calc) A Yes answer in-dicates that the taxpayer and ERO must sign the form because PINsignatures are being used and either the Practitioner PIN Method isbeing used or the ERO entered a PIN for at least one taxpayer forthe return.


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Taxpayer Declarations

Perjury StatementUnder penalties of perjury, I declare that I have examined this return, includ-ing any accompanying statements and schedules and, to the best of myknowledge and belief, it is true, correct, and complete.

Consent to DisclosureI consent to allow my Intermediate Service Provider, transmitter, or ElectronicReturn Originator (ERO) to send my return/form to IRS and to receive the fol-lowing information from IRS: 1) acknowledgment of receipt or reason for re-jection of transmission; 2) refund offset; 3) reason for any delay in process-ing or refund; and, 4) date of any refund.

Electronic Funds Withdrawal ConsentI authorize the U.S. Treasury and its designated Financial Agent to initiate anACH debit (electronic withdrawal) entry to the financial institution accountindicated for payment of my Federal taxes owed on this return and/or a pay-ment of estimated tax. I further understand that this authorization may applyto subsequent Federal tax payments that I direct to be debited through theElectronic Federal Tax Payment System (EFTPS). In order for me to initiatesubsequent payments, I request that the IRS send me a personal identificationnumber (PIN) to access EFTPS. This authorization is to remain in full forceand effect until I notify the U.S. Treasury Financial Agent to terminate theauthorization. To revoke a payment, I must contact the U.S. Treasury Finan-cial Agent at 1-888-353-4537 no later than 2 business days prior to thepayment (settlement) date. I also authorize the financial institutions involvedin the processing of the electronic payment of taxes to receive confidential in-formation necessary to answer inquiries and resolve issues related to thepayment.

I am signing this Tax Return and Electronic Funds Withdrawal Consent, if ap-plicable, by entering my Self Select PIN below.-----------------------------------------------------------------------------------------------------------Taxpayer’s PIN: _ _ _ _ _ Date (all numeric): _ _ _ _ _ _ _ _Taxpayer’s Date of Birth: _ _ _ _ _ _ _ _ (2 digit month, 2 digit day, 4 digit yr)Taxpayer’s Prior Year Adjusted Gross Income (Dollars Only): _ _ _ _ _ _ _ _Spouse’s PIN: _ _ _ _ _Spouse’s Date of Birth: _ _ _ _ _ _ _ _ (2 digit month, 2 digit day, 4 digit yr)Spouse’s Prior Year Adjusted Gross Income (Dollars Only): _ _ _ _ _ _ _

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Sign and mail paper 8453 AFTER filing electronically. Unless you properlyused PIN signatures, once the return is transmitted and accepted, you mustprint the Form 8453 and file it with all appropriate physical signatures. Thetaxpayer must sign an original copy of the printed form, which must be eitherthe IRS form itself, a copy produced using a photocopy machine and anoverlay, or a graphic-printed Form 8453 using HowardSoft's Laser or Win-dows-graphic printouts. (Facsimile printouts of Form 8453 are NOT accept-able for filing with the IRS. Only graphic printouts are acceptable because ofthe lengthy consents.) CAUTION: If you are required to file a paper Form8453, you must mail the signed Form 8453 to the address listed in the ac-knowledgment you receive after acceptance of the return, NOT to the ad-dress you would file a paper Form 1040.

Pay by check using Form 1040-V, not Form 8453. If instead of paying your taxby direct debit you choose to pay by check, you must send the payment withForm 1040-V to the address shown in the IRS instructions for that form. DoNOT send the check with Form 8453; payments go to a different location.

ERO DeclarationI declare that the information contained in this electronic tax return is the in-formation furnished to me by the taxpayer. If the taxpayer furnished me acompleted paper tax return signed by a paid preparer, I declare that the in-formation contained in this electronic tax return is identical to that containedin the paper return, and I have entered the paid preparer’s identifying infor-mation in the appropriate portion of this electronic return. If I am the paidpreparer, under the penalties of perjury I declare that I have examined thiselectronic return, and to the best of my knowledge and belief, it is true, cor-rect, and complete. This declaration is based on all information of which Ihave any knowledge.

ERO SignatureI am signing this Tax Return by entering my PIN below.

ERO’s PIN _ _ _ _ _ _ _ _ _ _ _ (enter EFIN plus 5 self selected numerics)


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Table 2-15. Forms Allowed for Electronic FilingForm Max. allowed CommentsForm 1040 REQUIRED formSchedule A 1 MUST REMOVE if standard deduction usedSchedule B 1Schedule C 5 no C allowed for spouse with a C-EZSchedule C-EZ 1 or 2 2 for MFJ (one for each taxpayer)Schedule D 1 Up to 5000 short- and long-term salesSchedule E 1 (15 side 1s) Up to 45 rental properties allowedSchedule EIC 1Schedule F 2Schedule H 1 or 2 2 for MFJ (one for each taxpayer)Schedule J 1Schedule R 1Schedule SE 1 or 2 2 for MFJ (one for each taxpayer)Form 1116 10 Requires Premium LevelForm 1310 1 or 2 2 for MFJ (one for each taxpayer)Form 2106 1 or 2 2 for MFJ (one for each taxpayer)Form 2210 1 Schedule A & B of 2210 also allowedForm 2210-F 1Form 2441 1Form 2555 1 or 2 2 for MFJ (one for each taxpayer)Form 3468 1Form 3800 1Form 3903 2Form 4136 1Form 4137 1 or 2 2 for MFJ (one for each taxpayer)Form 4255 2Form 4562 18Form 4684 1Form 4797 1Form 4835 1Form 4952 1Form 4970 1Form 4972 1 or 2 2 for MFJ (one for each taxpayer)Form 5329 1 or 2 2 for MFJ (one for each taxpayer)Form 5695 1Form 5884 1Form 6198 10Form 6251 1Form 6252 5Form 6478 1Form 6765 1Form 6781 1Form 8271 1Form 8283 1Form 8379 1Form 8396 1Form 8582 1Form 8586 1Form 8594 1Form 8606 1 or 2 2 for MFJ (one for each taxpayer)Form 8611 5Form 8615 1Form 8801 1Form 8812 1Form 8814 10Form 8815 1Form 8824 5Form 8828 1Form 8829 1 to 5 One for each Schedule CForm 8834 1Form 8839 1Form 8846 1Form 8853 1Form 8859 1Form 8861 1Form 8862 1Form 8863 1Form 8880 1Form 8885 1 or 2 2 for MFJ (one for each taxpayer)Form 8901 1Form 8914 1Form 8453 REQUIRED formW-2 50 \ Software limits number ofW-2G 30 > worksheets you can complete1099-R 20 / to these IRS limits

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Table 2-16. Overflow supporting statements allowed Form Line Entries required � length in ( )Form 1040 6c, Dependent Worksheet CHILD, SON, DAUGHTER, NIECE, FOSTERCHILD, GRANDCHILD, GRANDPARENT, PARENT, SISTER, BROTHER, AUNT, UNCLE, NEPHEW, NONE, and OTHER 21, Other income Type (25) and amount 31a, Alimony paid SSN and amount 36, Other adjustments Type (11) and amount 55c, Credit on other form Form number and credit 63, Special tax Type (8) and amount 65, Est pmts under diff. name ExplanationSchedule A 8, Other taxes Type (28) and amount 10, Home int on 1098 1098 explanation 11, Mortgage Int. Worksheet Name (20), address, SSN 11, Other received 1098 Names/address 1098 recipient 20, Employee expenses Type (25) and amount 22, Other expenses Type (30) and amount 27, Other miscellaneous Type (30) and amountSchedule B 1, Seller-financed mort Name(20), address(29),IDN, $ 1, 1099-INT Worksheets Unlimited (payer and amount) 5, 1099-DIV Worksheets Unlimited (payer and amount)Schedule C F, If other, specify Accounting method (25) 16a, Mortgage to banks Explanation 16b, Other interest Name/address 1098 recipient 33, Other method Describe other method 34, Inventory method change Explanation 4850, Other expenses Type (25) and amountSchedule D 1, ST Gain/Loss Worksheet Unlimited 8, LT Gain/Loss Worksheet UnlimitedSchedule E Pt I, Rents/Royalties Up to 15 worksheets allowed 12, Mortgage interest Explain 1098 discrepancy 13, 1098 rcvd by another Name/address 1098 recipient Pt II, Partnership/S-Corp Unlimited Pt III, Estates/Trusts Unlimited Pt IV, REMICs Worksheets UnlimitedSchedule F 7a, CCC under election Explanation 8c, Election to defer Explanation 23a, Mortgage interest Explain 1098 discrepancy 23b, Other interest Name/address 1098 recipient 34, Other expenses Type (20) and amount 41a, CCC under election ExplanationForm 2120 Eligible supporters UnlimitedForm 2210/2210-F Waiver request ExplanationForm 2441 1, 2, 9b worksheets UnlimitedForm 2555 Qualify for waiver of tests Explanation 6d,8b,9,12b,14,14d,15c,15e, 18,18f,20b,21abcdf,23,42 UnlimitedForm 3468 1, 4 ExplanationForm 3800 1s, 6 ExplanationForm 4562 6,15,19a-19i,26,27,30-36,42 UnlimitedForm 4684 4, 22, 32, 37 worksheets UnlimitedForm 4797 2, 10 worksheets Unlimited Part III worksheets No overflows (4 properties)Form 4835 Same as Schedule F See Schedule FForm 5329 17, Itemized claim for waiver ExplanationForm 5884 Exception statement ExplanationForm 6198 2c Other form or schedule Type (20)Form 6252 Part III, 29e, Tax avoidance ExplanationForm 6765 16, 39 Schedule of reduced deduc�nsForm 6781 10, 12 worksheets Unlimited Straddles, 4797, unrec gn SchedulesForm 8283 1 & 5, Donated Prop�y Wrkshts UnlimitedForm 8582 Worksheets 1 through 7 UnlimitedForm 8586 1, 3b, 4, 5 UnlimitedForm 8594 Supplemental statements ExplanationsForm 8814 1099-INT & 1099-DIV Workshts UnlimitedForm 8815 1 worksheet UnlimitedForm 8824 1, 2, 11c, 19, 27, 28 UnlimitedForm 8829 35, 40 ScheduleForm 8846 4 Part subj only to Medicare Show computationForm 8861 2 group credit division Schedule 2 exception Explanation

In addition, no more than 30 statements total are allowed.


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RAL or QIK Bank Application(Included in Standard and Premium Level software ONLY. )

Purpose. This form is used in conjunction with e-file Form 8453 to apply fora Refund Authorization Loan (RAL) or QIK Funds in which the preparer’s fessare deducted automatically before a check or deposit is issued to the tax-payer. This Bank Application is fully integrated with your transmission soft-ware (EFI 2006), and will not function until you have purchased our e-fileBank Products, which allow you to offer RAL or QIK to your clients. Onceyou have purchased Bank Products, and have updated your EFI 2006, infor-mation about the bank and fees will appear on this form automatically. Youmust complete every part of this form in order for your bank application to beaccepted. Once you properly complete the form, a summary of the applica-tion will appear on the last screen, including applicable APRs. If you see“NONE” for “Type of Bank Application” on the last screen, then either thetaxpayer is not qualified for a RAL or QIK, or you have not properly com-pleted the form. Once you have completed the return and this form, gener-ated e-file output with this software, and imported the return into EFI 2006,you will be able to print a detailed Bank Application form for your client tosign using your EFI 2006 software. The RAL or QIK Bank Application is ac-cessible through the Road Map from the Direct Deposit sections of Forms1040 and 8453 (below line 74a of Form 1040 and on screen 7 of Form8453).

CAUTION: Do Not Use this form if you have not purchased e-file Bank Prod-ucts. If you have not purchased Bank Products, you will not be able to usethis form. Furthermore, the presence of this form may interfere with yourability to enter direct deposii information at line 74b of Form 1040, becausethe direct deposit information you enter on the Bank Application may inter-fere. You should therefore refrain from accessing this form if not applicable,and remove it from the return with our file manager if you accidentally createit.

Chapter 3

Laser and Windows Graphic Printing

What Is RequiredHow to Install

Operating HintsIf You Have Trouble


3-1

What Is RequiredGraphic printing built into Standard and Premium Levels of Tax Preparer.Graphic printing is now built into the regular edition of Tax Preparer (1040),California Supplement (540), and Partnership Edition (1065) for all but theEconomy Level of our software. It is designed to provide the graphic look ofthe official IRS forms without the inconvenience of using preprinted forms ortransparent overlays. However, as noted below, there are specific hardwarerequirements depending on the version of Tax Preparer you use. Two levelsof capability are available for each:

Economy Level: graphics for main form ONLY. This low-cost version ofour software generates graphics for the main signature form only.Accordingly, the 1040 version generates a 2-page graphic Form1040 for the regular Tax Preparer, and the 540 version generates a2-page graphic Form 540 for the California Supplement.

Standard and Premium Levels: graphics for ALL forms. These versionsof our software generate graphic versions of ALL IRS forms andschedules that are built into the software that it supports. Thus the1040 version generates graphic versions of all IRS forms containedin Tax Preparer, and the 540 version generates graphic versions ofall FTB forms contained in our California Supplement.

Laser-graphic printing vs. Windows-graphic printing. Two options forgraphic printing are available, each with their own hardware requirements:

Laser-graphic printing. This option provides the fastest printing, but itrequires a laser printer that emulates the HP laser printer family, asdetailed later, and a compatible tax font. It also requires that theprinter be connected to the computer through a parallel port (LPT1,LPT2, etc.). However, it is included in both our Windows productsand our DOS products.

Windows-graphic printing. This option provides graphic printing on vir-tually any Windows-compatible printer. However, it requires Win-dows 95 or later, and so is not included in DOS or Windows 3.1versions of our software. The printer can be connected through anystandard port, including USB as well as parallel ports.

Since files for both Laser-graphic and Windows-graphic printing are includedin the Windows versions of our Standard Level and Premium Level programs,you can choose the one that is optimum for your equipment.

What else you will need for Laser-graphic printing. In addition to our Stan-dard Level or Premium Level program, you need special printer hardware andsoftware to use the laser option:

An HP-compatible (PCL4) laser printer. The printer must be capable ofunderstanding Hewlett-Packard’s industry-standard Printer ControlLanguage 4 (PCL4). Some older printers that understand only PCL3or earlier are therefore not compatible. You can use Table 3-1 as ageneral guide for compatibility, or call us for the latest word oncompatibility.

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Table 3-1. Laser Printer Compatibility

A compatible tax font. The HowardSoft approach to Laser-graphicprinting relies on special tax fonts for the fastest printing, the small-est disk files, and the highest print quality. However, this approachhas the disadvantage that you must have a cartridge (hard-font) ordisk (soft-font) that gives your printer the needed fonts. This font

NELCO NELCO "T" T-FONT MEGA- SOFT- OTHER COMPATIBLEBRAND/MODEL CART. FONT FONT OPTIONS OR SPECIAL REQUIREMENTSACER LP-75 No No No Acer's Tax Cartridge L-FC2T.ALPS LPX600 No No YesBrother HL-6,8,10,730, 760,1060,260,1660 Yes No Yes or HP's Tax Cartridge 92286T.Brother HL-4V, 630 No No YesCIE 3000 No No Yes '' CI-4 Yes No YesDataproducts 1230 No No No 2-card set & 1.28 & up firmware. '' LZR-650 No No Yes or Dataproducts' Tax Font Card.Destiny Laser Act I No No No Destiny's Tax Cart. L-FC2T.Epson GQ-3500 No No No Requires Epson cards 5414 & 5691. '' EPL-6000,Action Yes No Yes '' EPL-7000,7500 No No YesFortis 600S No No YesFujitsuRX7100,RX7300 No No No Fujitsu cartridge D05B-9009-C070.Genicom 5010,7170 No No Yes or Genicom's cartridge 5A0010B35.LanierHarris/3M 2006 Yes No YesHP Series II,III,4,4+, 4M,4M+,4P,4Si,4SiMX Yes Yes Yes or HP's Tax Cartridge 92286T.HP 4L,4ML,4MP,4V,4MV, 5,5L,5M,5N,5P,5MP, 5Si,5SiMX,6P,6MP No Yes YesIBM/Lexmark4019,4029 No No Yes or IBM Tax Font Card 1255848.Kyocera F,FS-series No No Yes Requires ROM revision 6.32 & up. '' Q/P-series No No YesMannesmann Tally 905 Yes No Yes or HP's Tax Cartridge 92286T. '' Tally 910 No No No Cartridge 403070-15 Tax US.NEC LC860 No No Yes or NEC's Tax Font set 90-609. '' LC890 No No No NEC's set & rev 47.2 or later. '' Silentwriter 2 No No No NEC's Tax Font set 90-609. '' SilWri95,SupSc860Yes No YesOAS LaserPro,Express Yes No Yes or HP's Tax Cartridge 92286T.Okidata LaserLine 6 No No No Okidata tax font cartridge. '' 400,800,820,840 No No Yes or Okidata Font Card 70014401. '' OL400e,OL810,OL830 '' DOC-IT 4000 No No YesPackard-Bell PB9815 Yes No YesPanasonic KX-P44xx, '' -P5400,-P5410 No No Yes or Panasonic Font Card KX-P471.PCP LaserImage No No No PCP's Tax Cartridge. Model 2000 requires HP emulation option.Qume LaserTen & Ten+ No No YesRicoh 6000 No No YesRosetta RT4115,4224 No No Yes Requires software rev 2.61 & up.SharpJX9300,9500,9700No No YesStar LaserPntr 4,LS5 No No YesTandy LP 1000 No No YesTexas Instr. 2015 No No No Requires TI cartridge2539153.0010 and HP-emulation 3.01 & up. '' MicroLaser(&Pro) No No Yes or TI font card 2559859.0005.Toshiba PageLaser 12 No No No Toshiba Tax Font Set LS12-FC10. '' PageLaser 6 No No YesXerox 4030, 4030II '' 4045, 4220 No No Yes Requires HP emulation cartridge.


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set is purchased only once and used year after year. The requiredfont set is popularly known as the Tax Font set or HP's "T" Fontset, but you should refer to Table 3-1 for the specific font set re-quired for your printer.

Cartridge vs. soft-font. The soft-font has the advantage that it workswith most HP-emulating printers and is quite inexpensive. However,you must send the fonts to your printer whenever you turn theprinter power on anew, which can take an appreciable time on anolder computer without a print buffer. (See Table 3-1 for compati-bility of the "T" Soft-Font available from HowardSoft.) A cartridgehas the advantage that, once plugged into your printer, it gives yourprinter the fonts permanently, without requiring a separate step ofloading fonts into the printer each time the printer is turned on.However, cartridges are limited to printers with a compatible slot.(See Table 3-1 for compatibility of the Nelco cartridges. The NelcoT-font Cartridge works with most Hewlett-Packard laser printers anda few other printers, as shown in Table 3-1, but the Nelco Mega-font cartridge, which contains more than a hundred additional fontsfrom HP's cartridges A through Z, works only with Hewlett-PackardSeries II and later laser printers.)

How to InstallGraphic Option installation. Installation of a selected graphic option is nolonger required because the option is built into the standard installation of thelevel of software you purchased:

Premium Level: Graphics included for all forms supplied for the Pre-mium Level.

Standard Level: Graphics included for all forms supplied for the Stan-dard Level.

Economy Level: Graphics included for the main signature form only(such as Form 1040).

For Windows-graphic printing there is nothing you need to do; fonts for Win-dows-graphic printing are loaded every time you start Tax Preparer. For Laser-graphic printing, however, you must install the proper tax fonts and activatethem before you start Tax Preparer, as described next.

Tax font installation (for Laser-graphic printing only). The font installationdepends on whether you are using a font cartridge or a soft font:

Cartridge installation. You must install the proper font before youstart. If you have a tax cartridge for your printer, merely plug itfirmly into the slot provided on your printer before you turn theprinter on. For printers that have two slots, you may have to try thecartridge in both slots, or you may have to remove any cartridge inthe other slot All forms included for the edition purchased.

Soft-font disk installation (for Laser-graphic printing only). If you donot have a tax font cartridge for your printer, you must copy the re-quired fonts to your printer's built-in memory each time you turn the

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printer on. If your software is installed on a hard disk you canautomate the procedure whenever you start the printer or Tax Pre-parer. However you must first install the soft-font on your hard disk.For the Anderson's "T" Soft-Font that HowardSoft offers, it is bestto install the soft-font in the same directory as you install Tax Pre-parer. For example, if you install Tax Preparer in C:\TAX, which isthe standard location, you can insert the Anderson disk in drive Aand type (from DOS):

copy a:*.* c:\taxYou must then copy the fonts into your printer each time you turnthe printer on anew, as instructed next

Activating soft fonts (for Laser-graphic printing only). If you use soft fontsyou must reactivate the fonts each time you restart Tax Preparer:

Activating soft font in DOS installations. If you operate Tax Preparerunder DOS, you can send the tax soft-font to your printer (after it isturned on) by typing (from DOS): cd\tax

DLThe fonts are then copied to your printer ready for use by Tax Pre-parer. If you instead want the fonts sent to your printer automati-cally every time you start Tax Preparer, you can create a new start-up file in the root directory of your hard disk, but you then must ei-ther turn your printer on every time before you start Tax Preparer orhave a 256K software print buffer installed. To create a new start-up file, from the DOS prompt type.

cd\ copy con: tax.bat cd\tax copy /b z.dat prn tax

This instruction replaces Step 2A of the instructions for hard diskinstallation on page Intro A-5 of the separate User's Guide. Oncethis new start-up file is created, whenever you type TAX from theroot directory of your hard disk the tax fonts are copied to theprinter's memory, then Tax Preparer is started.

Activating soft font in Windows installations (for Laser-graphic printingonly). If you use Windows, you could activate the soft font by per-forming the above commands at the MS-DOS prompt. However, ifyou operate Tax Preparer under Windows, we recommend that youset up an icon for the soft-font in the same Windows group as theTax Preparer icons. See the section in your Windows User's Guidetitled "Non-Windows Applications." You should set up the applica-tion as follows:

Description: Tax Soft-font Command line: C:\TAX\DL Working directory: C:\TAX


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With this setup, you copy the fonts to your printer merely by click-ing on the icon you so create, even while you are running Tax Pre-parer.

Operating HintsHow program settings control printing. Your program settings (Chapter 14 ofthe separate User's Guide) let the software know whether you have a com-patible laser printer or a graphics-capable Windows printer. With the Windowsversion of Tax Preparer the second entry for each of the three printout types(Fill-in, Facsimile, and Cover Letters) is

Special (1=HPLaser,2=Windows)This setting replaces what is described on pages 14-9 and 14-10 of yourprior User’s Guide. (Note that the “2=Windows” choice appears only if youare using the Windows version of Tax Preparer and started the program withthe Windows interface installed by the HowardSoft installation program.) Thesettings for this entry have the following effect:

Special = 0: No special printer is identified, and all settings on thescreen for the printer margins, etc., are under your control. Printingis performed through a DOS printing interface, so the printer mustbe configured to print in DOS (as well as Windows if running underWindows).

Special = 1: An HP LaserJet printer or equivalent is identified, and mostsettings on the screen are predetermined and not under your con-trol. Printing is again performed through a DOS printing interface, sothe printer must be configured to print in DOS (as well as Windowsif running under Windows). In addition, if you have the required taxfonts, you can potentially print laser-graphic forms depending on thelevel of update you ordered.

Special = 2 (Windows version only): A Windows-compatible printer isidentified, and all printer settings are predetermined and not underyour control. Even the printout device spec is out of your controlbecause printing is performed through a 32-bit Windows interface(Windows 95 or later), and your Windows settings control whatprinter is used. With this setting the standard Windows Print dia-logue box appears when you start a printout, so you can change thecurrent printer’s characteristics, choose a different printer, or in-crease the number of copies to print from the default of one. In ad-dition, you can potentially print Windows-graphic forms dependingon the level of update you ordered.

While this entry appears on all three printer setting screens, only the one forFill-in Printouts is relevant for the graphic printing of IRS forms. Nevertheless,unless you are using more than one printer for the same return, we recom-mend that you set all three screens to the same setting for “Printout devicespecification” and “Special (1=HPLaser…).”

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Changing style for official fill-in specs (not applicable to Windows printing).When you enter Special=1, the laser form graphics are automatically usedwhen printing a form for which the software level provides the graphics, anddata is printed in the standard pica typeface. However, you can change thelook of the data that is printed onto the form through your entries for Empha-sized type ON and OFF. To use a boldface type, enter Emphasized type ON............ (27)(40)s1B Emphasized type OFF........... (27)(40)s0BTo use a slanted (italic) typeface, enter Emphasized type ON............ (27)(40)s1S Emphasized type OFF........... (27)(40)s0SHowever, do NOT enter typeface commands that change the size or spacingof the type or else the data will not properly align with the form! PICA type (a10 pitch, 12 point, non-proportional type) is required for all IRS forms. Print-ing operates the same as usual except that the printing of alignment dots isautomatically bypassed since it is not needed for Laser-graphic printing;alignment is fully-automatic. (You cannot control the style of data printing forSpecial=2 or 3 because Windows controls the typeface.) CAUTION: Tab set-tings must use the preset 1 for all built-in graphic printing, illustrated in Figure1-1 in Chapter 1 of this Tax Forms Guide. (See “Printouts and Form 1040Tab Settings” in Chapter 1 of this Tax Forms Guide for more information.)

Changing style for facsimile printout specs (not applicable to Windowsprinting). When you enter Special=1, the standard upright pica typeface isused. No entries should be necessary for initial setup characters, or underlin-ing on or off. The margins and page size are preset for pica type size printedat 6 lines per inch, as before.

Changing style for cover letter specs (not applicable to Windows printing).When you enter Special=1, an italic (slanted) typeface is automatically usedif your printer has such a typeface built-in. If you prefer an upright typefaceinstead of the built-in slant typeface, you can enter

(27)(40)s0Sfor "Letter typeface ON," and the slant typeface command will be canceled.

The software knows what options are available. Your program setting for"Special (1=HPLaser,2=Windows)" in “OFFICIAL FILL-IN SPECS” to a num-ber other than zero tells the software what type of printer you want to usefor the graphic printing of forms. The software decides how to use this capa-bility based on what files it sees during the start-up of Tax Preparer:

Economy Level. The Economy Level programs include graphics only forthe main signature form(s) of each edition. Accordingly, Special=2activates the Windows-graphic printing of Form 1040, 1065, or540 on a compatible laser printer whenever you choose to print themain form via "COMPLETE Tax Returns" or "FILL-IN Printouts Only."Similarly, Special=1 activates the Laser-graphic printing of Form1040, 1065, or 540 on a compatible laser printer for which taxfonts have been installed. Text-based facsimiles are printed for allother forms, but the same settings are appropriate because they en-


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sure the proper typeface and paging without requiring you to manu-ally enter any settings.

Standard Level. The Standard Level programs include graphics all formsthat are supplied at the Standard Level. Accordingly, Special=2 ac-tivates the Windows-graphic printing of all forms and Special=1 ac-tivates the Laser-graphic printing of all forms.

Premium Level. The Premium Level programs include graphics for allthat are supplied at the Premium Level. Accordingly, Special=2 ac-tivates the Windows-graphic printing of all forms and Special=1 ac-tivates the Laser-graphic printing of all forms.

(HINT: If the "Special" setting for the three printout types are not all thesame, and you use Special=1 for one of them, you may need to enter (27)Efor "Initial Setup" for the types that have "Special" set to 0. These setupcharacters will ensure that the printer is returned to its factory defaults aftergraphic printing so that normal printing can resume. Also note that you cantemporarily disconnect graphic printing, so that fill-in printouts can be gener-ated with entries only and no graphics, by changing the program settings for"Special" to zero.)

Special=3 available for special circumstances. (Not recommended for nor-mal use.) While not the recommended setting for most setups, some peoplemay find it useful to set "Special (1=HPLaser,2=Windows)" to 3 rather than2 for Windows printing. With this choice the standard Windows Print Windowdoes not appear when you start a printout. In its place, a simple dialoguebox is displayed within Tax Preparer, giving you only the choice of number ofcopies. This choice makes sense under only two circumstances:♦ Full-screen mode. If you operate your computer in full-screen mode, so

that Tax Preparer fills the entire screen, you will not be able to see thestandard Windows Print Window that is displayed when you start aprintout with a setting of Special=2. By contrast, the dialogue box thatappears in its place when you set Special=3 is always visible.

♦ Print driver without a collating option. Some print drivers do not give youthe choice of collating when you choose to print more than one copy ofa printout. As a result, when you choose to print multiple copies youmay get the chosen number of copies for each form before you get thenext form, so that you would not have a single complete return alreadyavailable as a complete packet. By contrast, the dialogue box that ap-pears when you start a printout with a setting of Special=3 providesautomatic collating. That is, when you choose to print more than onecopy

For most people, however, Special=2 is the best setting because it gives youthe capability to change any setting provided by your print driver (or evenchange printers or drivers) and have it stored as your permanent setting forTax Preparer without affecting the setting for any other programs.

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If You Have TroublePrinting not aligned within form. If the graphics look fine but the data do notalign within the spaces on the laser form for the main form, it may mean thatyour program settings for the main form's tabs do not match the ones de-signed for computer-generated graphics. For example, if Form 1040 is mis-aligned but all other forms are fine, make sure your tab settings are set forgraphic forms. Tab settings for Form 1040 must use the preset 2 for bothLaser-graphic and Windows-graphic printing, illustrated in Figure 1-2 on page1-11 of this Tax Forms Guide. For the proper settings for Partnership (Form1065) and California (Form 540) returns, see the beginning of the corre-sponding forms guide for those supplements. However, if the data do notalign for other forms as well, it may mean that your typeface for the data isnot a PICA typeface, either because you have inappropriate entries for initialsetup characters or emphasized type (for Official Fill-in Specs) or becauseyour printer requires special entries for setup characters.

Form and data on separate pages. Some printers, print buffers, print spool-ers, and networks are set to automatically eject a page if no characters aresent to the printer after a certain period of time, or each time a printer file isopened or closed. Since the graphics for the form are printed first, followedby the data for that page, it is conceivable with an improper setup for thesedevices that the printer will eject the page after the graphics are printed butbefore the data are printed. This "automatic eject" feature MUST be turnedoff, or the time delay increased, to prevent page ejection before data hasbeen printed on the form. If the printer itself is the culprit, you can generallyturn the feature off either mechanically or by entering the proper charactersfor "Initial setup characters." But if a print buffer, print spooler, or network isthe culprit, their setup must be modified before Tax Preparer is used.

Special needs for some Windows printers when attempting Laser-graphicprinting. With some newer printers you may find that not all of the graphicsor typefaces are printed properly when printing a laser graphic (Special=1)under Windows. If the printer is claimed to have PCL4 compatibility, theproblem is probably that the driver used when you installed the printer is a“host-based driver” rather than a “PCL driver.” The problem is most commonwith the popular Hewlett-Packard LaserJet 5L. The solution is to install thePCL driver that either came with the printer or is available from its manufac-turer. The PCL driver is generally more complete than the host driver, so itsuse should not affect your other programs. (You can tell which driver is be-ing used by checking the settings for the printer through the Windows Con-trol Panel. If you need help in installing the proper driver, please call our Cus-tomer Service for further information.)

Extra blank pages ejected. This problem can be caused by either the printeror the software. Make sure that the printer is set for printing with a verticalline spacing of 6 lines per inch (66 lines per 11-inch page). Also make surethat the setting for "No. of lines fed by auto-skip" is proper for your printer; 0


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and 6 are the most common settings. Extra pages can also be caused by im-properly set print buffers, print spoolers, or networks.

Garbled printing of graphics. If the graphics are totally misaligned, such aswrong type sizes, words overwriting each other, lines misplaced, etc., the taxfont is the most likely culprit. Check that any tax cartridge is firmly imbeddedin its slot. If more than one cartridge is installed, remove all but the T-fontcartridge, and try it in all available slots. If the tax font is on disk (soft font),make sure that the font is loaded into the printer before you start Tax Pre-parer, that no other optional fonts are still in the printers memory, and thatneither the printer nor the computer is turned off in the interim. To reconfirmwhether a tax font is loaded, most printers have front panel controls that letyou generate a printout of the fonts currently recognized. CAUTION: If youuse a soft font and you ever have to turn the printer off during a session, youmust recopy the font into the printer before you can print graphically again. Ifoperating under DOS, this means that you must leave the Tax Preparer andreturn to DOS to perform the needed command, then restart Tax Prepareranew.

"Insufficient disk space" during installation. You may encounter this messageif the disk onto which you have installed Tax Preparer is nearly full. The La-ser-graphic files require nearly 400K of free disk space for the Premium ver-sion (laser graphics for all forms), or 44K for the Standard version (1040-only). The Windows-graphic files require 6.0MB for the Premium version and1.0MB for the Standard version. If you do not have enough room becausedata files are consuming appreciable space, you may have to move the datafiles to another disk.

Chapter 4

Electronic Filing (e-file)

The BasicsHow to Install

Operating HintsIf You Have Trouble


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The BasicsProfessional e-file. These instructions apply only to Standard Level and Pre-mium Level CD-ROM versions of Tax Preparer. E-file is not available for theEconomy Level. HowardSoft’s e-file is designed for the transmission of sev-eral returns at a time using transmission software we supply. Returns arenormally transmitted to the IRS by way of a third-party service for a nominalper return charge. However, if you purchased our e-file Upgrade to Platinumyou have the choice of transmitting through the third-party or direct to theIRS, with no per return fee for either choice. (Note that e-file upgrades mustbe purchased anew each year because the tax forms and electronic filingspecifications are changed annually by the IRS. E-file is not available for theDOS or Windows 3.1 versions of Tax Preparer.)

CAUTION: Electronic returns are much more restricted than paper returns.In spite of the publicity and the potential for faster refunds, electronic returnscarry a number of restrictions that make many returns unsuitable for elec-tronic filing. It is therefore important that you read not only this chapter butalso our details for Form 8453 at the end of Chapter 2, so that you are awareof the limitations and can make the proper decisions when consideringwhether or not to prepare a return for e-filing rather than paper filing.

What HowardSoft’s e-file contains. The process of filing returns electronicallyconsists of preparing the returns and creating an electronic filing disk file foreach return with HowardSoft's Tax Preparer, then transmitting these fileswith the EFI transmission software provided. HowardSoft’s e-file thereforeconsists of two parts:

HowardSoft's e-file link. This software is built into Standard Level andPremium Level CD-ROM versions of Tax Preparer. It adds to TaxPreparer Form 8453 (and associated forms) and the ability to gener-ate disk files that can be read by the transmission software.

EFI transmission software. This software reads the files you createdwith Tax Preparer and transmits them to the IRS, either directly orthrough NTS (the developer of the EFI software). The includedsoftware is customized for use with HowardSoft’s Tax Preparer andcannot be purchased separately.

What hardware is required. The requirements for HowardSoft e-file are con-siderably stricter than they are for other HowardSoft products:

Computer: IBM-compatible PC with Pentium or higher processor;Operating system: Windows 2000, Windows ME, or Windows XP;Memory: 32 megabytes minimum (64 megabytes minimum recom-

mended);CD-ROM drive: all software is delivered on one CD-ROM;Hard Disk: hard disk with at least 75 megabytes of space available;Internet access: You must have an Internet connection. While

broadband speed is highly recommended, it is not required.

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What else is required. Before you can use the e-file software you must beaccepted into the e-file program by the IRS and register each year withHowardSoft. You apply for acceptance into the program by filing Form 8633with the IRS. Upon acceptance, the IRS issues you an Electronic Filing Identi-fication Number (EFIN), which you use to identify yourself every time youtransmit a return to the IRS. Registration with us is required to activate thetransmission software each year, and includes payment arrangements for anyper return charges and sign-up for bank products including Refund Anticipa-tion Loans (RALs). You can contact us if you have any questions about theIRS e-file program, need a copy of Form 8633 to file, or want to register fore-file. You can also get Form 8633 and the HowardSoft e-file RegistrationForm from our web site at www.howardsoft.com/e-filepro.htm. You can evencomplete our e-file Registration Form on-line through our secure website.

How to InstallInstallation of HowardSoft software. To install the HowardSoft software,merely insert the supplied CD-ROM and follow the instructions that appear onthe screen. Once installation is complete, you should click “Check for Up-dates” on the Tax Preparer Control Panel to ensure that the latest e-filechanges are installed. We also recommend that you “Check for Updates”daily because frequent changes are common with e-file. If installation doesnot start automatically when you insert the CD-ROM, you must execute theprogram install.exe that resides on the HowardSoft CD-ROM. For example, ifyour CD-ROM is identified on your computer as the D-drive, click Start, thenclick Run, and then enter in the “Open” box: D:\INSTALL.EXE

then follow the instructions that appear on the screen.

Installation of NTS’s EFI software. If the installation of NTS’s EFI softwaredoes not start automatically once the installation of HowardSoft software iscomplete, you must execute the program efiwin.exe, which resides on theHowardSoft CD-ROM. For example, if your CD-ROM is identified on yourcomputer as the D-drive, click Start, then click Run, and then enter in the“Open” box: D:\EFIWIN.EXE

then follow the instructions that appear on the screen. The installation pro-gram will put an icon named “EFI 2006” on your desktop for starting the EFItransmission software.

Configuration of NTS’s EFI software. When you first start “EFI 2006” you aretaken to the Configuration screen for EFI 2006, in which you must supply in-formation about yourself (including your IRS-assigned EFIN number) andchoose your options for running the software. Following are highlights of thesettings in the seven folders that appear on the Configuration screen:


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1. Company. You must enter your IRS-assigned EFIN number on thispage. This number is required to identify you to the IRS.

2. E-filing(1). There are a number of critical settings on this page:Assign DCN in EFI. The DCN is a Document Control Number that in-

cludes the 6-digit EFIN that identifies you, a 3-digit Batch Number thatidentifies the batch of returns you send in one transmission, and a 2-digitSerial Number that identifies a particular return within the batch. To re-lieve you of organizing the batches yourself, we recommend that you an-swer Yes here. The EFI software will then keep track of the batches andautomatically assign successive batch and serial numbers. Otherwise, youmust enter the batch and serial numbers in HowardSoft’s on-screen Form8453 before you generate the electronic filing output for a return.

Pass Acks to Prep Package. Answer No. Acknowledgements must beretrieved and viewed with the EFI 2006 software, not Tax Preparer.

Production/Test Indicator. You should keep this answer at Test initiallyso that you can transmit the test returns that NTS provides before trans-mitting your first client return.

Force Transmission to NTS. (Requires Upgrade to Platinum.) This entryis relevant to you only if you purchased the Upgrade to Platinum for taxyear 2006, for which no transmission fee is charged per return. With thePlatinum version of EFI 2006 software you have a choice of either trans-mitting directly to the IRS via dial-up or transmitting indirectly throughNTS via the Internet. Answer Yes here to choose the latter. Otherwiseyour transmissions will use the IRS phone number shown in the E-filing(2)folder and the modem settings you supply in the Modem folder.

Tax Package. Select HowardSoft from the pull-down menu. This willcause the entry for “Electronic Filing Directory” in the bottom portion ofthe page to be automatically set to C:\TAX\E-FILE, which is proper for thenormal installation of Tax Preparer. Exception: If you did not install TaxPreparer in the default location of C:\TAX, you must modify the entry for“Electronic Filing Directory” to reflect your particular location for Tax Pre-parer.

3. E-filing(2). You must enter here the Dealer Code, Mailbox, and Pass-word given to you in the letter from HowardSoft that came with your CD-ROM.

4. Bank(1). This page relates to any banking functions you have set upwith HowardSoft, such as an ability to issue Refund Authorization Loansfor your clients.

5. Bank(2). This page shows you the banking fees that will be applied toyour returns and lets you set additional fees to be subtracted from re-funds.

6. Modem/Comm. (Requires Upgrade to Platinum.) This entry is relevant toyou only if you purchased the Upgrade to Platinum for tax year 2006, for

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which no transmission fee is charged per return. For direct filing to theIRS you must supply the modem settings on this page.

7. Options. If you also purchased our Standard Level or Premium LevelCD-ROM for California (540) returns, and registered with us for Californiae-file, CA should automatically appear on this page.

If you don’t make these choices the first time you start EFI 2006 software,you can make them (or change them) later by choosing, from the menu bar atthe top of the EFI 2006 Window, “System” then “Configuration.” The samefolders as described above will then appear.

Operating HintsElectronic Filing is fully integrated into Tax Preparer. Once the installation iscomplete, you will find that the HowardSoft software operates precisely as ithas in the past with the following additions:

Forms Menu: All forms menus (such as the menus titled “Select Formto Prepare” or “Select Form to Print,” both of which list the formsbuilt into the software) will have the additional Form 8453 (TaxDeclaration for Electronic Filing) included. HINT: Form 8453 is a re-quired form for electronic filing, whether or not you use PIN signa-tures, and is accessible for preparation ONLY through the FormsMenu, and NOT through the Road Map. (If you are not familiar withaccessing forms through the Forms Menu, see page 3-7 and 3-8 ofthe separate User’s Guide for an explanation of this alternative wayof accessing forms.)

Printout Menu: The Printout Menu that you see when you choose "3PRINT Official Returns" from the Main Menu has an additionalchoice -- ELECTRONIC Filing Output -- as illustrated in Figure 4-1.When you make this choice the return is written to a disk file that issuitable for use by NTS’s EFI 2006 transmission software.

Other than these additions, the software operates in the same familiar way asit does without e-file. You merely write a disk file to be transmitted to the IRSthrough NTS instead of printing a paper return to be mailed to the IRS.

Steps to ElectronicFiling. Although pre-paring an electronic re-turn is the same aspreparing a paper re-turn in principle, thereare a number of detailsthat may make your approaches differ. The general procedure is outlinedhere, but you should read on to understand the details for each step and thelimitations that electronic filing imposes on the way you prepare a return. Thegeneral steps are:

PRINT Official R PRINT Official R PRINT Official R PRINT Official Reeeeturnsturnsturnsturns 1 CHANGE FILENAME to Print 1 CHANGE FILENAME to Print 1 CHANGE FILENAME to Print 1 CHANGE FILENAME to Print 2 PREVIEW on Screen 2 PREVIEW on Screen 2 PREVIEW on Screen 2 PREVIEW on Screen 3 PRINT on Printer or Disk 3 PRINT on Printer or Disk 3 PRINT on Printer or Disk 3 PRINT on Printer or Disk 4 ELECTRONIC Filing Output 4 ELECTRONIC Filing Output 4 ELECTRONIC Filing Output 4 ELECTRONIC Filing Output Which do you choose? 1 Which do you choose? 1 Which do you choose? 1 Which do you choose? 1

Figure 4-1. Printout Menu with e-file


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Step 1: Prepare return with Tax Preparer. You should prepare the re-turn with Tax Preparer as you normally do, but be aware of restric-tions on the forms and supporting statements that you are allowedto include with an electronic return generated by Tax Preparer, asdescribed in Chapter 2 in the details for Form 8453. If you must filea return that exceeds one of the restrictions, you must file a paperreturn rather than an electronic return. CAUTION: Note that the IRSrequires that ALL information on the Forms W-2, W-2G, and 1099-Rreceived by the taxpayer be transmitted with the return, so youmust enter all information into the corresponding worksheets thatare built into Tax Preparer in support of Form 1040 lines 7a and 7b,15a and 16a, and 21. (Separate versions of Forms W-2, W-2G, and1099-R are no longer accessible from Form 8453. Instead, theworksheets accessible from Form 1040 have been expanded tosupport all data required for e-file.)

Step 2: Complete Form 8453. The IRS Form 8453 is the paper form thatthe taxpayer and ERO sign to verify the validity of the transmitted e-file return. However, the Form 8453 that is built into Tax Preparerserves many additional purposes, which makes it mandatorywhether or not you have to file the paper Form 8453. In Tax Pre-parer, it is the place where amounts throughout the return are con-solidated to provide automatic eligibility checks. It is also the placewhere direct debit information is enter, Refund Authorization Loansare identified, and any PIN signatures are entered, including informa-tion for Form 8879 (IRS e-file Signature Authorization). See the endof Chapter 2 of this Tax Forms Guide for details on our Form 8453and what it contains.

Step 3: Generate Electronic Filing Output. Once the return and Form8453 are complete, the return can be written to a disk file. The pro-cess is as easy as printing a return, and is performed through thenew choice on the Printout Menu. You can create files for as manyreturns as you want to transmit in the same batch before proceed-ing to the next step. See the next page for details.

Step 4: Check and Transmit returns with NTS’s EFI 2006 software.When you are ready to start checking or transmitting returns, startNTS's EFI software by clicking the “EFI 2006” icon that should ap-pear on your desktop. Choose the returns you want to process bychoosing “IRS Processing” from the EFI 2006 menu bar, thenchoosing “Import Tax Returns” from the pull-down menu that ap-pears. The list of files you generated in Step 3 then appears, show-ing the SSN and taxpayer names for the returns. Click (or highlight)the returns you want to process to get started. If any returns arerejected before transmission, you can return to Tax Preparer, correctthe problem, and generate a new file for transmission.

Step 5: Check acknowledgements. Within 24 hours of transmission anacknowledgement should be available for each return, showing

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whether it was accepted or rejected. You can check the status ofreturns by choosing “Reports” from the EFI 2006 menu bar.

Step 6: Print and file Form 8453, if necessary. If you have any acceptedreturns for which you did not use the PIN method of signing the re-turn, you must print a paper Form 8453, you and the client mustsign it, and you must file it with the IRS. (If you configured the EFI2006 to “Assign DCN in EFI,” you must enter the assignedbatch/serial number (the 5-digit portion of the DCN) at the beginningof our on-screen Form 8453 before printing.)

Example of Generating Electronic Filing Output. Once the return and Form8453 are complete, and the Conclusion of Eligibility on Form 8453 showsYes for "May be eligible for Electronic Filing," an “ELECTRONIC Filing Output”can be generated for the return. The process is just like printing a return, andis performed through the new choice on the Printout Menu. Choose 3 (PRINTOfficial Returns) from the Main Menu, and the new Printout Menu shown inFigure 4-1 appears. If you want to create e-file disk files for returns otherthan the active one named near the top of the Tax Preparer window, youmust choose 1 (CHANGE FILENAME to Print) from this menu and select thereturn you want to use, or choose 17 (ALL files) to create e-file disk files forall returns in the tax volume. Once you are satisfied with the choice, choose4 (ELECTRONIC Filing Output) from the new Printout Menu to start the proc-ess of creating an e-file disk file for the selected return(s). You are immedi-ately prompted to confirm your choice through the prompt

Ready to write disk file(s) for Electronic Filing?Once you answer Yes, the return is read from disk and the writing of the diskfile will begin, confirmed on the screen with a message like

Writing Electronic Filing file E-FILE\TS07B01.LDT

Once writing and conversion to IRS e-file format are complete, a file namedTS07B01.IRS (for this example) will reside in the subdirectory E-FILE withinthe folder where you installed your Tax Preparer software. For example, ifyou installed Tax Preparer in C:\TAX (which is where it is installed if youdidn’t specify a different location yourself during installation), the e-file outputwill reside in C:\TAX\E-FILE. If your software does not operate as describedabove, see the next section (“If You Have Trouble”) for more information.

Reconfiguring NTS’s EFI2006 software. When you choose HowardSoft as the“Tax Package” in your configuration of NTS’s EFI2006 software, the entryfor “Electronic Filing Directory” is automatically completed with the pathC:\TAX\E-FILE. Therefore, if you installed Tax Preparer in a location otherthan C:\TAX, you must change your configuration of the EFI 2006 softwareaccordingly. For example, if you installed Tax Preparer in D:\TAX2007, youwould change your configuration for EFI2006 by choosing, from the EFI2006menu bar, System, then Configuration, then E-filing (1), and would then re-type the entry for “Electronic Filing Directory” to D:\TAX2007\E-FILE. (Note


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that E-FILE is now always the subdirectory where Tax Preparer stores its e-file output.)

If You Have TroubleProgram improperly started. Cannot generate e-file output. If this messageappears instead of "Ready to write disk file(s) for Electronic Filing?" you mayhave started Tax Preparer using an old icon, such as one you placed on yourdesktop for some prior edition. The message means that critical new portionsof the software are being bypassed because of how you started the program,and the conversion of your data to IRS e-file format cannot be completed. Itis therefore imperative that you start Tax Preparer using the new icon placedin your Program Folder for HowardSoft Tax Preparer this year. You can copythis new icon to your desktop if you so choose, but you should remove or re-name any other Tax Preparer icons that reside on your desktop in order toavoid confusion.

E-FILE\TS07B01.LDT already exists. OK to erase? A message like this onemay appear (with a slightly different filename) if the generation of an e-fileoutput was previously attempted for the same client within the same tax vol-ume, but the was not successfully completed. The LDT file (a file with anLDT extension in its filename), is an intermediate file generated during theconversion of your data to IRS e-file format. Once the conversion is complete,a file with an IRS extension (such as TS07B01.IRS) will reside on this disk in-stead. Therefore this message is normal if you are trying to generate e-fileoutput anew after having made a change to the return, and you should an-swer Yes.

INVALID Spec or Filename. If this error arises soon after you answer Yes to"Ready to write disk file(s) for Electronic Filing?" it means that the subdirec-tory E-FILE does not exist within the folder where you installed Tax Preparerthis year. Since this subdirectory is automatically created when you first in-stall an e-file version of Tax Preparer, the message indicates that either theinstallation was not successfully completed or the subdirectory is damaged.In either case you usually avert the problem by creating the subdirectory(folder) yourself through Windows Explorer or MS-DOS Prompt. You can con-tact HowardSoft Customer Service if you need help with the procedure.

Return has no Form 8453. A return CANNOT be filed electronically without aForm 8453. You MUST complete the form and supply all required informa-tion, including the Form W-2, W-2G, and 1099-R worksheets. In addition, thewithholding information supplied on the worksheets must agree with the to-tals on line 64 of Form 1040 for the return.

Return NOT eligible for electronic filing. If the return is not eligible based onthe forms or entries in the return, the question "May be eligible for e-file" atthe bottom of screen 5 of Form 8453 will be automatically No, and the mes-sage "NOT eligible for electronic filing" appears immediately if you attempt to

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generate Electronic Filing Output for this return. The message also appearslater if, while generating the disk file, the software determines that the returncannot be written in a format acceptable to the IRS because too many sup-ports exist for a particular line. See Table 2-16 at the end of Chapter 2 of thisTax Forms Guide for inherent limitations. (The form that appears in the boxwhen the message is displayed is the form that violates the supportingstatement limitations.)

Return cannot be modified enough by Tax Preparer to pass NTS's pre-transmission error checking. When Tax Preparer fails to write an electronicfiling file to completion due to its own eligibility checks, or a completed filecontinually fails NTS's error checking, yet the return seems to meet all IRSrules for electronic filing, you may have run into a restriction imposed by oursoftware. See Tables 2-15 and 2-16 at the end of Chapter 2 of this TaxForms Guide for a list of restrictions. You must then file a paper version ofthat return instead of an e-file version.

Tax Forms Guide · (for preparing 2006 Form 1040 tax returns and tax planning for 2007 and beyond)...

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Transcript of Tax Forms Guide · (for preparing 2006 Form 1040 tax returns and tax planning for 2007 and beyond)...