What Can I Deduct on My Return?

After you have totaled your income, you are allowed to deduct (subtract) certain amounts to arrive at adjusted gross income. For example, you can deduct interest paid on a qualified student loan (discussed next). You also are allowed to deduct certain amounts, such as a standard deduction or itemized deductions (discussed later), to figure your taxable income.

Deductible student loan interest.   You may be able to deduct interest you pay on your qualified student loan. This applies to loan interest payments due and paid in 2000.

You may be able to deduct the interest even if you took out the loan before 2000. Regardless of when you took out the loan, you can deduct only interest paid during the first 60 months that interest payments are required.

Example 1.   You took out a qualified student loan in 1993. You made payments on the loan every month as required, beginning October 1, 1995. You can deduct the interest of your first nine payments for 2000. You cannot deduct the interest on any later payments because they are after the 60-month period (October 1, 1995 - September 30, 2000).

Maximum deduction.   Your deduction for 2000 cannot be more than $2,000. This limit increases to $2,500 for 2001 and later years.

Limit on deduction.   Your deduction may be limited depending on your modified adjusted gross income (AGI). See the Form 1040 Instructions and the Student Loan Interest Deduction Worksheet for these limits.

Claiming the deduction.   This deduction is an adjustment to income, so you can claim it even if you do not itemize your deductions on Schedule A (Form 1040). You cannot claim the deduction if:

1. Another taxpayer claims you as a dependent, or
2. Your filing status is married filing a separate return.

You claim the deduction on line 24 of Form 1040 or line 17 of Form 1040A. See your form instructions for more information.

Use the Student Loan Interest Deduction Worksheet in the form instructions to figure your deduction.

Change in dependency status.   You cannot deduct interest on a student loan for any year you are claimed as a dependent on another person's return. But you can, subject to other requirements, deduct payments made in a later year when you are no longer claimed as a dependent.

Standard deduction.   Most people are entitled to deduct a certain amount called the standard deduction from their income. This amount is set by law and generally increases each year.

Dependent.   If your parent or someone else can claim you as a dependent, your standard deduction is the greater of:

1. $700 ($1,800 if blind), or
2. Your earned income plus $250, but not more than $4,400 ($5,500 if blind).

Earned income for this purpose is income you received as payment for work you did, plus any part of a scholarship or fellowship grant that you must include in income.

Not a dependent.   If no one can claim you as a dependent, you can subtract a standard deduction of $4,400 ($5,500 if blind).

Itemized deductions.   You may have high medical bills, pay a lot of mortgage interest or state and local income taxes, or contribute large amounts to charity. If these expenses add up to more than the amount of the standard deduction, the law allows you to claim the higher total instead of the standard deduction. To do this, you must itemize (list) your deductible expenses on Schedule A (Form 1040). As a student, you probably do not have enough of these kinds of expenses to itemize, but keep this in mind for future years when you do.

Exemptions.   Generally, you can subtract from income your own personal exemption. This amount is $2,800 for 2000. It is set by law and generally increases each year. However, if you can be claimed as a dependent by your parents or others, you are not entitled to a personal exemption.

What Can I Subtract From My Tax?

After you have figured your tax, you may be able to subtract certain amounts from it. These amounts are called credits. They reduce your tax dollar for dollar.

Higher education tax credits.   You may be able to claim one of two education tax credits.

1. The Hope credit.
2. The lifetime learning credit.

The amount of each credit is determined by the amount you pay for qualified tuition and related expenses and the amount of your modified adjusted gross income.

What expenses qualify.    The credits are based on qualified tuition and related expenses you pay for yourself or dependent you claim on your tax return. In general, qualified tuition and related expenses are tuition and fees required for enrollment or attendance at an eligible educational institution. Fees for course-related books, supplies and equipment, and student activity fees are included in qualified tuition and related expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. Qualified tuition and related expenses do not include the cost of insurance, medical expenses (including student health fees), room and board, transportation, or similar personal, living or family expenses, even if the fee must be paid to the institution as a condition of enrollment or attendance. For more information, see Publication 970, Tax Benefits for Higher Education.

Child tax credit.   If you have children, you may be entitled to a child tax credit for each qualifying child. You must provide the name and identification number (usually the social security number) of each qualifying child on your return. The maximum amount of the credit you may claim is $500 for each qualifying child.

Limit on credit.   The credit may be limited depending on the amount of your tax liability and your modified adjusted gross income. See the Form 1040 or 1040A Instructions for more information.

Earned income credit.   If you qualify for the earned income credit, you may be able to get a refund from the IRS even if you had no tax withheld. See Publication 596, Earned Income Credit, or the instructions for the tax form you file, to see if you can claim this credit.

You do not have to have a qualifying child to be able to claim the earned income credit in 2000. If you are at least 25 years old, have earned income of less than $10,380, and cannot be claimed as a dependent by another person, you may be eligible for the credit.

Child and dependent care credit.   If you have a child and you were employed in 2000, you may be eligible for the child and dependent care credit. See Publication 503, Child and Dependent Care Expenses, for more information.

How Do I File a Return?

Before filing your return, make sure you have all your wage and other income statements, along with the correct tax form and instructions.

Income statements.   In January, each of your employers should give you a Form W-2. It will show the amount of wages you were paid during the past year and how much tax (income, social security, and Medicare) was withheld. Your bank or other financial institution will send you Form 1099-INT or a similar statement showing the interest you earned during the past year.

If you do not receive Form W-2 by January 31, ask your employer for it. If you do not receive your Forms 1099-INT or other statements from your bank by January 31, call your bank and ask for them. If you have not received these income statements by February 15, call the IRS telephone number for your area. The numbers are listed in the tax form instructions.

Tax return forms.   You can probably use the shortest, simplest form, Form 1040EZ. You can get it from your local IRS office, post office or library. You can also download it by accessing the IRS web site at www.irs.gov.

You can also receive forms and instructions by fax, using the phone attached to your fax machine and calling 703-368-9694, 24 hours a day, 7 days a week. To order by phone, call 1-800-829-3676. After you have filed your first return, the IRS will send you blank tax forms for your use in future filing seasons.

If you cannot file Form 1040EZ, file one of the longer forms, Form 1040A or Form 1040, instead. You cannot file Form 1040EZ if your income includes more than $400 of taxable interest or any income other than wages and tips, taxable scholarship or fellowship grants, unemployment compensation, qualified state tuition program earnings, or Alaska Permanent Fund dividends. You cannot file Form 1040EZ or Form 1040A if you had income from self-employment, you are reporting any allocated tips, or you itemize deductions as explained earlier.

Due date of return.   If you are required to file a tax return for 2000, you must file it with the IRS by April 16, 2001.

You can receive an automatic 4-month extension to file your return if by the regular due date you do any of the following.

• File a paper Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.
• File Form 4868 electronically by phone or over the Internet.
• Pay part or all of your estimate of tax due electronically by using a credit card. (If you use this option, you do not have to file Form 4868.)

An extension of time to file is not an extension of time to pay. See Form 4868 for details.

Penalties.   There are penalties for filing your return late and for paying the tax late. If you pay your taxes late, you will also be charged interest on the amount you owe.

Putting Your Return Together

After you have received all your wage and other income statements, and have the correct tax form and instructions, you are ready to complete your return. Because you most likely can use Form 1040EZ, completing Form 1040EZ is discussed here.

Form 1040EZ is only 12 lines long on the front of a single page. The booklet, 2000 Form 1040EZ Instructions, contains instructions for each line. An example of a filled-in Form 1040EZ is at the back of this publication.

Fill in your name, address, and social security number. Or, if you have an IRS label, attach it instead. Make sure you enter your social security number. Enter your total income for the year (from your Forms W-2 and 1099-INT, for example). From that adjusted gross income amount you subtract the amount of your standard deduction and your personal exemption if you can claim one. Then you find the tax on the remaining amount (taxable income) in the Tax Table in the instructions booklet.

Compare the amount of tax shown in the table to the amount of your payments, including the tax your employer withheld. You can find the amount of tax withheld in box 2 of Form W-2. If any tax was withheld from your interest income, you can find that amount in box 4 of Form 1099-INT.

If your payments are more than your tax, the difference between the two amounts is your refund. If your tax is more than your payments, the difference is what you owe. If you owe tax, you must send a check or money order for the amount due with your return. You may also pay by credit card. For more information, get the Form 1040EZ, 1040A, or 1040 instructions booklet.

Attach a copy of all your Forms W-2 to your return. Do not attach Forms 1099-INT, but keep them for your records. Make a copy of your return before you mail it. Keep it in a safe place with the other copies of your Forms W-2 and your Forms 1099-INT.

Alternative Filing Methods

The IRS offers several filing alternatives to make filing your return easier. This section explains IRS e-file (electronic filing).

• Using a tax professional.
• Using your personal computer.
• Using a telephone (TeleFile).

IRS e-file

IRS e-file uses automation to replace most of the manual steps needed to process your paper returns. As a result, processing e-file returns is faster and more accurate than the processing of paper returns. Taxpayers who file electronically and choose direct deposit receive their refunds in less than half the time that paper filers do.

Using a tax professional.   Many tax professionals file returns electronically for their clients. You can prepare your own return and have a professional electronically transmit it, or you can have your return prepared and transmitted by a tax professional.

Using your personal computer.   If you have a computer and tax preparation software, you can e-file your return electronically from home 24 hours a day, 7 days a week.

Using the telephone (TeleFile).   If you receive a TeleFile tax package, you may be able to file your Form 1040EZ information over the phone. You can use TeleFile only if you receive the package. You cannot order it.

More information.   For more information on IRS e-file, call TeleTax and listen to topic 252. The TeleTax number for your area is listed in your tax forms package.

What Tax Records Should I Keep?

You should make and keep a copy of your completed tax return.

Keep Copy C of all Forms W-2, your Forms 1099 showing interest and other income, and a record of any other information you filed with your return. Keep these records for at least 3 years from the date your return was due or filed, or 2 years from the date you paid the tax, whichever is later. For more information, get Publication 552, Recordkeeping for Individuals.

When Will I Get My Refund?

Refund information is not available until at least 4 weeks after you file your return (3 weeks if you file electronically), and sometimes not available for up to 6 weeks. If you have not received your refund within 4 weeks after filing your return, you can call TeleTax. The TeleTax number is listed in your tax forms package. Be sure to have your social security number, your filing status, and the exact whole-dollar amount of your refund when you call.

Sample Tax Forms

Preparing the various tax forms may look difficult but really is not. If you follow the forms line by line and refer to the instructions when necessary, you should be able to complete the forms easily. On the next few pages are examples of Form W-4, Form 1040EZ, and Schedule C-EZ that you can use as a guide. And don't forget, if you have any questions, you can contact the IRS.

Form W-4

Rachel Smith is 19 years old and a sophomore at City College. Her parents pay most of her college costs, including living expenses, and claim her as a dependent on their tax return. In 2001, Rachel has a job as a cashier at the ABC Department Store.

Rachel estimates that she will earn about $1,220 during the school year and about $3,420 during the summer. Also, she usually earns about $50 a year in interest on checking and savings accounts at a local bank. Her total income will be about $4,690.

On Rachel's first day of work, her boss gives her Form W-4 to fill in. Her completed Form W-4 is shown later.

Rachel begins by reading the information and instructions above the Form W-4 certificate. She reads the information under Exemption from Withholding and the statement on line 7 of Form W-4. She had a right to a refund of all federal income tax withheld in 2000 because she had no tax liability. But she expects to have a tax liability for 2001 because her earned income will be more than $4,550, and her parents can claim her as a dependent. Rachel cannot claim exemption from withholding.

Personal allowances worksheet.   Because Rachel is not exempt from withholding, she completes the Personal Allowances Worksheet on page 1 of Form W-4.

Line A.   Because her parents can claim her as a dependent, Rachel cannot claim an allowance for herself. So she leaves line A blank.

Line B.   Because she is single and has only one job, she can enter 1 on line B.

Lines C-G.   Rachel leaves lines C and D blank because she has no spouse or dependents. She reads the information under Head of Household in the instructions at the top of the form. Rachel realizes that she cannot claim head of household filing status, so she also leaves line E blank. She leaves lines F and G blank because she has no children.

Line H.   She adds lines A through G and enters the total of her allowances (1) in the entry space for line H.

Rachel reads the bulleted items under line H and finds that neither the first nor the second items apply to her. Following the instruction for the third bulleted item, she enters the 1 from line H of the worksheet on line 5 of the form.

Form W-4.   She fills in the identifying information at the top of the form and checks the Single box in item 3. Rachel leaves line 6 blank because she does not want any additional amount (beyond what claiming 1 allowance will provide) withheld from her wages.

Because she cannot claim exemption from withholding, she leaves line 7 blank.

Rachel signs and dates the form at the bottom. Boxes 8, 9, and 10 are left blank. These are for her employer's use, if needed.

Form 1040EZ

Pat Brown is single and has no dependents. She is 22 years old and a full-time student at State University. She has a scholarship that covers her tuition and $500 of her room and board each year. Her parents are able to claim her as a dependent.

In 2000, Pat worked in the community library during the summer. Her Form W-2 (not illustrated) shows she earned $2,250 in wages and had $150 in federal income tax withheld during 2000. She also received a Form 1099-INT showing she had $277 in interest income. She files Form 1040EZ as explained below. Her completed Form 1040EZ is shown later.

Name and Address

Pat picked up a Form 1040EZ instructions booklet at the local post office. She followed the instructions and wrote her name, address, and social security number as reported on her social security card, in the space provided on the top of the Form 1040EZ. When she finished she checked again to make sure everything was written as the instructions requested.

Presidential Election Campaign Fund.   Pat wants $3 of her taxes to go to this fund, so she checks the Yes box. Checking Yes will not change her tax or reduce her refund.

Income

Pat has two items of income that must be combined and the total entered on line 1 of Form 1040EZ. The part of her scholarship that is for room and board ($500) is taxable. She adds this amount to the wages ($2,250) shown in box 1 of her Form W-2. She enters the total (2,750.00) on line 1. In the space to the right of W-2 form(s), she writes SCH $500. On line 2, she enters her interest income of 277.00. She adds her wages, taxable scholarship, and interest together to figure her adjusted gross income of $3,027. She enters 3,027.00 on line 4.

Standard Deduction and Personal Exemption

Because Pat can be claimed as a dependent by her parents, she checks the Yes box on line 5. She uses the worksheet on the back of her Form 1040EZ to figure the amount to enter on line 5. The information from her completed worksheet is shown below.

A.	Amount, if any, from line 1 on the front $2,750
	plus $250 Enter total	A.	$3,000
B.	Minimum standard deduction.	B.	$700
C.	Enter the larger of line A or line B here.	C.	$3,000
D.	Maximum standard deduction. If single, enter $4,400; if married, enter $7,350.	D.	$4,400
E.	Enter the smaller of line C or line D here. This is your standard deduction.	E.	$3,000
F.	Exemption amount.
	· If single, enter 0.
	· If married and both you and your spouse can be claimed as dependents, enter 0.
	· If married and only one of you can be claimed as a dependent, enter $2,800.	F.	-0-
G.	Add lines E and F. Enter the total here and on line 5 on the front.	G.	$3,000

Pat enters 3,000.00 on line 5.

Note.   If she could not be claimed as a dependent by her parents or someone else, she would have had a standard deduction amount of $4,400 and a personal exemption of $2,800. In that case, she would have checked the No box and entered $7,200 on line 5.

Payments and Tax

Pat subtracts line 5 (3,000.00) from line 4 (3,027.00) and enters the result of 27.00 on line 6. This amount is her taxable income. She will figure her income tax on this amount.

Pat had $150 of federal income tax withheld from her wages by her employer. She found this amount in box 2 of her Form W-2. She enters this amount on line 7 of Form 1040EZ.

Because she is under age 25 and her parents can claim her as a dependent, Pat is not eligible for the earned income credit. She prints No in the space to the right of the word below on line 8.

If she wanted the IRS to compute her tax for her, she would stop at this point. She would make sure that lines 1 through 8 were completed accurately, then sign and date the return and enter her occupation.

Pat decides to compute her tax by herself. She adds the amounts on lines 7 and 8 and enters her total payments (150.00) on line 9.

She goes to the Tax Table in the instructions and reads down the income column until she finds the line that includes $27, her taxable income shown on line 6 of her Form 1040EZ. She then reads across the line to the tax column for single persons to find her tax ($6). She enters 6.00 on line 10 of her Form 1040EZ.

Refund or Amount You Owe

Pat compares line 9 and line 10. Because line 9 is larger, she subtracts line 10 (6.00) from line 9 (150.00) to arrive at her refund of 144.00. She enters this amount on line 11a. She does not want to have her refund deposited directly into her bank account; therefore she leaves lines 11b, 11c, and 11d blank. She also leaves line 12 blank. She will receive a tax refund of $144.

Note.   If her employer had not withheld any federal income tax from her wages, Pat would have owed $6 in income tax. She would have left line 11a blank and entered that amount on line 12. She would then have enclosed in the envelope with her return a check or money order for the full amount of $6 payable to United States Treasury. She would have written on the front of her check or money order:

• 2000 Form 1040EZ,
• Her name,
• Her address,
• Her daytime telephone number, and
• Her social security number.

Sign Your Return

Pat checks her return to make sure that she entered the numbers clearly and correctly and that her math is correct.

Pat enters her occupation (student) and signs and dates her return at the bottom of the form. She makes a copy of her filled-in tax return for her records. She attaches a copy of her Form W-2 where indicated on the front of her return. Then she mails her return to the appropriate Internal Revenue Service Center as indicated on the back of the instructions.

Schedule C-EZ

Stephen Burke is a high school student. During the summer of 2000, he mowed lawns for some of his neighbors. He used his father's lawn mower and paid for gas and oil used in his business.

Stephen kept good records that showed he earned $750, including tips, and spent $40 on gas and oil. Because his income minus business expenses is at least $400, he must file Form 1040 and either Schedule C or Schedule C-EZ, even if this was his only income. Because his net earnings from self-employment are at least $400, Stephen must also complete Schedule SE to compute his self-employment tax. Form 1040 and Schedule SE are not shown here. Stephen chooses to file Schedule C-EZ. He enters his name and social security number at the top of the schedule. He then fills in the required information in Parts I and II. (Stephen's filled-in Schedule C-EZ is shown at the end of this publication.)

Part II, line 1.   This is where income is reported. All the money he received ($750) is shown on line 1.

Part II, line 2.   This is where expenses are reported. He lists the $40 for gas and oil on line 2.

Part II, line 3.   This shows the net profit from the business that is subject to tax. Stephen must include $710 on Form 1040, line 12.

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate.   If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

• Call the Taxpayer Advocate at 1-877-777-4778.
• Call the IRS at 1-800-829-1040.
• Call, write, or fax the Taxpayer Advocate office in your area.
• Call 1-800-829-4059 if you are a TTY/TDD user.

For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

Free tax services.   To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.

Personal computer. With your personal computer and modem, you can access the IRS on the Internet at www.irs.gov. While visiting our web site, you can select:

• Frequently Asked Tax Questions (located under Taxpayer Help & Ed) to find answers to questions you may have.
• Forms & Pubs to download forms and publications or search for forms and publications by topic or keyword.
• Fill-in Forms (located under Forms & Pubs) to enter information while the form is displayed and then print the completed form.
• Tax Info For You to view Internal Revenue Bulletins published in the last few years.
• Tax Regs in English to search regulations and the Internal Revenue Code (under United States Code (USC)).
• Digital Dispatch and IRS Local News Net (both located under Tax Info For Business) to receive our electronic newsletters on hot tax issues and news.
• Small Business Corner (located under Tax Info For Business) to get information on starting and operating a small business.

You can also reach us with your computer using File Transfer Protocol at ftp.irs.gov.

TaxFax Service. Using the phone attached to your fax machine, you can receive forms and instructions by calling 703-368-9694. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

Phone. Many services are available by phone.

• Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current and prior year forms, instructions, and publications.
• Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
• TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications.
• TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.

Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers, we evaluate the quality of our telephone services in several ways.

• A second IRS representative sometimes monitors live telephone calls. That person only evaluates the IRS assistor and does not keep a record of any taxpayer's name or tax identification number.
• We sometimes record telephone calls to evaluate IRS assistors objectively. We hold these recordings no longer than one week and use them only to measure the quality of assistance.
• We value our customers' opinions. Throughout this year, we will be surveying our customers for their opinions on our service.

Walk-in. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Also, some libraries and IRS offices have:

• An extensive collection of products available to print from a CD-ROM or photocopy from reproducible proofs.
• The Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.

Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Find the address that applies to your part of the country.

• Western part of U.S.:
  Western Area Distribution Center
  Rancho Cordova, CA 95743-0001
• Central part of U.S.:
  Central Area Distribution Center
  P.O. Box 8903
  Bloomington, IL 61702-8903
• Eastern part of U.S. and foreign addresses:
  Eastern Area Distribution Center
  P.O. Box 85074
  Richmond, VA 23261-5074

CD-ROM. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:

• Current tax forms, instructions, and publications.
• Prior-year tax forms, instructions, and publications.
• Popular tax forms which may be filled in electronically, printed out for submission, and saved for recordkeeping.
• Internal Revenue Bulletins.

The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling 1-877-233-6767 or on the Internet at www.irs.gov/cdorders. The first release is available in mid-December and the final release is available in late January.

IRS Publication 3207, The Business Resource Guide, is an interactive CD-ROM that contains information important to small businesses. It is available in mid-February. You can get one free copy by calling 1-800-829-3676.

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