SaveFirst: A Tax Preparation and Financial Literacy Initiative

1
SaveFirst A Tax Preparation and Financial
Literacy Initiative

• Intermediate
• Tax Training

2
Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Credits

3
Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Credits

4
Itemized Deductions

• Every taxpayer can take a specific amount for a
  standard deduction, which reduces taxable
  income.
• There are certain designated expenses that a
  taxpayer can choose to list out separately, and
  if they total more than the standard deduction,
  the taxpayer will itemize his deductions, which
  reduces his taxable income by a greater amount.

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Itemized DeductionsWhen to Itemize

• On the federal level, a taxpayer generally needs
  to have a home mortgage payment or a large number
  of medical bills to be better off itemizing.
• On the state level, the standard deduction is
  much lower, and itemizing may be beneficial at
  the state even when it is not at the federal.

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Itemized DeductionsWhen to Itemize

• If a taxpayer has answered yes to the itemized
  deductions questions on the interview sheet,
  complete the Schedule A to see if it is
  beneficial to itemize at the state or federal
  level.
• If the Alabama A appears with a green check,
  complete the Schedule A fully.

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Itemized Deductions

• The main expenses that are itemized
• Unreimbursed Medical Expenses
• Charitable Contributions
• Taxes
• Home Mortgage Interest
• Miscellaneous Deductions

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Itemized DeductionsUnreimbursed Medical Expenses

• A taxpayer can claim unreimbursed medical
  expenses for
• Himself/Herself
• Spouse
• Dependents

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Itemized DeductionsUnreimbursed Medical Expenses

• Taxpayers can only deduct the amount of expenses
  that exceeds 7.5 of AGI.
• At the Alabama level, taxpayers can deduct the
  amount of expenses that exceeds 4 of AGI.

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Itemized DeductionsUnreimbursed Medical Expenses

• Deductible expenses
• Prescription drugs
• Health insurance premiums
• Long-term care insurance premiums (cap on amount
  based on age)
• Co-pays to doctor, dentist, eye doctor
• Cost of glasses, hearing aids
• Cost of medical equipment
• Cost of surgery, operations
• Miles to and from doctor

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Itemized DeductionsUnreimbursed Medical Expenses

• Nondeductible expenses
• Life insurance policy premiums
• Nonprescription drugs
• Funeral, burial, cremation costs
• Unnecessary cosmetic surgery

12
Itemized DeductionsCharitable Contributions

• Contributions must be made to organizations that
  are organized for religious, charitable,
  educational, scientific, or literary purposes.
• Nonqualifying organizations include businesses,
  civic or political organizations, social clubs,
  foreign organizations, homeowners associations.

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Itemized DeductionsCharitable Contributions

• Deductible items
• Monetary donations
• FMV of clothing, furniture
• Uniforms required to be worn during service
• Unreimbursed transportation expenses
• Must subtract FMV of any good received in
  exchange for the donation.
• Taxpayer must keep receipts!

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Itemized DeductionsCharitable Contributions

• Nondeductible expenses
• Raffle, bingo, lottery tickets
• Tuition
• Value of time of service
• Blood
• Contributions to individuals

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Itemized DeductionsTaxes

• Deduct taxes imposed on and paid by the taxpayer.
• Taxpayers cannot deduct a tax they pay for
  someone else, their own tax someone else pays, a
  tax not paid in 2008.

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Itemized DeductionsTaxes

• State and local taxes
• Real estate taxes (Property Tax)
• Sales taxes
• Ad valorem tax on car tags
• Nondeductible taxes federal taxes hunting
  licenses water/sewer taxes on alcohol, tobacco,
  or gas utilities

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Itemized DeductionsHome Mortgage Interest
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Itemized DeductionsInterest

• Personal interest cannot be deducted (e.g.,
  interest on personal loans, car loans, or credit
  cards).

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Itemized DeductionsMiscellaneous Deductions

• Union dues
• Uniforms (that cannot be worn in any other
  circumstance)
• Professional books, journals
• Employment-related educational expenses
• Expenses for looking for a new job
• Tax preparation fee from last year
• Safe deposit box
• Gambling losses up to amount of winnings

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Itemized DeductionsMiscellaneous Deductions

• Nondeductible Expenses
• Burial or funeral expenses
• Wedding expenses
• Fees and licenses
• Fines, penalties, traffic tickets
• Home repairs and insurance
• Rent
• Insurance premiums (except health)
• Losses from sale of home

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Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums
• 2. Vitamins
• 3. Federal income tax
• 4. Interest on car loan
• 5. Church contribution
• 6. Tax preparation fee from last year

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Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins
• 3. Federal income tax
• 4. Interest on car loan
• 5. Church contribution
• 6. Tax preparation fee from last year

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Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins (NO)
• 3. Federal income tax
• 4. Interest on car loan
• 5. Church contribution
• 6. Tax preparation fee from last year

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Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins (NO)
• 3. Federal income tax (NO)
• 4. Interest on car loan
• 5. Church contribution
• 6. Tax preparation fee from last year

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Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins (NO)
• 3. Federal income tax (NO)
• 4. Interest on car loan (NO)
• 5. Church contribution
• 6. Tax preparation fee from last year

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Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins (NO)
• 3. Federal income tax (NO)
• 4. Interest on car loan (NO)
• 5. Church contribution (YES)
• 6. Tax preparation fee from last year

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Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins (NO)
• 3. Federal income tax (NO)
• 4. Interest on car loan (NO)
• 5. Church contribution (YES)
• 6. Tax preparation fee from last year (YES)

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Itemized Deductions

• TAXWISE EXERCISE

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Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Deductions
• Intermediate Credits

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Self-Employment Income

• We can file a Schedule C-EZ if the taxpayer
• Had business expenses of less than 5,000
• Cash method of accounting
• No inventory
• No net loss
• Only one business (if taxpayer owns a business)
• No employees during the year
• Does not want to depreciate

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Self-Employment Income1099-MISC

• Income reported in Box 7 on a 1099-MISC is
  considered self-employment income and should be
  reported on a Schedule C-EZ.

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Self-Employment Income1099-MISC
Box 7 Nonemployee Compensation
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Self-Employment Income1099-MISC

• Let me repeat that
• Income reported in Box 7 on a 1099-MISC is
  considered self-employment income and should be
  reported on a Schedule C-EZ.

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Self-Employment IncomeSchedule C-EZ

• Include net profit
• Deductible expenses advertising, vehicle
  expenses, insurance, interest, legal and
  professional services, repairs, 50 of business
  entertainment, utilities
• If deducting car expenses, you will need to
  provide additional information on the Schedule
  C-EZ.

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Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Credits

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Pensions Retirement Plans

• Pension series of payments for past work
• Annuity series of payments from a contract with
  company, trust, individual
• 401(k) Plan employer contributes part of
  employees cash wages to a retirement plan on a
  pre-tax basis (not subject to income tax when
  deferred)

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Pensions Retirement Plans
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Pensions Retirement Plans

• A retirement plan is fully or partially taxable
  depending on whether the employee contributed to
  the plan.
• The cost of the pension is the amount that the
  employee contributed.

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Pensions Retirement Plans

• If the taxpayer did not contribute to the cost of
  the pension plan (e.g., all of the contributions
  came straight from the employer), the plan is
  fully taxable.
• If the taxpayer contributed to the plan with
  before-tax dollars, the plan is fully taxable.

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Pensions Retirement Plans

• If the taxpayer contributed to the plan with
  after-tax dollars, the plan is only partially
  taxable.
• Part of the pension income received has already
  been taxed. Therefore, only part of the pension
  plan is taxable.
• Roth IRAs are not taxable because all
  contributions were made with after-tax dollars.

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Pensions Retirement Plans

• If the taxpayer contributed to the pension with
  after-tax dollars (has a cost to recover), he
  can exclude part of each pension payment from
  income until all of the cost has been recovered.
• Tax-free portion remains the same each year.

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Pensions Retirement Plans

• You can prepare returns for retired individuals
  if the taxable amount of the retirement
  distribution has been determined.

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Pensions Retirement PlansRailroad Retirement

• RRB-1099 treat like SSA-1099 (e.g., social
  security benefits)
• RRB-1099-R treat like 1099-R (e.g., pension)

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Pensions Retirement PlansAlabama Tax Rules

• Defined Benefits Plan Employee receives a
  specific amount of money based on salary history
  and years of service. Contributions from
  employee, employer, both. Employer bears
  investment risk.
• Defined Contributions Plan (e.g., 401(k) or
  403(b) Employee chooses to defer part of salary
  into plan. Employee bears investment risk.

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Pensions Retirement PlansAlabama Tax Rules

• Defined Benefits Plans are not taxable at the
  Alabama level.
• We have a list that covers most plans that are
  not taxable, but if your taxpayers plan is not
  listed, you must contact the plan administrator
  to determine if it is a defined benefits plan.
• BE SURE TO CLICK BOX 1 IN TAXWISE IF IT IS A
  DEFINED BENEFITS PLAN.

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Pensions Retirement PlansAlabama Tax Rules
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Pensions Retirement PlansAlabama Tax Rules

• 1099-R issues can get complicated when the
  taxpayer does not have enough information
  regarding his/her retirement plan.
• You may need to call the IRS or the company that
  administers the retirement plan to find out if it
  is a defined benefits or defined contributions
  plan.

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Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Credits

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Adjustments to Income

• Adjustments decrease taxable income.
• Lines 23-37 on Form 1040.

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Adjustments to IncomeEducator Expenses

• K-12 teachers, counselors, administrators who
  work at least 900 hours in the year
• Deduct 250 of classroom expenses, including
  books, supplies, or equipment
• Must reduce if reimbursed, had tax-free interest
  on savings bonds, or non-taxable earnings from
  QTP, ESA

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Adjustments to Income½ of self-employment tax

• TaxWise will automatically calculate if you have
  completed a Schedule C-EZ.

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Adjustments to IncomePenalty on early withdrawal
of savings

• TaxWise will automatically calculate if you have
  included this on the Interest Statement.

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Adjustments to IncomeAlimony Paid

• Deduct alimony paid (be sure to calculate for
  year, not for one month)
• Must have recipients SSN
• Child support is NOT considered alimony

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Adjustments to IncomeIRA Deduction

• IRA Individual Retirement Arrangement
• Personal savings plan that offers tax advantages
  to set aside money for retirement.

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Adjustments to IncomeIRA Deduction

• Contributions to a traditional IRA can be
  deductible or nondeductible.
• Earnings and gains on the contributions are not
  taxed until withdrawn from the IRA account.

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Adjustments to IncomeIRA Deduction

• Anyone under 70 ½ years of age who has taxable
  compensation can contribute to a traditional IRA.
• Contribution limit is the lesser of
• 4,000 (5,000 if gtage 50)
• Taxable compensation

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Adjustments to IncomeIRA Deduction

• If the taxpayers file a joint return and one
  spouses compensation is greater than the
  others
• Married taxpayers combined contributions cannot
  exceed combined compensation
• Neither spouse can contribute more than 4,000
  (5,000 if gt age 50)

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Adjustments to IncomeIRA Deduction

• Contributions for 2008 can be made up until the
  due date of the return (e.g., April 15, 2009).
• An excess contribution above these limits and any
  earnings on it will be taxed.
• Nondeductible IRA contributions should still be
  reported on Form 8606.
• If the taxpayer has made excess contributions,
  refer them to a paid preparer.

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Adjustments to IncomeIRA Deduction

• The allowable deduction may be adjusted based on
  filing status, whether or not the taxpayer/spouse
  is covered by an employer retirement plan, and
  income.

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Adjustments to IncomeIRA Deduction

• Taxpayers may incur penalties for
• Excess contributions
• Early withdrawals
• Too little withdrawals

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Adjustments to IncomeStudent Loan Interest

• Can deduct up to 2,500 of interest paid
• Taxpayer
• Spouse
• Dependent (when the loan was obtained)
• Student must have been enrolled at least
  half-time in a program leading to a degree,
  certificate, or other credential.

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Adjustments to IncomeStudent Loan Interest

• Filing status cannot be MFS.
• Taxpayer cannot be claimed as dependent.
• Qualified expenses include tuition and fees, room
  and board, books, supplies, and other necessary
  expenses.
• Must be reduced by scholarships,
  employer-provided benefits, or tax-free
  educational assistance.

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Adjustments to IncomeStudent Loan Interest

• Eligible schools are those that qualify to
  participate in student aid program or conduct
  internship/residency programs leading to a degree
  or certificate.
• Must be accredited.

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Adjustments to IncomeTuition Fees Deduction

• Deduct up to 4,000 of higher education expenses
  for taxpayer, spouse, or dependent whom taxpayer
  claims.
• Cannot be MFS
• Cannot be a dependent
• Cannot also claim Hope and Lifetime Learning on
  same student

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Adjustments to IncomeTuition Fees Deduction

• Eligible expenses include tuition, fees, and
  other expenses required for enrollment
• Non-eligible expenses include transportation,
  room board, insurance, medical expenses, living
  expenses

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Adjustments to IncomeTuition Fees Deduction

• Institution must be able to participate in
  student aid programs administered by Dept of
  Education (almost all accredited schools)
• Must reduce if receive tax-free scholarship
• Can claim if paid with loan

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Adjustments to IncomeJury duty pay given to
employer

• Jury duty pay is taxable income.
• But, if that pay were given to employer, it can
  be deducted as an adjustment.
• On TW, find the line for Other under line 35.

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Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Credits

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Intermediate Credits

• Foreign Tax Credit
• First-Time Homebuyers Credit
• Residential Energy Credit

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Intermediate CreditsForeign Tax Credit

• Take if a taxpayer paid income to a foreign
  country U.S. possession or political
  subdivision, agency, or instrumentality of a
  foreign country.
• We may see some foreign tax reported on a
  1099-DIV. See the student training guide for
  requirements for reporting directly on Form 1040.

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Intermediate CreditsFirst-Time Homebuyer Credit

• Refundable Credit of 8,000 or 10 of purchase
  price of home (whichever is smaller)
• Use Form 5405
• Taxpayer does not have to repay credit

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Intermediate CreditsFirst-Time Homebuyer Credit

• Taxpayer cannot have owned a home in the last
  three years
• Must stay in the home for at least three years to
  avoid repayment (cannot sell, move, convert to
  rental property, or be foreclosed upon)

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Intermediate CreditsFirst-Time Homebuyer Credit

• Must be main home purchased in U.S.
• Home may not be bought from a close relative or
  related entity

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Intermediate CreditsFirst-Time Homebuyer Credit

• Homes bought after Dec 31, 2008, AND
• Contract entered into to buy home by April 30,
  2010, AND
• Closing date by June 30, 2010
• Credit cannot be claimed until closing occurs

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Intermediate CreditsFirst-Time Homebuyer Credit

• Return must be filed as a paper return.
• Documentation needs to be sent to IRS
• Settlement document
• Copy of drivers license (front and back)
• Documentation of mortgage payment

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Intermediate CreditsFirst-Time Homebuyer Credit

• Taxpayers who purchased home in 2008 may take a
  7,500 credit that must be repaid over 15 years
• Similar to a no-interest loan

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Intermediate CreditsResidential Energy Credit

• Nonrefundable credit available to taxpayers who
  made purchases for qualified energy efficient
  improvements for their main home
• Taxpayer must own his home

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Intermediate CreditsResidential Energy Credit

• Use Form 5695, Part I
• Eligible expenses include high-efficiency heat
  pumps, air conditioners, and water heaters
  energy-efficient windows, doors, insulation
  materials, and certain roofs

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Intermediate CreditsResidential Energy Credit

• Taxpayers may qualify for an energy credit for
  qualified solar electric property costs,
  qualified solar water heating property costs,
  qualified small wind energy property costs, and
  qualified geothermal heat pump property costs.
• This is outside scope of VITA.

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Administrative NotesAmended Returns

• Once a tax return has been accepted by the IRS,
  it cannot be changed without submitting an
  amended return.
• A taxpayer should amend his return if anything
  was excluded that affects taxable income or tax
  liability or if anything was reported incorrectly.

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Administrative NotesAmended Returns

• Common reasons returns must be amended
• Taxpayer receives another W-2
• Taxpayer remembers another source of income
• Taxpayer wants to add itemized deductions
• A dependent was mistakenly claimed

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Administrative NotesAmended Returns

• If we completed the return, you will be able to
  pull it up in TaxWise to amend it.
• If someone else completed the return, you will
  need to re-key the original return that was
  submitted (exactly as it was submitted) before
  you can amend it.

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Administrative NotesAmended Returns

• Add a 1040X.
• IMPORTANT On the 1040X, click the check-box that
  says Check this box to override.
• If the AL return must be amended, click the box
  at the top of the AL40 that says Amended
  Return.
• DO THESE THINGS BEFORE MAKING CHANGES TO THE TAX
  RETURN!!

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Administrative NotesAmended Returns

• Once you check the appropriate boxes on the 1040X
  and the AL40, make any needed changes to the tax
  return.
• Add a new W-2.
• Add or take off a dependent.
• Change filing status.
• Etc.
• All changes will be recorded on the 1040X.

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Administrative NotesAmended Returns

• On Line C of the 1040X, explain what changes are
  being made to the tax return and why.
• If the taxpayer already made a payment, indicate
  this on Line 15.
• A new amount owed or refund will be listed once
  all changes are made.

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Administrative NotesAmended Returns

• Amended returns cannot be e-filed.
• Print the 1040X and AL40 and any new schedules
  that have been added (if applicable).
• Include documentation of changes (if necessary
  e.g., a new W-2).

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Administrative NotesAmended Returns

• Have the taxpayer sign the 1040X and mail to
• Department of the Treasury
• Internal Revenue Service Center
• Atlanta, GA 39901
• Have the taxpayer sign the AL40 and mail to
• Alabama Department of Revenue
• P.O. Box 327464
• Montgomery, AL 36132-7464

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Administrative NotesAmended Returns

• Be sure to print the entire pdf for the taxpayer
  to keep for his records (e.g., the 1040X and the
  resulting 1040 after changes were made).
• It may take weeks for the IRS to process an
  amended return. Refer the taxpayer to
  1-800-829-1040 if they have further questions
  about when the return will be processed.

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Administrative NotesPaper Returns

• Sometimes, tax returns cannot be e-filed OR the
  taxpayer prefers to mail the return rather than
  e-file it.
• Tax returns that cannot be e-filed
• Filing a return on which a dependent has been
  incorrectly previously claimed by another
  taxpayer
• Filing a return for someone who has already been
  incorrectly claimed as a dependent
• MFS if spouses SSN is unknown

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Administrative NotesPaper Returns

• To set up the return to be filed as a paper
  return
• On the Main Info Sheet, scroll midway down and
  click Paper next to Type of Return.
• On the AL40, scroll to the bottom and click No
  stating that you do NOT want to e-file the return.

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Administrative NotesPaper Returns

• Prepare the return as normally.
• Print two copies of everything give one to the
  taxpayer to keep.
• Have the taxpayer sign the 1040 and the AL40.

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Administrative NotesPaper Returns Preparing
the 1040

• The 1040 (Pg 1 2) go on top.
• Put the rest of the forms in order based on the
  numbers listed in the Attachment Sequence No at
  the top right corner of each form.
• Staple one copy of each W-2 on the left side
  about half-way down the 1040 Pg 1.
• Staple one copy of each W-2G or 1099-R (if they
  have withholding) on the left side about half-way
  down the 1040 Pg 1.
• Staple the whole packet together at the top left.

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Administrative NotesPaper Returns Mailing the
1040

• Put the whole 1040 package into a manila envelope
  (or, a white envelope if it is small enough).

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Administrative NotesPaper Returns Mailing the
1040

• If there is a payment enclosed, mail the 1040 and
  attachments with payment and voucher to
• Department of the Treasury Internal Revenue
  Service Austin, TX 73301-0002

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Administrative NotesPaper Returns Mailing the
1040

• If there is no payment enclosed, mail the 1040
  and attachments to
• Department of the Treasury Internal Revenue
  Service Austin, TX 73301-0102

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Administrative NotesPaper Returns Mailing the
1040

• Paper returns take much longer to process than
  e-filed returns.
• Refunds can still be directly deposited on a
  paper return just include this information in
  TaxWise.