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2010 Season Federal Tax Training Module


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Accounting Aid Society Federal tax law training module

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2010 Season Federal Tax Training Module

  1. 1. 2010 Tax Season Federal Tax Training <ul><li>January 2010 </li></ul>
  2. 2. <ul><li>Our training is designed to provide you with skills necessary to prepare taxes for the clients of Accounting Aid Society. </li></ul><ul><li>Our clients are individuals with household income of $25,000 per year or less (regardless of age) or families with income of $50,000 per year or less. </li></ul><ul><li>Household income includes both taxable and nontaxable income. </li></ul><ul><li>Check with IRS Publication 17 and/or a site coordinator whenever you encounter something unusual. </li></ul>
  3. 3. Who We Are and What We Do
  4. 4. Who We Are and What We Do <ul><li>Accounting Aid Society provides tax assistance and promotes the economic self-sufficiency of low and moderate income families, seniors and others in need through volunteerism and partnerships . </li></ul>
  5. 5. Who We Are and What We Do <ul><li>More than 13,500 families received income tax refunds and tax credits in 2009 with the help of 800 trained Accounting Aid Society volunteers. Since 1976, Accounting Aid Society has returned more than $170 million to low and moderate income residents in Wayne, Oakland, Macomb and Livingston counties, and in turn into our state's economy. </li></ul>
  6. 6. Who We Are and What We Do <ul><li>We partner with local, state and federal government to coordinate customized training for our volunteers.  We then place our volunteers at more than 25 sites in metropolitan Detroit in locations including libraries, community centers, nonprofit and for-profit facilities. We also partner with corporations and other groups who train together and volunteer to “Adopt-a-Site”. </li></ul>
  7. 7. How You Fit In <ul><li>Because of the low income levels of our clients ($11,000 average household income), most do not owe any tax. You will be helping them receive refunds such as the Earned Income Tax Credit as well as Michigan Homestead Property Tax and Home Heating Credits. </li></ul><ul><li>Each site has a trained site coordinator who assists volunteers with questions or concerns. </li></ul>
  8. 8. How You Fit In <ul><li>Accounting Aid’s tax assistance program is one of the nation’s oldest free Volunteer Income Tax Assistance (VITA) programs. </li></ul><ul><li>As a VITA program, we partner with the IRS to prepare returns for low and moderate income individuals and families. </li></ul><ul><li>The IRS provides training materials, forms, software, and assistance in recruiting volunteers. </li></ul>
  9. 9. How You Fit In <ul><li>As VITA volunteers, our preparers are not allowed to receive payment from taxpayers for preparing returns and do not sign the returns as preparers. </li></ul><ul><li>We use a standard VITA designation in the preparer area of the returns without identification of the individual preparer. </li></ul>
  10. 10. Quality <ul><li>Our number one priority is quality! </li></ul><ul><li>We are not going to do complicated returns which exceed our training or capability. </li></ul><ul><li>Don’t guess if you are not sure how to handle a particular situation. </li></ul><ul><li>Consult the instructions, IRS Publication 4012 – the spiral book, IRS Publication 17 and/or a site coordinator for help. </li></ul><ul><li>All returns should be reviewed by a site coordinator. </li></ul>
  11. 11. Getting Started – The Interview
  12. 12. Intake/Interview Sheet <ul><li>The Intake/Interview & Quality Review Sheet is shown on Pages 9-15 of the Administrative Manual for the Volunteer. </li></ul><ul><li>We will review the intake sheet in the Administrative section of your training and in the TaxWise lab sessions. </li></ul><ul><li>Please familiarize yourself with our Intake/Interview Sheet as the completion of the intake sheet is the first step in preparing a quality return. </li></ul><ul><li>The intake sheet must be completed before you start a return on TaxWise! </li></ul>
  13. 13. Reference Materials <ul><li>Throughout this training session we will be referencing the following publications: </li></ul><ul><ul><li>IRS Publication 4012, Volunteer Resource Guide (the spiral book) </li></ul></ul><ul><ul><li>IRS Publication 17, Your Federal Income Tax for Individuals </li></ul></ul><ul><ul><li>Step by Step Instructions for TaxWise </li></ul></ul><ul><ul><li>Intake/Interview & Quality Review Sheet </li></ul></ul><ul><li>Consult IRS Publication 4491, Student Training Guide, for interview techniques and additional exercises. </li></ul>
  14. 14. What’s New for 2009? <ul><li>First-Time Homebuyers Credit available until June 30, 2010. </li></ul><ul><li>Earned Income Tax Credit available for up to three children (increased from two) for 2009 and 2010. </li></ul><ul><li>American Opportunity Credit replaces HOPE Credit. </li></ul><ul><li>Making Work Pay Credit added for 2009 and 2010. </li></ul><ul><li>Additional Child Tax Credit earned income threshold reduced from $8,500 to $3,000. </li></ul><ul><li>Government Retiree Credit. </li></ul><ul><li>Residential Energy Property Credits. </li></ul>
  15. 15. What’s New for 2009? <ul><li>First $2,400 of Unemployment Compensation excludible. </li></ul><ul><li>Standard deduction increased for sales tax on vehicle purchases. </li></ul><ul><li>Personal Casualty and Theft Deduction initial limitation changed to $500 (the overall limit of 10% of AGI is unchanged). </li></ul><ul><li>Change in Definition of Qualifying Child. </li></ul><ul><li>Form 8332 required for all noncustodial parents. </li></ul>
  16. 16. Who Must File? (See IRS Pub. 4012, Pg. A-1) <ul><li>Many low-income individuals do not have to file federal returns, but may be required to file state or city returns. </li></ul><ul><li>Taxpayers who file federal returns should generally file state returns as well. </li></ul><ul><li>Some clients should file to recover withholding or collect refundable credits (such as EITC), even if they are not required to file by the gross income guidelines. </li></ul><ul><li>See the gross income table on the next slide. </li></ul>
  17. 18. Who Must File? (See IRS Pub. 4012, Pgs. A-1 to A-3) <ul><li>The gross income limits are lower if the taxpayer is someone else’s dependent – See the instructions. </li></ul><ul><li>There are other special situations listed in IRS Publication 17 such as: </li></ul><ul><ul><li>Self-employment income of $400 or more, </li></ul></ul><ul><ul><li>You received Advance Earned Income Credit Payments, </li></ul></ul><ul><ul><li>And others. </li></ul></ul>
  18. 19. Which Form to Use? <ul><li>There are three choices – 1040, 1040A and 1040EZ. </li></ul><ul><li>The amount of tax or refund is not affected by the form chosen. </li></ul><ul><li>TaxWise users should always use Form 1040. Form 1040 can be used for most returns. </li></ul><ul><li>TaxWise defaults to the 1040. </li></ul>
  19. 20. Which Form to Use? <ul><li>Form 1040NR is for Non-Resident Aliens. Don’t prepare these returns without additional training. </li></ul><ul><li>Form 1040X is for amending a return that’s already been filed. </li></ul><ul><ul><li>Early in the season we often get clients with a W-2, but not all of their W-2’s. Make sure that they have all of their information documents or we’ll end up having to amend the return. </li></ul></ul><ul><ul><li>A tax return is a compilation of all relevant information for an entire year. Nothing stands alone! </li></ul></ul>
  20. 21. TaxWise
  21. 22. Starting a New Return in TaxWise <ul><li>A return is started on TaxWise by entering the client’s social security number (See Step by Step, Starting a New Client ). We should have proof of SSN before starting a return. </li></ul><ul><li>The names and social security numbers for the taxpayer, spouse and dependents that are entered on the tax return have to match what’s on file at the Social Security office or the return will be rejected. </li></ul><ul><li>It is crucial to check that the SSN on the taxpayer’s documents (Forms W-2 and 1099) match the social security card. </li></ul>
  22. 23. Starting a New Return in TaxWise <ul><li>If the client presents you with forms (W-2, 1099, etc.) that don’t match the social security card, advise the client to contact the payer to make a correction. Consult with a site coordinator before preparing a return in this situation. </li></ul><ul><li>Note: Taxpayers unable to obtain a social security number can file with an Individual Taxpayer Identification Number (ITIN) obtained from the IRS. </li></ul><ul><li>Take your time and double-check. </li></ul>
  23. 25. Social Security Numbers <ul><li>There has been a lot of identity theft lately. </li></ul><ul><li>Social security numbers can be a key to this crime. </li></ul><ul><li>It’s important to keep this, along with whatever else a client tells or shows us, in the strictest confidence. </li></ul><ul><li>Speak softly! </li></ul><ul><li>Shred all unneeded tax return pages. Do not discard in the wastebasket. </li></ul>
  24. 26. TaxWise Main Information Sheet <ul><li>Entries on the Main Information Sheet (Main Info) flow to all parts of the return. An error here is significant, but can easily be corrected by changing the entry. </li></ul><ul><li>If you discover an error in name or address while working in another part of TaxWise, always go back to Main Info to correct it. </li></ul><ul><li>Some sections of the Main Info Sheet pertaining to the federal return will be discussed here, but see Step by Step, The Main Information Sheet (Main Info) , for complete instructions on how to make entries on this page of TaxWise. </li></ul>
  25. 27. Main Information Sheet Sections <ul><li>Taxpayer’s general data (name, address, etc.) </li></ul><ul><li>Taxpayer Information </li></ul><ul><li>Filing Status </li></ul><ul><li>Exemptions </li></ul><ul><li>Dependents </li></ul><ul><li>Type of Return </li></ul><ul><li>Bank account information for direct deposit </li></ul><ul><li>Self-Select and Practitioner PIN(s) </li></ul><ul><li>Preparer’s Use Fields </li></ul>
  26. 30. Filing Status
  27. 31. Filing Status – Single (See Pub. 4012, Pgs. B-2 & B-3) <ul><li>Single on the last day of the year. </li></ul><ul><li>Do not qualify for another status . </li></ul>
  28. 32. Filing Status – Married (See Pub. 4012, Pgs. B-2 & B-3) <ul><li>Married Filing Jointly can be used if you are married on the last day of the year or your spouse died during the tax year. </li></ul><ul><li>Married Filing Separately is rarely a good deal for the taxpayer. It disqualifies them for certain credits such as the Earned Income Credit. Social Security benefits may be taxed if the couple lived together at any time during the tax year. Nevertheless, some couples do not get along well enough to file together. </li></ul>
  29. 33. Filing Status – Head of Household (See Pub. 4012, Pgs. B-2 & B-3) <ul><li>You are unmarried or “considered unmarried” on the last day of the tax year. </li></ul><ul><li>You paid more than half the cost of keeping up a home for the year. </li></ul><ul><li>A qualifying person lived with you for more than half the year </li></ul><ul><li>There are certain tests to meet to be “considered unmarried”, including that you did not live with your spouse at any time during the last 6 months of the tax year, your home was the main home of your child for more than half the year, and you must be able to claim an exemption for the child. Check IRS Publication 17 for a complete definition. </li></ul><ul><li>This filing status is not available on state or local returns. The the filing status would be Single on the Michigan and local returns. </li></ul>
  30. 34. Head of Household – Qualifying Person (See Pub. 4012, Pg. B-1) <ul><li>Who is a qualifying person is a function of: </li></ul><ul><ul><li>Their relationship to you, </li></ul></ul><ul><ul><li>Whether or not you can claim an exemption for them, and </li></ul></ul><ul><ul><li>How long they lived with you. </li></ul></ul><ul><li>See the table in IRS Publication 17 any time you encounter an unusual situation. </li></ul>
  31. 35. Filing Status – Qualifying Widow(er) with Dependent Child (See Pub. 4012, Pgs. B-2 & B-3) <ul><li>Can be used for two years following the year in which the spouse died. </li></ul><ul><li>Must not be remarried. </li></ul><ul><li>Must have a child or stepchild for whom you can claim an exemption. (This does not include a foster child.) </li></ul><ul><li>Paid more than half the cost of keeping up a home that was the main home for you and that child for the entire year, except for temporary absences. </li></ul><ul><li>This filing status is not available on state or local returns. </li></ul>
  32. 37. Exemptions
  33. 38. Personal Exemptions (See IRS Pub. 4012, Pgs. C-1 & C-2) <ul><li>TaxWise will automatically enter a personal exemption for the filer. </li></ul><ul><li>If the filer or spouse can be claimed as a dependent on another return, they are not entitled to their own personal exemption. </li></ul><ul><ul><li>See Intake/Interview Sheet, Part I, No. 13 . </li></ul></ul><ul><ul><li>In TaxWise, there is a box to check in the Exemptions section of Main Info if the taxpayer or spouse can be claimed on another person’s return. </li></ul></ul>
  34. 39. Dependency Exemptions for Qualifying Children and Qualifying Relatives (See IRS Pub. 4012, Pgs. C-3 - C-7) <ul><li>Tests applicable to all dependents: </li></ul><ul><ul><li>Dependent taxpayer test (If taxpayer can be claimed as a dependent by another person, he/she cannot claim anyone else as a dependent.) </li></ul></ul><ul><ul><li>Joint return test </li></ul></ul><ul><ul><li>Citizen or resident test (U.S., Canada, or Mexico) </li></ul></ul>
  35. 40. Dependency Exemption Tests for Qualifying Children <ul><li>Relationship – Child, grandchild, brother, sister (including stepbrother & stepsister, niece or nephew), foster child placed by agency </li></ul><ul><li>Age – Under 19; under 24 and a full-time student; or permanently and totally disabled. Unless permanently and totally disabled, the qualifying child must be younger than the taxpayer (New for 2009) </li></ul><ul><li>Residency – Lived with taxpayer more than half of the year (temporary absences are ok) </li></ul><ul><li>Support – Child did not provide more than half of his/her own support </li></ul><ul><li>Special rules for qualifying child of more than one person – see Publication 4012, Pg. C-3 </li></ul>
  36. 41. Children of Divorced or Separated Parents (See IRS Pub. 4012, Pg. C-7) <ul><li>General rule: Custodial parent can claim the dependency exemption. </li></ul><ul><li>If the parents provide over one-half support, the custodial parent can release the claim to the non-custodial parent by signing Form 8332. </li></ul><ul><li>For divorces after 2008, attaching a copy of the divorce decree instead of Form 8332 is no longer allowable. </li></ul>
  37. 42. Dependency Exemption Tests For Qualifying Relatives <ul><li>Not a Qualifying Child Test </li></ul><ul><ul><li>The person cannot be your qualifying child or the qualifying child of anyone else </li></ul></ul><ul><ul><li>Note: An exception applies where the parent is not required to file or only files to get a refund of taxes withheld </li></ul></ul><ul><li>Member of Household or Relationship Test </li></ul><ul><li>Gross Income Test </li></ul><ul><li>Support Test </li></ul>
  38. 43. Member of Household/ Relationship Test – Qualifying Relative <ul><li>The person must be one of the specified relatives of the taxpayer (either taxpayer, if joint return) or be a member of the taxpayer’s household for the entire year. </li></ul><ul><li>Once a relationship is established by marriage, it continues even if there is a change in marital status. </li></ul><ul><li>The relationship cannot be in violation of local law (still an issue in Michigan). </li></ul>
  39. 44. Gross Income Test – Qualifying Relative <ul><li>The person’s gross income for the year must be less than the amount allowed for an exemption ($3,650 for 2009) </li></ul><ul><li>(For a definition of gross income see Page 7 of Pub. 17.) </li></ul>
  40. 45. Support Test – Qualifying Relative <ul><li>Taxpayer must provide more than 50% of the person’s support during the tax year </li></ul><ul><ul><li>An exception to support test requirement: </li></ul></ul><ul><ul><li>Multiple support agreement </li></ul></ul>
  41. 47. Mini-Quiz #1 <ul><li>Mary Jones is single, 20 years old and not a student. She lived with her single mother, Jane, for the entire tax year. She earned $4,000 which she spent on her car, video games and a trip to Disneyworld. Jane provided health insurance, lodging, food and clothing which is worth $5,000. </li></ul><ul><ul><li>Can Jane claim her as a dependent? </li></ul></ul><ul><ul><li>No. Mary is not a Qualifying Child or Qualifying Relative. The Gross Income Test has not been met. </li></ul></ul><ul><ul><li>Note that if Mary had been under 19 or a full-time student, Mary’s mother could have claimed her as a Qualifying Child. </li></ul></ul>
  42. 48. Mini-Quiz #1 <ul><li>Mary Jones is single, 20 years old and not a student. She lived with her single mother, Jane, for the entire tax year. She earned $4,000 which she spent on her car, video games and a trip to Disneyworld. Jane provided health insurance, lodging, food and clothing which is worth $5,000. </li></ul><ul><ul><li>Can Mary take a personal exemption? </li></ul></ul><ul><ul><li>Yes </li></ul></ul><ul><ul><li>What is Mary’s filing status? </li></ul></ul><ul><ul><li>Single </li></ul></ul>
  43. 49. Mini-Quiz #1 <ul><li>Mary Jones is single, 20 years old and not a student. She lived with her single mother, Jane, for the entire tax year. She earned $4,000 which she spent on her car, video games and a trip to Disneyworld. Jane provided health insurance, lodging, food and clothing which is worth $5,000. </li></ul><ul><ul><li>What is Jane’s (Mary’s mother’s) filing status? </li></ul></ul><ul><ul><li>Single. Mary has to qualify as her dependent in order to be a </li></ul></ul><ul><ul><li>qualifying person for Head of Household filing status. </li></ul></ul><ul><ul><li>Her Michigan and local filing status is also Single. </li></ul></ul>
  44. 50. Mini-Quiz #1 <ul><li>Mary Jones is single, 20 years old and not a student. She lived with her single mother, Jane, for the entire tax year. She earned $4,000 which she spent on her car, video games and a trip to Disneyworld. Jane provided health insurance, lodging, food and clothing which is worth $5,000. </li></ul><ul><ul><li>What is Jane’s filing status if she were married, but did not live </li></ul></ul><ul><ul><li>with her husband during the last six months of the tax year? </li></ul></ul><ul><ul><li>Married Filing Separately. Jane does not meet all of the tests </li></ul></ul><ul><ul><li>for “considered unmarried” under Head of Household. </li></ul></ul><ul><ul><li>Specifically, she has to be able to claim Mary as a dependent </li></ul></ul><ul><ul><li>to be considered unmarried. </li></ul></ul><ul><ul><li>Jane’s Michigan and local filing status would also be Married </li></ul></ul><ul><ul><li>Filing Separately. </li></ul></ul>
  45. 51. Mini-Quiz #2 <ul><li>Martha Washington is 35. She lives with her dependent son, Andrew (16). Her husband, George, died in the previous tax year. She has not remarried. </li></ul><ul><li>What is her filing status? </li></ul><ul><li>Qualifying Widow(er) with Dependent Child. </li></ul><ul><li>She could also file as Head of Household, but Qualifying Widow is more advantageous. </li></ul><ul><li>Note that on the Michigan return, Qualifying Widow is not an option. She’ll file her Michigan and local returns as Single . </li></ul>
  46. 52. Mini-Quiz #2 <ul><li>Martha Washington is 35. She lives with her dependent son, Andrew (16). Her husband George died in the previous tax year. She has not remarried. </li></ul><ul><li>What is Martha’s filing status is If George had died in this tax year? </li></ul><ul><li>Martha could have filed Married Filing Jointly. </li></ul><ul><li>What would her status be if Martha had remarried during the year? </li></ul><ul><li>She would be Married Filing Jointly or Married Filing Separately . </li></ul>
  47. 53. Mini-Quiz #3 <ul><li>George (30) is single and lives with his daughter, Sue (10). George’s income is $2,000 in wages from a part-time job and $6,000 in benefits from the State of Michigan Department of Human Services (DHS). </li></ul><ul><li>What is George’s filing status? </li></ul><ul><ul><li>Single. He does not qualify as Head of Household because he did not pay more than half the cost of maintaining the home. Most of the money came from the state. </li></ul></ul><ul><li>Can George claim a dependency exemption for Sue? </li></ul><ul><li>Yes. Sue is a Qualifying Child because she did not provide more than one-half of her own support. </li></ul>
  48. 54. Mini-Quiz #4 <ul><li>Tom, his girlfriend Mary, and her son Fred, age 10, lived together the entire year. Mary did not work and will not file a return. Tom supported the entire household with his wages of $35,000. </li></ul><ul><ul><li>Assuming Tom is not Fred’s father, what is Tom’s filing status and how many exemptions is he entitled to? </li></ul></ul><ul><ul><li>Single. Neither Mary nor Fred are qualifying persons for Head of Household status. </li></ul></ul><ul><ul><li>Tom is entitled to two exemptions , a personal exemption and a dependency exemption for Fred as a Qualifying Relative. He cannot claim Mary because of local law restrictions. </li></ul></ul>
  49. 55. Income
  50. 56. Gross (taxable) Income <ul><li>Income is entered in various places in TaxWise. Most income items are entered in forms and worksheets that in many cases replicate the source document. </li></ul><ul><li>See the Intake/Interview Sheet, Part IV and the Supplemental Intake/Interview Sheet, AAS Part II , for a list of sources of income (both taxable and nontaxable income) typical to our clients. </li></ul><ul><li>See Step by Step Instructions for TaxWise, Income Information , for a list of income items and how to enter them on TaxWise. </li></ul><ul><li>Nontaxable items (also listed in Step by Step, Income Information ) only affect the Michigan credit claims and will be discussed in the Michigan training module. </li></ul>
  51. 57. Wages (See Step by Step, Income Information ) <ul><li>Wages are reported on Form W-2. </li></ul><ul><li>Enter all of the information from the W-2 into TaxWise, including the withholding and the special codes. </li></ul><ul><li>TaxWise may use the coded information to determine eligibility for certain credits. </li></ul><ul><li>Copy B of the W-2 is attached to paper returns or submitted with the E-file Packet for electronic returns. </li></ul><ul><li>One copy is attached to the city return. </li></ul><ul><li>One copy is retained by the client. </li></ul>
  52. 58. Wages – Group Legal Service Plans <ul><li>Occasionally a retired taxpayer will have a small (approximately $100 or less) W-2 that represents the value of these benefits. </li></ul><ul><li>There is no social security or Medicare tax withheld, but it is to be paid by the taxpayer as an other tax on Line 59 of Form 1040. </li></ul><ul><li>The amount of uncollected tax is shown in either Box 12 or Box 14. A Box 12 entry flows to Line 59 of Form 1040; however, a Box 14 entry must be entered on Form 1040 with an override in the UT Box under Line 59. </li></ul><ul><li>Note: there are variations in the reporting of these plan benefits to the taxpayer. See the site coordinator if you have any questions. </li></ul>
  53. 60. Interest Income (See Step by Step, Income Information ) <ul><li>Interest income includes interest received from bank accounts, certificates of deposit, loans made to others, and other sources. </li></ul><ul><li>Interest income is reported on Form 1099-INT. </li></ul><ul><li>Interest income is almost always taxable for our clients. Exceptions are interest from municipal bonds, and under certain conditions, U.S. government bonds, if it is used to pay for education expenses. </li></ul><ul><li>Information from the 1099-INT is entered on the Interest Stmt linked to Sch B in TaxWise. </li></ul>
  54. 62. Dividend Income (See Step by Step, Income Information ) <ul><li>Dividends are earnings that a company pays to shareholders. </li></ul><ul><li>Dividend income is reported on Form 1099-DIV. </li></ul><ul><li>Information from the 1099-DIV is entered on the Dividend Stmt linked to Sch B in TaxWise. </li></ul><ul><li>Qualified dividends and capital gain distributions are eligible for special tax rates and make calculating the tax complicated. </li></ul><ul><li>If the data is entered correctly, TaxWise will handle the calculations. </li></ul>
  55. 64. Capital Gains <ul><li>Capital gains occur when an investment is sold for a profit. Our clients might see this on a statement from a mutual fund. </li></ul><ul><li>Like qualified dividends, some capital gains are eligible for special tax rates. </li></ul><ul><li>We typically do not prepare returns if a taxpayer has sales of stock. Consult the site coordinator if you encounter this situation. </li></ul>
  56. 65. Pensions (See Step by Step, Income Information ) <ul><li>Pensions are reported on Form 1099-R. </li></ul><ul><li>Enter all of the data into TaxWise. (See Step by Step and IRS Pub. 4012, Pg. 2-10 for instructions.) </li></ul><ul><li>Be sure to attach a copy to paper returns (if federal withholding) or include it with the E-file Packet. </li></ul><ul><li>If the taxable amount is not determined, you need to ask more questions. If the employee paid in to the fund while working, some of the payment is not taxable. The calculations are complicated, and may be impossible if they don’t have records. </li></ul>
  57. 67. Fully Taxable Pensions <ul><li>Hourly workers at the auto companies do not pay into the plans, but salaried do. If the worker is hourly (the typical situation with our clients), the total distribution is the taxable amount. </li></ul><ul><li>Otherwise, advise them to get help, or they may be overpaying. </li></ul><ul><li>Even if there is no federal tax liability, the state credits will likely be affected. </li></ul>
  58. 68. Partially Taxable Pensions <ul><li>If the taxpayer’s pension or annuity starting date is after November 18, 1996, generally the Simplified Method is used to figure the taxable portion. </li></ul><ul><li>The Simplified Method worksheet is at the bottom of the Form 1099R input screen in TaxWise. </li></ul><ul><li>Partially taxable pensions not covered by the Simplified Method or lump sum distributions should be discussed with the site coordinator. We may not be able to assist these recipients. </li></ul><ul><li>Civil Service retirements are discussed in IRS Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits. These are usually reported on CSA-Form1099-R. See the site coordinator for assistance and IRS Pub. 4012, Page 2-12. </li></ul>
  59. 69. Partially Taxable Pensions <ul><li>The Simplified Method Worksheet computes the tax-free part of each payment by dividing the taxpayer’s cost by the total number of anticipated payments. </li></ul><ul><li>The number of anticipated payments is based on the taxpayer’s (and beneficiary’s if applicable) age when the payments start. </li></ul>
  60. 70. Partially Taxable Pensions <ul><li>If the annuity starting date is before 1987 the total exclusion is not limited to cost. </li></ul><ul><li>If the annuity starting date is after 1986, the total exclusion cannot exceed the total cost. </li></ul>
  61. 71. Disability Pensions <ul><li>Generally taxable if the plan is paid for by the employer. </li></ul><ul><li>Taxable as wages (and earned income for the EITC) until the taxpayer reaches minimum retirement age (as set by the employer for receiving a retirement pension). </li></ul><ul><li>May be reported on a Form W-2, or Form 1099-R with distribution code 3 in Box 7. </li></ul><ul><li>If reported on 1099-R with code 3 in Box 7 and the distribution should be taxable as wages, check the box under Box 7 on TaxWise’s 1099R input screen regarding disability. </li></ul>
  62. 72. IRA Distributions <ul><li>Traditional IRA – May be fully or partly taxable (unless rolled over tax-free). </li></ul><ul><li>We are not trained to handle partly taxable IRA’s (these result from nondeductible contributions). </li></ul><ul><li>Minimum distributions are required when the taxpayer reaches age 70 ½. Note: This requirement was suspended for 2009. </li></ul>
  63. 73. IRA Distributions <ul><li>Roth IRA – Distribution is tax-free if : </li></ul><ul><ul><li>Made after 5 years from year of first contribution, and </li></ul></ul><ul><ul><li>The distribution is: </li></ul></ul><ul><ul><ul><li>Made on or after age 59 ½, </li></ul></ul></ul><ul><ul><ul><li>Made because of disability, </li></ul></ul></ul><ul><ul><ul><li>Made by reason of death of the taxpayer, or </li></ul></ul></ul><ul><ul><ul><li>To buy, build or rebuild a first-home ($10,000 limit) </li></ul></ul></ul>
  64. 74. Early Distribution Tax <ul><li>Early distributions (before age 59 ½) may be subject to an additional tax of 10%. </li></ul><ul><li>Usually identified by distribution code 1 in Box 7 of Form 1099-R. </li></ul><ul><li>Form 5329 lists exceptions to the additional tax. </li></ul>
  65. 75. Rental Income <ul><li>We generally do not prepare returns for landlords. </li></ul><ul><li>There are complicated rules for depreciation and expenses. </li></ul><ul><li>See the site coordinator if it appears that rental income is an issue. </li></ul><ul><li>Sometimes a client will state that they are paying rent to a parent or other relative in order to claim a Michigan Homestead Property Tax Credit. </li></ul><ul><ul><li>We need to make them understand that if this is claimed as rent paid, their parent needs to show this as income on their return. </li></ul></ul><ul><ul><li>They may choose instead to treat their payments as “helping out with expenses” rather than rent. </li></ul></ul>
  66. 76. Unemployment Compensation (See Step by Step, Income Information ) <ul><li>Unemployment compensation is reported on Form 1099-G. </li></ul><ul><li>There may or may not be federal and/or state income tax withholding. </li></ul><ul><li>Enter all of the data directly on TaxWise’s 1099G Wkt. </li></ul><ul><li>The first $2,400 of unemployment compensation is excludible. (New for 2009). </li></ul><ul><li>Some clients do not elect to have withholding on taxable unemployment. These taxpayers get lower refunds or owe tax. Please encourage your clients to have taxes withheld on any future payments. </li></ul>
  67. 78. Social Security Benefits (See Step by Step, Income Information ) <ul><li>Social Security recipients will get a year-end statement, Form SSA-1099, showing benefits received for the tax year. Recipients receive either retirement, survivor or disability benefits (SSDI) paid by the Social Security Administration (SSA). If applicable, the statement will indicate the Medicare premiums deducted from their benefit. </li></ul><ul><li>Enter the amount from Box 5 of Form SSA-1099, and the amount of Medicare premiums deducted, on “1040 Wkt 1” in TaxWise; do not enter directly on the 1040. </li></ul><ul><li>Social Security is generally not taxable for low income individuals who qualify for our program, but must be shown on the form. </li></ul><ul><li>Again, Married Filing Separately filers who have lived together at any time during the tax year will generally have some of their benefits taxed. </li></ul>
  68. 80. Supplemental Security Income (SSI) – Not taxable (See Step by Step, Income Information ) <ul><li>SSI is paid by the Social Security Administration (SSA) and is nontaxable. We are presenting it here because many of our clients receive SSI, and very often their only source of income for the tax year is Social Security benefits and/or SSI. SSI is typically paid on the 1 st of the month and Social Security is typically paid on the 3 rd of the month. </li></ul><ul><li>SSI is paid to individuals who are 65 or older, or are blind or disabled, and have limited income and financial resources. </li></ul><ul><li>For 2009, the maximum amount of SSI is $674 per month for an individual. </li></ul>
  69. 81. Supplemental Security Income (SSI) – Not taxable (See Step by Step, Income Information ) <ul><li>There is no year-end statement sent for recipients of SSI. </li></ul><ul><li>These same recipients generally get quarterly payments of $42 every three months from the Michigan Department of Human Services (DHS). These payments are referred to as State SSI – see Step by Step, Income Information . </li></ul><ul><li>Neither of these payments (SSI or State SSI) is taxable for federal or state purposes, but must be included in Household Income for the Michigan credit claims. This will be discussed further in the Michigan module. </li></ul>
  70. 82. Gambling Winnings (See Step by Step, Income Information ) <ul><li>Contrary to what might have been heard at the casino, gambling winnings are taxable. </li></ul><ul><li>If they are above a certain level, the taxpayer will receive a Form W-2G. </li></ul><ul><li>These are entered in TaxWise on Form W2G and treated as “Other Income”. </li></ul><ul><li>Losses are not deductible unless you itemize. The deduction is limited to the amount of winnings reported. </li></ul><ul><li>The fair market value of prizes and awards is also taxable. </li></ul>
  71. 84. <ul><li>Some clients do work for which they receive money which is not wages. </li></ul><ul><li>If they do, we need to prepare a Schedule C-EZ, Net Profit from Business, or Schedule C, Profit or Loss from Business. </li></ul><ul><li>They may or may not receive a Form 1099-MISC. If they do, this income would be reported in Box 7, Nonemployee compensation (or in Box 6 for medical and health care payments). </li></ul><ul><li>They have to pay both the employee’s and the employer’s Social Security and Medicare taxes. This is computed on Schedule SE, Self-Employment Tax. </li></ul><ul><li>If entries are made, or linked, to Schedule C-EZ or Schedule C, TaxWise will automatically bring in a Schedule SE and calculate the self-employment tax. </li></ul><ul><li>If you believe a Schedule C is needed, consult with the site coordinator. </li></ul>Self-Employment (See Step by Step, Income Information )
  72. 86. Self-Employment – Continued (See Step by Step, Income Information ) <ul><li>We can do simple returns with self-employment income. For example, if the client earned $5,214 as a daycare provider and had expenses of $553 for care-related expenses. </li></ul><ul><li>The client should have records. </li></ul><ul><li>Be sure to work with the site coordinator on these. </li></ul><ul><li>Do not do these returns if the business is complicated, the client has hired other people to help, there is inventory, or there are numerous income and expense items. </li></ul>
  73. 88. Daycare Providers – Standard Meal and Snack Rates <ul><li>The rates for 2009 for each child per day are: </li></ul><ul><ul><li>Breakfast $1.17 </li></ul></ul><ul><ul><li>Lunch $2.18 </li></ul></ul><ul><ul><li>Dinner $2.18 </li></ul></ul><ul><ul><li>Snack $0.65 (max. 3 per day) </li></ul></ul>
  74. 89. Child and Adult Care Food Program (CACFP) <ul><li>Self-employed daycare providers might be eligible for reimbursement for food costs under the CACFP. </li></ul><ul><li>Any reimbursement received will reduce the deduction for food expense. Our preferred method is to report the reimbursement as Other Income on Schedule C, Line 6, or as Gross Receipts, on Schedule C-EZ, Line 1. </li></ul>
  75. 90. Child and Adult Care Food Program (CACFP) <ul><li>If a self-employed daycare provider is unfamiliar with the CACFP, please direct them to contact the following agencies: </li></ul><ul><li>Detroit Urban League </li></ul><ul><li>313-832-4600, ext. 15126 for residents of Wayne, Oakland, or Macomb Counties. </li></ul><ul><li>Eastminster Community Concerns, Inc. </li></ul><ul><li>517-349-4550 for residents of Livingston County. </li></ul>
  76. 91. Self-Employment Tax <ul><li>The basic calculation of self-employment tax is: </li></ul><ul><ul><li>Net profit (line 3, Schedule C-EZ or line 31, Schedule C) </li></ul></ul><ul><ul><li>Multiplied by 92.35% ( .9235) </li></ul></ul><ul><ul><li>This total (if $400 or more) multiplied by 15.3% </li></ul></ul><ul><li>A deduction from AGI is allowed in the amount of one-half of the self-employment tax computed above. </li></ul>
  77. 92. Form 1099 -MISC <ul><li>Occasionally automobile manufacturers report a lump-sum payment in Box 3. </li></ul><ul><li>Amounts in Box 3 are taxable but are not income subject to self-employment tax. These should be linked directly to Form 1040, not to a Schedule C-EZ. </li></ul>
  78. 94. Other Taxable Income <ul><li>Alimony is taxable income, but Child Support is not. Most of our clients do not receive alimony. Child support is usually paid through the Friend of the Court and should be included in Household Income on the Michigan credit claims. </li></ul><ul><li>Jury duty is reported as other income. (If repaid to employer, the amount repaid is deductible as an adjustment to income.) </li></ul><ul><li>Hobby income. </li></ul>
  79. 95. Mortgage Forgiveness Exclusion <ul><li>Applies to forgiveness of debt incurred to acquire, construct, or improve the taxpayer’s principal residence, up to $2 million. </li></ul><ul><li>Applies to restructuring of debt or foreclosure. </li></ul><ul><li>Exclusion reduces basis of residence is reduced but not below zero. </li></ul><ul><li>Applicable to forgiveness after 12/31/06 and up to 12/31/12. </li></ul><ul><li>In a forgiveness and/or foreclosure, the client will have a Form 1099-C and/or Form 1099-A. Consult with the site coordinator when you see these forms or the client mentions that they had such a situation. </li></ul>
  80. 96. Other Nontaxable Income for Federal Purposes <ul><li>Child Support </li></ul><ul><li>Gifts </li></ul><ul><li>Inheritances </li></ul><ul><li>Welfare benefits (Michigan Department of Human Services) </li></ul><ul><li>Veteran’s (VA) Benefits </li></ul><ul><li>Workers’ compensation </li></ul><ul><li>Important – While nontaxable items do not affect the federal return, they will be included in Household Income for Michigan credit claims. This will be covered in the Michigan module. </li></ul>
  81. 97. Deductions
  82. 98. Adjusted Gross Income (AGI) <ul><li>The income is totaled, and then there are certain deductions subtracted to arrive at Adjusted Gross Income (AGI). </li></ul><ul><li>Worksheets/forms are available in TaxWise by linking to them from the Form 1040 line entry. </li></ul>
  83. 99. Adjusted Gross Income (AGI) <ul><li>Adjustments to arrive at AGI include, but are not limited to: </li></ul><ul><ul><li>One-half of self-employment tax. </li></ul></ul><ul><ul><li>Penalty on early withdrawal of savings – this should be reported on Form 1099-INT, Box 2. Entered on Interest Stmt in TaxWise. </li></ul></ul><ul><ul><li>IRA deduction (rare for our clients). </li></ul></ul><ul><ul><li>Student loan interest deduction, reported on Form 1098-E. </li></ul></ul><ul><ul><li>Tuition and fees deduction. Use Form 8917. </li></ul></ul><ul><ul><ul><li>The taxpayer may be able to take a credit for qualified education expenses – see the slides later in this presentation regarding the education credits. Both methods should be tried to determine the best refund/tax due situation on both the federal and Michigan returns. </li></ul></ul></ul>
  84. 100. Standard Deduction <ul><li>The standard deduction is subtracted from Adjusted Gross Income (AGI) before the taxes are calculated. </li></ul><ul><li>TaxWise automatically calculates the standard deduction based upon what was entered for filing status, whether a dependent of someone else, age and blindness. </li></ul>
  85. 101. Standard Deduction Amounts – 2009 <ul><li> Filing Status SD ASD* </li></ul><ul><li>Single $ 5,700 $1,400 </li></ul><ul><li>Married, Filing Jointly $11,400 $1,100 </li></ul><ul><li>Qualifying Widow(er) $11,400 $1,100 </li></ul><ul><li>Head of Household $ 8,350 $1,400 </li></ul><ul><li>Married, Filing Separately $ 5,700 $1,100 </li></ul><ul><li>* The Additional Standard Deduction (ASD) is allowed for those 65 and over or blind. </li></ul><ul><li>Note: The above Standard Deduction for an individual who may be claimed by another taxpayer is limited to $950 or the sum of $300 and the individual’s earned income. </li></ul>
  86. 102. Increased Standard Deduction for Real Property Taxes <ul><li>The standard deduction is increased by the lesser of: </li></ul><ul><li>Real property taxes paid during the year </li></ul><ul><li>OR </li></ul><ul><li>$500 ($1,000 for MFJ) </li></ul><ul><li>Note: Taxes must be paid to obtain this deduction, unlike the Michigan Homestead Property Tax Credit, which only requires that the taxes be billed. </li></ul>
  87. 103. Increased Standard Deduction for Sales Tax on a Vehicle Purchase <ul><li>The standard deduction is increased by the sales tax paid on the purchase of a new car, light truck, motorcycle, or motor home. </li></ul><ul><li>The additional standard deduction for each vehicle is limited to tax on a purchase price of $49,000. </li></ul><ul><li>Only purchases after 2/16/2009 qualify for this additional standard deduction. </li></ul><ul><li>Phased out for those with modified AGI of $125,000 or more ($250,000 for MFJ). </li></ul>
  88. 104. Itemizing Deductions <ul><li>This is not something you should do unless you have had more extensive training than this session. </li></ul><ul><li>This only helps a client with a tax liability. For example, if a client has an AGI of $18,000, but is Head of Household with two dependents, then they have no tax liability. This is because $18,000 is less than the Standard Deduction plus three times the exemption amount. ($8,350 + 3 x $3,650 = $19,300). Itemizing deductions would not affect the refund or amount owed. </li></ul>
  89. 105. Itemizing Deductions – Continued <ul><li>If a client does have a tax liability, it is in their best interest to use the larger of the Standard Deduction or Itemized Deductions. </li></ul><ul><li>Clients with mortgage interest, property taxes and/or large charitable contributions may benefit from itemizing deductions. </li></ul><ul><li>Itemized deductions are reported on Schedule A. </li></ul><ul><li>If a taxpayer is filing as MFS and their spouse itemizes, they must also itemize. </li></ul>
  90. 107. Itemizing Deductions – Continued <ul><li>Itemized deductions include: </li></ul><ul><ul><li>Medical expenses over 7.5% of AGI </li></ul></ul><ul><ul><li>State and local income taxes (or sales tax) paid </li></ul></ul><ul><ul><li>Real estate taxes paid </li></ul></ul><ul><ul><li>Personal property tax paid (License Plates) </li></ul></ul><ul><ul><li>Mortgage interest (including qualified mortgage insurance premiums) </li></ul></ul><ul><ul><li>Charitable contributions </li></ul></ul><ul><ul><li>Casualty and theft losses over $500 (New for 2009) and 10% of AGI </li></ul></ul><ul><ul><li>Other miscellaneous items over 2% of AGI </li></ul></ul><ul><ul><li>Other miscellaneous items not subject to the 2% limit </li></ul></ul>
  91. 108. Calculating the Tax <ul><li>TaxWise will do the calculations. </li></ul><ul><li>You should be able to check the work using the tables. </li></ul><ul><li>Note that the calculations are more complicated for taxpayers with qualifying dividends and/or capital gain distributions. </li></ul>
  92. 109. Mini-Quiz #4 <ul><li>Assume that neither taxpayer has Qualifying Dividends or Capital Gains. </li></ul><ul><li>What is the tax for a single person with taxable income of $10,149 for 2009? </li></ul><ul><li>$1,101 </li></ul><ul><li>What is the tax for a head of household with taxable income of $20,350 for 2009? </li></ul><ul><li>$2,459 </li></ul>
  93. 110. Credits
  94. 111. Refundable and Nonrefundable Credits <ul><li>Nonrefundable credits are used to reduce federal tax liability, but if the credit exceeds the tax, the taxpayer does not receive the difference. </li></ul><ul><li>Refundable credits can be returned to the taxpayer, even if there is no tax liability. Refundable credits include the Earned Income Tax Credit (EITC), Making Work Pay Credit, First-Time Homebuyer Credit and the Additional Child Tax Credit. </li></ul>
  95. 112. Earned Income Tax Credit (EITC) (See IRS Pub. 4012, Pgs. H-1– H-5) <ul><li>We spend about an hour with most clients and their refunds average over $1,000. The Earned Income Tax Credit is responsible for the biggest piece of this. </li></ul><ul><li>Congress has authorized this credit to help low income filers and encourage them to work. </li></ul><ul><li>The credit can amount to as much as $5,657 for a taxpayer with three or more qualifying children. </li></ul>
  96. 114. Earned Income Tax Credit (EITC) <ul><li>The credit is not available for Married Filing Separately. </li></ul><ul><li>Your investment income must be $3,100 or less. </li></ul><ul><li>The taxpayer cannot be the qualifying child of another person. </li></ul><ul><li>The credit is not available if either the taxpayer, spouse, or qualifying child is filing with an ITIN. </li></ul><ul><li>It’s calculated twice, once based on your earned income, then again based on your Adjusted Gross Income. Your credit is based on the smaller of the two calculations. </li></ul>
  97. 115. Qualifying Child for Earned Income Tax Credit <ul><li>There are three tests: </li></ul><ul><ul><li>Relationship </li></ul></ul><ul><ul><li>Age </li></ul></ul><ul><ul><li>Residency </li></ul></ul>
  98. 116. Qualifying Child for Earned Income Tax Credit <ul><li>The Relationship Test: </li></ul><ul><ul><li>The child must meet the same Relationship Test to be a Qualifying Child for dependency purposes. </li></ul></ul>
  99. 117. Qualifying Child for Earned Income Tax Credit <ul><li>The Age Test: </li></ul><ul><ul><li>Under 19 at the end of the tax year, or </li></ul></ul><ul><ul><li>Under 24 and a full-time student, or </li></ul></ul><ul><ul><li>Totally and Permanently Disabled. </li></ul></ul><ul><li>These are the same rules for a Qualifying Child for dependency purposes. </li></ul>
  100. 118. Qualifying Child for Earned Income Tax Credit <ul><li>The Residency Test: </li></ul><ul><ul><li>Lived with you in the U.S. for more than half of the year. </li></ul></ul>
  101. 119. Qualifying Child for Earned Income Tax Credit <ul><li>Note that a child can be a qualifying child for more than one person. </li></ul><ul><li>For example, if daughter (age 3), mother (not a full-time student and age 22) and grandmother (age 50) share a household, either mother or grandmother could claim the child as a qualifying child for EIC, as long as the grandmother’s AGI is higher than the mother’s (The AGI requirement is new for 2009). </li></ul>
  102. 120. Qualifying Child for Earned Income Tax Credit <ul><li>There are tiebreaker rules which generally awards the child to the parent if they can’t agree. </li></ul><ul><li>If two people claim the same child, the IRS will use the tiebreaker rules to decide. This will create an investigation and delay the refund. </li></ul>
  103. 121. Qualifying Child for Earned Income Tax Credit <ul><li>Qualifying child information is entered on Schedule EIC. Answer the questions in TaxWise and attach the schedule to paper returns. </li></ul><ul><li>For qualifying children, it is crucial to check the “EIC” box in TaxWise when entering the dependent information in Main Info, or the software assumes that the child does not qualify. </li></ul>
  104. 122. Earned Income Tax Credit if There is No Qualifying Child <ul><li>The credit and income levels are much lower. </li></ul><ul><li>Must be at least age 25, but under age 65. </li></ul><ul><li>You can’t be someone else’s dependent. </li></ul><ul><li>Must have lived in the U.S. for more than half of the year. </li></ul>
  105. 123. Advance Earned Income Credit Payments <ul><li>Taxpayers can receive this money during the year from their employer by filling out Form W-5. </li></ul><ul><li>If they did, it would be reported on Form W-2 in Box 9. </li></ul><ul><li>Be sure to enter all of the W-2 data into TaxWise. </li></ul>
  106. 124. Mini-Quiz #5 <ul><li>Bill (40) and Hillary (39) have wages of $25,432 for 2009 and no other income; their filing status is Married Filing Jointly. They have one dependent child, Chelsea (16). Their friend Sally has been called to active duty in the military. At her request, they also supported and cared for the entire year for Sally’s son Ralph (6) as if he were their own child. </li></ul><ul><li>How much is their Earned Income Tax Credit? </li></ul><ul><li>$2,403 , from the 2009 Earned Income Tax Credit (EITC) Table. Bill and Hillary can claim the EITC based on one Qualifying Child. </li></ul><ul><li>Note that Ralph qualifies as a Dependent as a Qualifying Relative, however, he is not a Qualifying Child for purposes of the EITC because the Relationship Test was not met. </li></ul><ul><li>Note that this is a very unusual situation. Consult IRS Publication 17 and/or the site coordinator when you encounter something out of the ordinary. </li></ul>
  107. 125. Mini-Quiz #6 <ul><li>Harold has no dependents, lives alone and his total income was $8,000 wages in 2009. </li></ul><ul><ul><li>If he is 23 years old, how much is his EITC? </li></ul></ul><ul><ul><li>Zero. Without qualifying children, you must be at least 25 and under age 65 at the end of the tax year to qualify for the EITC. </li></ul></ul><ul><ul><li>How much is his EITC if he’s 26? </li></ul></ul><ul><ul><li>$414 from the 2009 Earned Income Tax Credit (EITC) Table. </li></ul></ul><ul><ul><li>How much is his EITC if he’s 67? </li></ul></ul><ul><ul><li>Zero. Without qualifying children, you must be at least 25 and under age 65 at the end of the tax year to qualify for the EITC. </li></ul></ul>
  108. 126. First-Time Homebuyer Credit <ul><li>Refundable credit equal to the lesser of $8,000 or 10% of the home’s purchase price (limited to $6,500 in the case of someone eligible under the five-year rule). </li></ul><ul><li>Credit is only available on homes costing $800,000 or less. </li></ul><ul><li>Applies to purchase agreements by April 30, 2010, with a closing by June 30, 2010 (extended to June 30, 2011 for military personnel serving outside the U.S. for at least 90 days). Credit is required to be paid back only if the home ceases to be the taxpayer’s main residence within a three year period following the purchase. </li></ul>
  109. 127. First-Time Homebuyer Credit <ul><li>Definition of First-Time Homebuyer </li></ul><ul><li>A taxpayer who did not own a home during the three years ending on date of purchase </li></ul><ul><li>OR </li></ul><ul><li>A taxpayer who owned and used the same residence as a principal residence for any 5-consecutive-year period during the 8-year period ending on the date of purchase of a new residence. </li></ul>
  110. 128. First-Time Homebuyer Credit <ul><li>Credit can be claimed on 2008 return for home purchased in 2009 (amended return). </li></ul><ul><li>Credit can be claimed on 2009 return for home purchased in 2010. </li></ul><ul><li>Phased out for those with modified AGI of $125,000 or more ($225,000 for MFJ). </li></ul><ul><li>E-filing not available. </li></ul>
  111. 129. Making Work Pay Credit <ul><li>A refundable credit of 6.2% of earned income up to $400 ($800 if MFJ). </li></ul><ul><li>Phased out for taxpayers with modified AGI > $75,000 ($150,000 MFJ). </li></ul><ul><li>Tax withholding was decreased to anticipate credit. </li></ul><ul><li>Reduced by any $250 Economic Recovery Payment received or Government Retiree Credit. </li></ul>
  112. 130. Credit for Certain Federal and State Government Retirees <ul><li>$250 Refundable Credit (New for 2009 ). </li></ul><ul><li>Available to government retirees who receive a pension from work not covered by Social Security. </li></ul>
  113. 131. Residential Energy Tax Credits <ul><li>Residential Energy Saving Improvement Credit – </li></ul><ul><li>$1,500 total for 2009 & 2010. </li></ul><ul><li>30% credit for energy efficiency improvements (insulation, exterior windows, energy efficient heating and air conditioning systems.) </li></ul><ul><li>Available even if the $500 “lifetime” credit was claimed in 2006 or 2007. </li></ul><ul><li>There is also a 30% credit available for energy efficient (solar, geothermal, wind) property (not subject to the $1,500 limit). </li></ul>
  114. 132. Child and Dependent Care Credit (See IRS Pub. 4012, Pgs. G-1 & G-2) <ul><li>This is a nonrefundable credit of up to 35% of day care expenses. </li></ul><ul><li>The client has to have the provider’s tax identification number. </li></ul><ul><li>Limit on eligible expenses: Lesser of earned income or $3,000 for one qualifying person ($6,000 for more than one). </li></ul><ul><li>A qualifying person is a dependent under 13 or a disabled dependent or spouse. </li></ul><ul><li>Use Form 2441 (for 1040 returns). </li></ul><ul><li>In TaxWise, check the “DC” box in the Dependent section of the Main Info sheet if the client paid for dependent care. Form 2441 will then be added to the return. </li></ul>
  115. 133. Credit for the Elderly or the Disabled (See IRS Pub. 4012, Pg. G-5) <ul><li>Taxpayer must be 65 or older, or retired on permanent and total disability. </li></ul><ul><li>Claimed on Schedule R (for 1040 returns). </li></ul><ul><li>Nonrefundable credit. </li></ul><ul><li>Two income limits: </li></ul><ul><ul><li>Adjusted Gross Income (AGI) </li></ul></ul><ul><ul><li>Nontaxable Social Security and nontaxable pensions </li></ul></ul><ul><li>Must have low Social Security and pensions, yet still have a tax liability. This doesn’t happen often. </li></ul><ul><li>TaxWise will bring in the schedule if appropriate. </li></ul>
  116. 134. Education Credits (See IRS Pub. 4012, Pgs. G-3 & G-4) <ul><li>There are two different nonrefundable credits: </li></ul><ul><ul><li>American Opportunity Credit ( New for 2009 - replaces HOPE Credit) </li></ul></ul><ul><ul><li>Lifetime Learning Credit </li></ul></ul><ul><li>They cover tuition, mandatory fees and books purchased from the school. Note: any course materials are covered by the American Opportunity Credit. </li></ul><ul><li>The school must be eligible for student aid from the Department of Education and should issue a Form 1098-T. </li></ul>
  117. 135. Education Credits – Continued <ul><li>Report both credits on Form 8863. </li></ul><ul><li>Cannot be used in conjunction with the Tuition and Fees deduction for the same student or with Married Filing Separately filing status. </li></ul><ul><li>The taxpayer may be able to take a deduction for qualified education expenses – see the slide previously in this presentation regarding adjustments to arrive at AGI. Both methods should be tried to determine the best refund/tax due situation on both the federal and Michigan returns. </li></ul>
  118. 136. American Opportunity Credit <ul><li>Good for the first four years of postsecondary education. </li></ul><ul><li>Covers tuition, fees, and course materials </li></ul><ul><li>Student must be enrolled at least half-time. </li></ul><ul><li>Good for taxpayers or dependents. </li></ul><ul><li>Maximum credit = $2,500 per student per year. </li></ul><ul><li>100% of the first $2,000 of qualified expenses. </li></ul><ul><li>25% of the next $500 of qualified expenses. </li></ul>
  119. 137. American Opportunity Credit <ul><li>40% of the credit is refundable (maximum = $1,000) unless the person claiming the credit is: </li></ul><ul><ul><li>Under 18 or a student 18 years old but under 24 with earned income not more than ½ of their support, </li></ul></ul><ul><ul><li>And with at least one living parent, </li></ul></ul><ul><ul><li>And does not file a joint return. </li></ul></ul>
  120. 138. Lifetime Learning Credit <ul><li>Same requirement for an eligible education institution. </li></ul><ul><li>Up to 20% of $10,000 of eligible expenses. </li></ul>
  121. 140. Retirement Savings Contributions Credit (See IRS Pub. 4012 – Pg. G-6) <ul><li>Used to encourage low-income taxpayers to save. </li></ul><ul><li>Nonrefundable credit of up to $1,000 ($2,000 on a joint return). </li></ul><ul><li>For making eligible contributions to an employer-sponsored retirement plan or to an IRA. </li></ul><ul><li>Not available if: </li></ul><ul><ul><li>Amount of AGI exceeds certain limits, </li></ul></ul><ul><ul><li>You are under 18, </li></ul></ul><ul><ul><li>You are a dependent on another person’s return, or </li></ul></ul><ul><ul><li>You were a full-time student in 2009 </li></ul></ul><ul><li>TaxWise will calculate this on Form 8880 for contributions to a 401K if you enter all of the W-2 information correctly. </li></ul>
  122. 141. Child Tax Credit (See IRS Pub. 4012, Pgs. G-7 & G-8) <ul><li>A nonrefundable credit of up to $1,000 per child. </li></ul><ul><li>Children must be under 17 at the end of the tax year, a citizen or U.S. resident, and be claimed as a qualifying child dependent. </li></ul><ul><li>TaxWise will do the calculations. Be sure to accurately enter dates of birth for children on TaxWise’s Main Info sheet. </li></ul>
  123. 142. Additional Child Tax Credit (See IRS Pub. 4012, Pg. G-7) <ul><li>Refundable in certain situations. </li></ul><ul><li>TaxWise will add a Form 8812 if they qualify. </li></ul><ul><li>15% of earned income above $3,000 for 2009. </li></ul><ul><li>Or, if greater, for taxpayers with three or more qualifying children, the excess of social security taxes over the EITC. Non-citizens may qualify based on this. </li></ul><ul><li>We are seeing this credit more often. Trust the software to tell you when it does, and then recognize what it is. </li></ul>
  124. 143. Adoption Credit <ul><li>This credit is nonrefundable, but can be spread over several years. </li></ul><ul><li>A credit of up to $12,150 in 2009 for qualifying adoption expenses. (Same credit is allowed for the adoption of a child with special needs even if there are no qualifying expenses.) </li></ul><ul><li>See the instructions for Form 8839. </li></ul>
  125. 144. Finishing the Return
  126. 145. Finishing the E-File Return <ul><li>It is very important that the tax preparer follow Accounting Aid Society’s Final Checklist and submit all required documents with the E-file Packet. </li></ul><ul><li>One copy of Form 8879 (and one copy of Form MI-8453 if applicable) is signed by the taxpayer (and spouse for Married Filing Jointly). Accounting Aid Society retains the signed copy for their files. </li></ul><ul><li>Make a copy of Form 8879 (and MI-8453 if applicable) for the client to keep with their tax records. </li></ul><ul><li>Attach one copy of all Forms W-2, W-2G, and 1099s to the E-file Packet. </li></ul><ul><li>Make a complete copy of the tax return (including the Michigan and city return) for the client to keep, and instruct them to bring it with them next year. </li></ul>
  127. 146. Finishing the Paper Return <ul><li>Follow Accounting Aid Society’s Final Checklist. </li></ul><ul><li>The tax return must be signed and dated by the taxpayer (and spouse if filing jointly). </li></ul><ul><li>The return has to be mailed by April 15 th unless they request an extension (Form 4868). </li></ul><ul><li>There are different mailing addresses for taxpayers who have tax due and those getting a refund. The sites will have mailing envelopes/labels in the Site Box. </li></ul><ul><li>Attach federal copy of Form(s) W-2 to the 1040, as well as any Forms 1099 that have federal tax withholding. </li></ul><ul><li>Make a complete copy of the tax return (including the Michigan and city return) for the client to keep, and instruct them to bring it with them next year. </li></ul>
  128. 147. If There is a Refund <ul><li>If the client has a bank account and wants direct deposit of their refund, make sure that you include the routing number and account number on the return. This will speed up the refund. </li></ul><ul><li>The routing number and bank account number should always be entered on TaxWise’s Main Info sheet first. </li></ul><ul><li>Federal refunds can be put into up to three accounts, including an option for U.S. Savings Bonds. </li></ul><ul><li>Form 8888 will be used to split a refund. </li></ul>
  129. 148. If There is a Refund – Continued <ul><li>Refunds for E-filed returns should be deposited within 3 weeks of the day we prepare it. </li></ul><ul><li>Checks will take about a week longer. </li></ul><ul><li>For federal paper returns, refunds require 6 –8 weeks to be processed. </li></ul><ul><li>There is a phone number and a website ( ) on the large client envelope for contacting the IRS to inquire about the status of a refund. </li></ul><ul><li>Accounting Aid Society’s Client Letter also lists instructions for inquiring about the status of a refund. </li></ul>
  130. 149. If There is a Refund – Continued <ul><li>Past due debts may be subtracted from refunds. </li></ul><ul><li>These include past-due federal and state income taxes, child support and student loans. </li></ul><ul><li>Injured spouses who file a joint return and still want to receive their portion of a refund should file Form 8379, Injured Spouse Claim and Allocation. </li></ul>
  131. 150. If There is Tax Due <ul><li>Most of our clients will be getting money back, but a few will owe the IRS money. </li></ul><ul><li>This often happens when there is self-employment income or unemployment compensation. </li></ul><ul><li>TaxWise will prepare a Form 1040-V payment voucher to be sent with the check or money order. </li></ul><ul><li>For e-file returns, verify with the client that they still want to e-file their return. Their return would be transmitted that week, but explain to them that they have until April 15 to make payment using Form 1040-V. </li></ul><ul><li>For paper returns, Form 1040-V and the check or money order should be included with the return when it is mailed. </li></ul><ul><li>It is possible to request (for a fee) a monthly installment agreement to pay any tax that is due – see Form 9465. </li></ul>
  132. 151. Recommendations <ul><li>We need to ask appropriate probing questions. </li></ul><ul><li>Don’t assume that all children live with the taxpayer or that any of the other tests for dependency, filing status, etc., have been met. </li></ul><ul><li>It’s not necessary to memorize all the flowcharts and eligibility rules, but you do need to recognize unique situations and use the tools provided. </li></ul><ul><li>Consult IRS Pub. 4012 (the spiral book) and Pub. 4491 (Student Training Guide) for interview tips and techniques. </li></ul><ul><li>Consult IRS Publication 17 and/or the site coordinator when you encounter something out of the ordinary. Don’t guess. </li></ul>
  133. 152. Amended Returns <ul><li>Enter the return as originally prepared or find the original return in a site computer. </li></ul><ul><li>Open a Federal 1040X (and Michigan 1040X if needed). Check the red box on the 1040X form next to the instruction “Check to override all original entries in Column A…” </li></ul><ul><li>Make the necessary changes on the original forms. </li></ul>
  134. 154. Thanks for attending this session!