TECHNICAL CHANGE NOTICE TCTP0305

for 2003 Edition of HowardSoft's Tax Preparer®

SUBJECT: 1040 line 20b calculates too low under special circumstances

Problem. When a return includes social security benefits on Form 1040 line 20a, the calculation of the taxable amount at line 20b may be too low if the return includes any of the following:

• Gambling income reported at line 21
• ESA/QTP distributions reported at line 21
• Tuition and fees deduction at line 26

These amounts are not properly reflected in the modified AGI used in the computation, so the taxable amount may be computed low for some income levels.

Perspective. The problem can arise only if one of the cited amounts exist on the return and income levels are in a particular middle range for which the taxable amount of social security benefits varies with modified AGI. (The cited amounts are properly reflected in modified AGI for all other calculations throughout the return. They are omitted only in the calculation for line 20b of Form 1040.)

Workaround. Because the proper computation of line 20b is much more complex than the IRS Form 1040 Instructions imply, we recommend that you implement the solution below rather than a workaround. However, if you are a sophisticated preparer and know when to use the worksheets in IRS Publications 590 and 915 instead of the simplified version in the IRS Form 1040 Instructions, you can use our Override Key to access line 20b and change its result.

Solution. The problem is averted by preparing the return using release 2003.01i (ef2003.01s for e-file) or later. CAUTION: In order to correct a return prepared using a prior release you must change an entry on Form 1040 to force its recalculation under the new release.