Taxpayer Help and Education 1998

The following Tax Topics are provided by the US Internal Revenue Service. They may be helpful in the preparation of tax forms for tax year 1998. The topics are provided for educational purposes only. The presentation of these topics is not to be construed as tax, legal or financial planning advice. For advice, please consult the appropriate professional. Forms, Publications and Instructions mentioned in this article may be downloaded for free in the ElderCare TaxPak 98.

Topical Index
Power of Attorney Information (Topic 310)
Dependents (Topic 354)
Decedents (Topic 356)
Nontaxable Income (Topic 422)
Medical and Dental Expenses (Topic 502)
Estate Tax (Topic 557)
Child Care and Dependent Tax Credit (Topic 602)
Credit for the Elderly or the Disabled (Topic 603)


Power of Attorney Information (Topic 310)

If you want to authorize someone to receive confidential tax information, file Form 8821, Tax Information Authorization, with the IRS office that will be providing the information. However, Form 8821 cannot be used to name an individual to represent you before the IRS.

If you want someone to represent you on a federal tax matter, file Form 2848, Power of Attorney and Declaration of Representative with the IRS office where you want your representative to act for you.

Your signature on Form 2848 authorizes the individual or individuals named to receive tax information and to represent you before the IRS. This authority includes, but is not limited to, extending the time for assessing and collecting tax, signing a waiver agreeing to a tax assessment, and waiving restrictions on the assessment and collection of deficiencies of tax. The representative can also substitute another representative if you specifically permit this on the power of attorney. A representative can be authorized to sign an income tax return for you but only in limited circumstances.

If you want to limit what the representative may do on your behalf, indicate these limitations on the appropriate line of Form 2848.

When completing the Form 2848, you must show the type of tax, the tax form number, and the year or period for which the power is granted.

You can list returns for any number of specified years or periods that have already ended and returns for years or periods that will end no later than three years from the date the form is signed. For example, you may list income tax, Form 1040, for calendar year 1996 and employment tax, Form 941, for the first and second quarters of 1996. A general reference to "all years", "all periods", or "all taxes" is not acceptable. The Form 2848 will be returned to you for correction if you use such general references.

Form 2848 must be signed and dated by both husband and wife if a joint return is involved and both husband and wife will be represented by the same individual. If, however, a husband and wife who have filed a joint return wish to be represented by different individuals, each spouse must complete his or her own power of attorney form.

In Part II of Form 2848, the representative must declare that he or she is authorized to represent the taxpayer and must declare that he or she is one of the listed individuals (such as attorney or Certified Public Accountant) that can practice before the Internal Revenue Service. If the representative is licensed as an attorney or Certified Public Accountant, he or she must also list the state that issued the license.

More detailed information is contained in the instructions to Form 2848. Additional information is also provided in Publication 947, Practice Before the IRS and Power of Attorney. Form 2848 and instructions for preparing it are included in the ElderCare Tax
Pak98 available on this website. Publication 947 is available directly from the IRS at


Dependents (Topic 354)

If you want to claim someone as your dependent, there are five tests that must be met:
*The member of household or relationship test,
*The citizenship test,
*The joint return test,
*The gross income test; and
*The support test.

The first test is the member of household or relationship test. To meet this criteria, a person must live with you for the entire year as a member of your household or be related to you. A person is not considered a member of your household if, at any time during the tax year, your relationship with that person violates local law. The Form 1040 and 1040A instruction booklets contain a listing of all relatives who may qualify under the relationship test. Your spouse is never considered your dependent. If a person was born or died during the year and was a member of your household during the entire part of the year he or she was alive, the person meets the member of household test.

The second test is the citizenship test. This means your dependent must be a U.S. citizen or resident, or a resident of Canada or Mexico for some part of the tax year.

The third test is the joint return test. Generally, you are not allowed to claim a person as a dependent if he or she files a joint return. However, you may claim a married dependent who is filing a joint return solely to claim a refund of tax withheld. This exception applies if neither the dependent nor the dependent's spouse is required to file a return and no tax liability exists for either spouse on separate returns.

The fourth test is the gross income test. Generally, you may not claim as a dependent a person who had gross income of $2,650 or more for 1997. Gross income is all income in the form of money, property, and services that is not exempt from tax. There are two exceptions to the gross income test. If your child is under age 19 at the end of the year or a full-time student under the age of 24, the gross income test does not apply.

The fifth test is the support test. To claim someone as your dependent you must provide more than half of that person's total support during the year. A special rule applies to children of divorced or separated parents. Generally, the custodial parent is treated as the person who provides more than half of the child's support; however, the non-custodial parent can meet this test if the custodial parent releases his or her claim to the exemption. See Publication 501 for more information.

You must include a valid Social Security Number or Individual Taxpayer Identification Number (ITIN) for each dependent claimed on your tax return or the exemption will be disallowed. For more information on the ITIN, see Topic 857 or order Publication 1915. For more information on dependents, order Publication 501, Exemptions, Standard Deduction, and Filing Information, and Publication 929, Tax Rules for Children and Dependents, by calling 1-800-829-3676.


Decedents (Topic 356)

When a person dies, the personal representative is responsible for filing certain tax returns for the decedent, and the decedent's estate. As the personal representative, you may be required to file: the final income tax return of the decedent and any returns not filed for preceding years, the U.S. Income Tax Return for Estates and Trusts, and the United States Estate Tax Return. The filing requirements that apply to individuals will determine if a final income tax return is required for the decedent. TeleTax Topic 351, Who Must File?, will help you.

Whether income must be included or deductions may be taken on the final return is determined by the method of accounting used by the decedent. Most individuals use the cash method. Under this method, the final return should show only the items of income that the decedent actually received, or had an unqualified right to receive, before death. Only the expenses the decedent paid before death should be deducted. If the decedent used the accrual method, see Publication 559, Survivors, Executors, and Administrators. Publication 538, Accounting Periods and Methods contains more information about the cash and accrual methods.

The complexity of the decedent's reportable income will determine which individual return form to file. If a personal representative has been appointed, that person must sign the return. If it is a joint return, the surviving spouse also must sign it as well.

If you are a surviving spouse filing a joint return and no personal representative has been appointed, you should sign the return and write in the signature area, "Filing as surviving spouse." If no personal representative has been appointed and there is no surviving spouse, see Publication 559. The final return should have the word "Deceased", the decedent's name, and the date of death written across the top of the return. Generally, the person who is filing a return for a decedent and claiming a refund must file Form 1310 along with a copy of the death certificate. However, if you are a surviving spouse
filing a joint return, or a court appointed or certified personal representative, you do not need to file the 1310. Court appointed or certified personal representatives must attach a copy of the certificate showing the appointment to the return.

The second return is Form 1041, U.S. Income Tax Return for Estates and Trusts. It must be filed if the gross income of the estate is $600 or more, or if a beneficiary is a nonresident alien. The third return you may have to file is Form 706, United States Estate and Generation Skipping Transfer Tax Return. Whether you must file a Form 706 depends on the value of the gross estate. A return is required for a U.S. citizen or resident whose gross estate is more than $600,000. See Topic 557 for additional information on estate tax. Call 1-800-829-3676 to request forms or publications or download from the IRS web
Site at


Nontaxable Income (Topic 422)

Some types of income you receive are not taxable. When you total your gross income to see if you are required to file a tax return, do not include your nontaxable income. You should keep records of your nontaxable income. Some types of income that generally are not taxable include:

*Child support payments,
*Welfare benefits,
*Life insurance proceeds that are received because of the death of an individual,
*Interest on state or local government obligations,
*Accident and health insurance proceeds,
*Property received as a gift or inheritance,
*Benefits received under any law administered by the Department of Veteran's Affairs; and
*Amounts received under a worker's compensation act for an occupational sickness or injury.

All or a portion of your Social Security or equivalent Railroad Retirement Benefits may be nontaxable. See Topic 423 for more information. Some scholarship and fellowship grants may be non-taxable. See Topic 421. Publication 525, Taxable and Nontaxable Income contains additional information on items not taxed and is available in the ElderCare TaxPak98.


Medical and Dental Expenses (Topic 502)

If you itemize your deductions on Schedule A, Form 1040, you may be able to deduct medical and dental expenses for yourself, your spouse, and your dependents. Medical and dental expenses include payments for the diagnosis, cure, relief, treatment, or prevention of disease. Expenses may also include payments for treatments affecting any part or function of the body, but they must be primarily for the alleviation or prevention of a physical or mental defect or illness.

Medical expenses include fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and Christian Science practitioners. Also included are payments for hospital services, medical and hospital insurance premiums, nursing services, therapy treatments, laboratory fees, prescription medicines and drugs, and insulin. Payments for such things as acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction are also deductible medical expenses.

The cost of things such as false teeth, eyeglasses, contact lenses, hearing aids, crutches, wheelchairs, and guide dogs for the blind or deaf are deductible medical expenses.

You may not deduct funeral or burial expenses, health club dues, programs to stop smoking or lose weight, over-the-counter medicines, toothpaste, toiletries, cosmetics, a trip or program for the general improvement of your health, or unnecessary cosmetic surgery.

Nursing home expenses are allowable as medical expenses in certain instances. If you, your spouse, or your dependent is in a nursing home or home for the aged, and the primary reason for being there is for medical care, the entire cost, including meals and lodging, is a medical expense. If the individual is in the home mainly for personal reasons, then only the cost of the actual medical care is a medical expense and the cost of meals and lodging is not deductible.

Transportation costs necessary for medical care qualify as medical expenses. The actual fare for a taxi, bus, train, or ambulance can be deducted. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate of 10 cents a mile. With either method you may include tolls and parking fees.

You may include in medical expenses the cost of meals and lodging while at a hospital or similar institution if your main reason for being there is to receive medical care. Lodging, but not meal expenses, is deductible for a person for whom transportation expenses are deductible because that person is traveling with the person receiving the medical care, such as a parent traveling with a sick child. The amount you may deduct for lodging is limited to $50 per person per night.

You may deduct qualified medical expenses you pay for yourself, your spouse, and your dependents, including a person you claim as a dependent under a multiple support agreement. If either parent claims a child as a dependent under the rules for divorced or separated parents, each parent may deduct the medical expenses he or she actually pays for the child. You can also deduct medical expenses you paid for someone who would have qualified as your dependent except that the person didn't meet the gross income or joint return test.

Insurance premiums you pay to cover the costs of medical treatment qualify as medical expenses. Some examples of the types of insurance premiums that you may deduct are:

*Policies that cover doctors, hospitals, X-rays, laboratory fees, prescription drugs, or lost or damaged contact lenses,

*Membership in an association furnishing co-operative or group medical care,
*Premiums for Medicare B; and
*Premiums for Medicare A if you are not covered by social security, but choose to purchase this coverage.

You may not deduct insurance premiums for life insurance, for policies providing for loss of wages because of illness or injury, or policies that pay you a guaranteed amount each week for a sickness. In addition, only the part of your lifetime care policy properly allocable to medical care is a medical expense. You may not deduct insurance premiums paid by an employer sponsored health insurance plan (cafeteria plan) unless the premiums are included in box 1 of your Form W-2.

You can include only the medical expenses paid during the year, regardless of when the services were provided. Your total medical expenses for the year must be reduced by any insurance reimbursement. It makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

Your total medical expenses must be reduced by 7.5% of your adjusted gross income. You may claim the remainder as an itemized deduction.

If you are self-employed and have a net profit for the year, or if you are a partner in a partnership or a shareholder in an S corporation, you may be able to deduct, as an adjustment to income, 40% of the amount you pay for medical insurance for yourself and your spouse and dependents. You can include the remaining premiums with your other medical expenses as an itemized deduction. You cannot take the special 40% deduction for any month in which you are eligible to participate in any subsidized health plan maintained by your employer or your spouse's employer.

Publication 502, Medical and Dental Expenses, contains additional information and is available in the ElderCare TaxPak98.


Estate Tax (Topic 557)

If you receive money or property that is left to you by someone who has died, you do not need to report it on your income tax return unless it came from a retirement plan. However, the personal representative or a survivor of the person who died may have to file tax returns for the estate. The personal representative may be an executor, administrator, or anyone in charge of the property of the person who died. Refer to Topic 356, Decedents, for income tax returns that may be required.

An estate is a taxable entity that comes into being with the death of an individual and exists until all the assets are distributed to the beneficiaries. The personal representative may have to file income tax returns for the estate on Form 1041, U.S. Income Tax Return for Estates and Trusts, and make quarterly estimated tax payments. In addition, Form 706, U.S. Estate Tax Return, generally must be filed within 9 months after the date of death if the value of the gross estate at the date of death was more than $600,000.

The gross estate of a decedent consists of any money, real property, or other assets the decedent had an interest in at the time of death.

Deductions and a special credit, called the unified credit, are allowed which may reduce or eliminate any tax. Please note that if the amount of the gross estate requires a return to be filed, it must be filed even if the deductions and unified credit make it a return with no tax due. Beginning in 1998, the unified estate and gift tax credit will increase annually, according to the following schedule, until the maximum value of estates exempt from tax reaches $1 million in 2006.

Year                 Unified Credit     Credit Equivalent in Taxable Estate or Taxable Gifts
--------------              --------------            ----------------------------------------------------

1997                      $192,800               $600,000
1998                     $202,050                $625,000
1999                     $211,300               $650,000
2000 & 2001        $220,550               $675,000
2002 & 2003        $229,800               $700,000
2004                    $287,300                $850,000
2005                    $326,300                $950,000
2006 and after     $345,800               $1,000,000

For more information, refer to Publication 950, Introduction to Estate and Gift Taxes, available in the ElderCare TaxPak98.

For information on your federal tax responsibilities if you are settling an estate, refer to Publication 559, Survivors, Executors, and Administrators. To get Publication 559 for tax year 1998, call 1-800-829-3676.


Child and Dependent Care Credit (Topic 602)

If you paid someone to care for a qualifying individual in order to work or look for work, you may be able to claim the credit for child and dependent care expenses. If you are married, both spouses must have worked, unless one spouse was either a full-time student or was physically or mentally incapable of self-care. The expenses you paid must have been for the care of one or more of the following qualifying individuals:
*A child under age 13 whom you can claim as a dependent or whom you could have claimed as a dependent had it not been granted to a noncustodial parent in a written agreement or decree of divorce or separate maintenance,
*Your spouse who is mentally or physically unable to care for himself or herself; or
*Any disabled person who was not able to care for himself or herself, and whom you can claim as a dependent (or could claim as a dependent except the person had $2,650 or more of gross income).

To take the credit, you must meet all the following conditions:
*You generally must have earned income during the year,
*The qualifying person must have lived with you in a home kept up by you; and
*Generally, if married, you must file a joint return.

To qualify for the credit, the expenses must have been paid for the qualifying person's care so you could work or look for work. However, you cannot include payments made to your spouse, a person whom you can claim as a dependent, or your child who was under age 19 at the end of the year.

If you qualify for the credit, use Schedule 2 of Form 1040A, or Form 2441 with Form 1040. If you received dependent care benefits (this amount should be shown in box 10 of your 1997 Form W-2), you must complete part III of the Schedule 2 or Form 2441. You cannot use Form 1040EZ if you claim the child and dependent care credit. You must report the name, address, and taxpayer identification number, either the social security number, or the employer identification number of the child care provider on your return. You can use Form W-10, Dependent Care Provider's Identification and Certification, to request this information from the care provider

The credit is a percentage, based on your adjusted gross income, of the amount you paid someone to care for the qualifying person. You may use up to $2,400 of the expenses paid in a year for one qualifying person, or $4,800 for two or more qualifying persons.

For additional information refer to Publication 503, Child and Dependent Care Expenses. Publication 503 is available in the ElderCare TaxPak98 on this site.

If you pay someone to look after your dependent or spouse in your home, you may be a household employer. If you are, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. For information on this subject, order Publication 926, Household Employer's Tax Guide, or refer to Topic 756 and Topic 760. Publications may be ordered by calling 1-800-829-3676.


Credit for the Elderly or the Disabled (Topic 603)

This credit is available to certain qualifying taxpayers who are age 65 or older or disabled, and whose gross income and nontaxable social security or other nontaxable pension are below specified amounts which can be found in the instructions for Schedule R (1040) or Schedule 3 (1040A).

If you are under age 65, you may qualify for the credit if you retired on permanent and total disability, you received taxable disability benefits paid under your employers accident, health, or pension plans, and you have not yet reached the age when your employer's retirement program would have required you to retire.

Use Schedule R (Form 1040) or Schedule 3 (Form 1040A) to compute the credit. You cannot take the credit if you file Form 1040EZ. Form 1040sr and instructions are available in the ElderCare TaxPak98 on this website.

Generally, if you are married, you and your spouse must file a joint return to claim this credit. However, you may claim the credit on a separate return if you and your spouse lived apart for the entire year. You are not considered married for this purpose if your filing status is head of household. Publication 524, Credit for the Elderly or the Disabled, has more information may be downloaded for free in the ElderCare TaxPak98.

Source: U.S. Internal Revenue Service, 1998

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