Accounting Aid Society 2006 Tax Season Federal Tax Training

1
Accounting Aid Society 2006 Tax SeasonFederal
Tax Training

• January, 2006

2
Overview

• Our training is designed to provide you with
  skills to prepare taxes for the clients of
  Accounting Aid Society.
• Our clients are individuals with household income
  less than 20,000 or families making less than
  38,000.
• Check with IRS Publication 17 and/or your tax
  supervisor whenever you encounter something
  unusual.

3
Quality

• Our number one priority is quality!
• We are not going to do complicated returns which
  exceed our training or capability.
• Dont guess if you are not sure how to handle a
  particular situation.
• Consult the instructions, IRS Publication 17
  and/or your tax supervisor for help.
• All returns should be reviewed by a tax
  supervisor.

4
Reference Materials

• Throughout this training session we will be
  referencing the following publications
• Step-By-Step for TaxWise
• IRS Publication 4012, Volunteer Resource Guide
  (the spiral book)
• IRS Publication 17, Your Federal Income Tax for
  Individuals

5
Whats New for Tax Year 2005?

• New Rules for Dependency Exemptions Uniform
  Definition of a Qualifying Child
• Several amounts used in the calculations have
  been increased to allow for inflation
• Exemption amount is now 3,200 (was 3,100)
• The Standard Deduction amounts have increased.
• New Rules for Car Donations
• Mileage rate increase
• Business Miles 40.5 cents per mile
• (48.5 cents per mile September December)

6
Who Must File? (See IRS Pub.
4012, Pg. 6)

• Many low-income people do not have to file
  federal returns, but may be required to file
  state or city returns.
• People who file Federal returns should generally
  file state returns as well.
• Some clients should file to recover withholding
  or collect refundable credits, even if they are
  not required to file by the gross income
  guidelines.
• See the income table on the next slide.

7
Who Must File (IRS Pub. 4012, pg. 6)
8
Who Must File? (See IRS
Pub. 4012, Pg. 6)

• The gross income limits are lower if the taxpayer
  is someone elses dependent. See the
  instructions.
• There are other special situations listed in IRS
  Publication 17 such as
• Self-employment income of 400 or more,
• You received Advanced Earned Income Credit
• And others.

9
Which Form to Use?

• There are three choices 1040, 1040A and 1040EZ.
• The amount of tax or refund is not affected by
  the form chosen.
• TaxWise users should always use Form 1040. Form
  1040 can be used for most returns.
• TaxWise defaults to the 1040.
• .

10
Which Form to Use?

• Form 1040NR is for Non-Resident Aliens. Dont
  prepare these returns without additional
  training.
• Form 1040X is for amending a return thats
  already been filed.
• Early in the season we often get clients with a
  W-2, but not all of their W-2s. Make sure that
  they have everything or well end up having to
  amend the return.
• A tax return is a compilation of all relevant
  information for an entire year. Nothing stands
  alone!

11
Entering the SSNStarting a New Return in TaxWise

• It is crucial to check the social security
  numbers on all of the taxpayers documents.
• The names and social security numbers for the
  taxpayer, spouse and dependents that are entered
  on the tax return have to match whats on file at
  the Social Security office or the return will be
  rejected.

12
Entering the SSNStarting a New Return in TaxWise

• If the client presents you with forms (W-2, 1099,
  etc.) that dont match the Social Security card,
  advise the client to contact the payer to make a
  correction. Consult with the tax supervisor
  before preparing a return in this situation.
• Take your time and double-check.

13
Social Security Numbers

• There has been a lot of identity theft lately.
• Social Security numbers can be a key to this
  crime.
• Its important to keep this, along with whatever
  else a client tells or shows us, in the strictest
  confidentiality.
• Speak softly!
• Shred all unneeded tax return pages. Do not
  discard in the wastebasket.

14
TaxWise Main Information Sheet

• Entries on the Main Information Sheet flow to all
  parts of the return. An error here is
  significant, but can easily be corrected by
  changing the entry.
• If you discover an error in name or address while
  working in another part of TaxWise, always go
  back to Main Information to correct it.

15
Main Information Sheet Sections

• Customer Card
• Taxpayer Information
• Filing Status
• Exemptions
• Dependents
• Type of Return
• Bank account information
• Preparer Use Fields

16
Customer Card

• Mailing Address use the address where any
  refunds are to be sent. Make sure to include the
  apartment number if applicable.
• Telephone number we need a telephone number for
  an e-file in case we need to contact the client
• Birthdate - Required
• Occupation Optional, but we should enter
• Presidential Election Campaign

17
Presidential Election Campaign Fund

• 3 can go to the fund if the taxpayer (or spouse)
  checks Yes.
• The taxpayers tax or refund will not change by
  checking Yes.
• TaxWise does not carry this election to the state
  forms.

18
Filing Status Single (See Pub.
4012, Pg. 9-10)

• Single on the last day of the year.
• Do not qualify for another status.

19
Filing Status Married(See Pub. 4012, Pg. 9-10)

• Married Filing Jointly is used if you are married
  on the last day of the year or your spouse died
  during the year.
• 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.

20
Filing Status Head of Household (See Pub. 4012,
Pg. 9-10)

• You are unmarried or considered unmarried on
  the last day of the year.
• You paid more than half the cost of keeping up a
  home for the year.
• A qualifying person lived with you for more than
  half the year.
• 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.
• This filing status is not available on state or
  local returns. The the filing status would be
  Single on the Michigan and local returns.

21
Head of Household Qualifying Person (See Pub.
4012, Pg. 9-10)

• Who is a qualifying person is a function of
• Their relationship to you
• Whether or not you can claim an exemption for
  them, and,
• How long they lived with you.
• See the table on Page 22 in IRS Publication 17
  any time you encounter an unusual situation.

22
Filing Status Qualifying Widow(er) with
Dependent Child

• Can be filed for the two years following the
  death of a spouse.
• Must not be remarried.
• Must have a dependent child, step-child, adopted
  child or foster child
• Paid more than half the cost of keeping up a home
  that is the main home for you and that child for
  the entire year, except for temporary absences.
• This filing status is not available on state or
  local returns.

23
Filing Status (IRS Pub. 4012, pg. 9)
24
Personal Exemptions

• TaxWise will automatically enter a personal
  exemption for the filer.
• If the filer can be claimed as a dependent on
  another return, they are not entitled to their
  own personal exemption. Box 6(a) on Main Info
  should be checked to remove the personal
  exemption.

25
Dependents TaxWise Entries

• TaxWise requires several entries for each
  dependent. Be very careful as these entries are a
  major source of errors that cause e-filing
  rejects and incorrect returns.
• Required Entries Name, Social Security Number,
  Date of Birth, Relationship, Code (listed in the
  TaxWise instructions).
• Optional Entries DC, EIC
• CTC (Child Tax Credit) Automatically calculated
  by TaxWise

26
Dependents TaxWise Entries

• Optional entries - DC
• Enter an X in this box if the Dependent Care
  Credit is applicable. See later explanation of
  this credit. This entry only results in a Form
  2441 waiting for information. Because most of
  clients owe no income tax, this credit is usually
  not a factor.

27
Dependents TaxWise Entries

• Optional Entry EIC
• Enter an X in this box if the child appears
  eligible for the Earned Income Tax Credit. This
  credit will be explained later.
• Other qualifying questions will be asked later in
  the TaxWise program.
• Important If you dont enter an x here, the
  EITC will not calculate.

28
Dependency Exemptions for Qualifying Children and
Qualifying Relatives (2005)

• Tests applicable to all dependents
• Dependent of another (a dependent can have no
  dependents)
• Joint return test
• Citizenship or residency test (U.S., Canada, or
  Mexico)

29
Dependency Exemption Tests for Qualifying
Children

• Relationship Test Child, grandchild, brother
  sister (including stepbrother stepsister, niece
  or nephew), foster child placed by agency
• Residency Lived with taxpayer more than ½ of
  the year (temporary absences are ok)
• Age Under 19, under 24 and a full-time student,
  or permanently and totally disabled
• Support Did not provide more than ½ of his/her
  own support

30
Dependency Exemption Tests For Qualifying
Relatives (old rules apply)

• Support
• Member of Household or Relationship
• Gross Income

31
Support Test

• Taxpayer must provide more than 50 of the
  dependents support
• An exception to support test requirement
• Multiple support agreement

32
Relationship Test

• Dependent must be one of the specified relatives
  of the taxpayer (either taxpayer, if joint
  return) or be a member of the taxpayers
  household for the entire year
• Once a relationship is established by marriage,
  it continues even if there is a change in marital
  status
• The relationship cannot be in violation of local
  law (still an issue in Michigan).

33
Gross Income Test

• Dependents gross income must be less than the
  amount allowed for an exemption (3,200 for 2005)

34
Dependency Exemptions(IRS Pub. 4012, pg. 16)
35
Dependency Exemptions(IRS Pub. 4012, pg. 16)
36
Mini-Quiz 1

• 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.
• Can Jane claim her as a dependent?
• Can Mary take a personal exemption?
• What is Marys filing status?
• What is Janes filing status?
• What is Janes filing status if she were married,
  but did not live with her husband during the last
  six months of the tax year?

37
Mini-Quiz 1 - Answer

• Can Marys mother claim her as a dependent?
• No, Mary is not a Qualifying Child or Qualifying
  Relative. The Gross Income Test has not been met.
  
• Note that if Mary had been under 19 or a
  full-time student, Marys mother could have
  claimed her as a Qualifying Child.
• Can Mary take a personal exemption? - Yes
• What is Marys filing status? - Single
• What is Janes (Marys mothers) filing status?
• Single. Mary has to qualify as her dependent in
  order to be a qualifying person for Head of
  Household filing status.
• Her Michigan and local filing status is Single.

38
Mini-Quiz 1 Answer (cont.)

• What is Janes filing status if she were married,
  but did not live with her husband during the last
  six months of the tax year?
• Single. Jane does not meet all of the tests for
  considered unmarried under Head of Household.
  Specifically, she has to be able to claim Mary as
  a dependent to be considered unmarried.
• Janes Michigan and local filing status would be
  Married Filing Separately.

39
Mini-Quiz 2

• 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. What is her filing status?

40
Mini-Quiz 2 - Answer

• Marthas filing status is Qualifying Widow(er)
  with Dependent Child.
• She could also file as Head of Household, but
  Qualifying Widow is more advantageous.
• Note that on the Michigan return, Qualifying
  Widow is not an option. Shell file her Michigan
  and local returns as Single.
• If George had died in this tax year, Martha could
  have filed Married Filing Jointly.
• If Martha had remarried, she would be Married
  Filing Jointly or Married Filing Separately.

41
Mini-Quiz 3

• George (30) is single and lives with his
  daughter, Sue (10). Georges 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).
• What is Georges filing status?
• Can George claim a dependency exemption for Sue?

42
Mini-Quiz 3 - Answer

• What is Georges filing status?
• George is 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.
• Can George claim a dependency exemption for Sue?
• Yes. Sue is a Qualifying Child because she did
  not provide more than one-half of her own support.

43
Other Main Info Items

• The other Main Info entries will be discussed in
  your computer lab session.

44
Gross (taxable) Income

• Income is entered in various places in TaxWise.
  Most income items are entered in worksheets that
  in many cases replicate the source document.
• Part C of Step-by-Step lists typical income items
  and where to enter them (Items 1 7).
• Nontaxable items (Items 8-13) only affect the
  Michigan return and will be discussed in the
  Michigan training module.

45
Wages (Step by Step Item C.1.)

• Wages are reported on Form W-2.
• Enter all of the information from the W-2 into
  TaxWise, including the withholding and the
  special codes.
• TaxWise may use the coded information to
  determine eligibility for certain credits.
• Copy B of the W-2 is attached to paper returns or
  submitted with the E-file packet for electronic
  returns.
• One copy is attached to the city return.
• One copy is retained by the client.

46
Sample W-2 Form
47
Social Security Benefits(Step by Step Item C.2.)

• Social Security recipients will get a year end
  statement, Form SSA-1099, showing benefits
  received. If applicable, the statement will
  indicate the Medicare premiums deducted from
  their benefit.
• Enter the amount from Box 5 of Form SSA-1099, and
  the amount of Medicare premiums deducted, on
  1040 Wkt 1 in TaxWise, not directly on the
  1040.
• Social Security is not generally taxable for low
  income people who qualify for our program, but
  must be shown on the form.
• Again, Married Filing Separately people who have
  lived together at any time during the tax year
  will generally have some of their benefits taxed.

48
(No Transcript)
49
Supplemental Security Income (SSI) Not taxable

• SSI is paid to people who are 65 or older, or are
  blind or disabled, and have limited income and
  financial resources.
• For 2005, the maximum amount of SSI is 579 per
  month for an individual.
• These same recipients generally get quarterly
  payments of 42 every three months from the
  Michigan Department of Human Services (DHS).

50
Supplemental Security Income (SSI) Continued

• There is no year end statement sent.
• Neither of these payments is taxable for Federal
  or State purposes, but be included in Household
  Income for the Michigan credits. This will be
  discussed further in the Michigan module.

51
Pensions(Step by Step Item C.3.)

• Pensions are reported on a Form 1099-R.
• Enter all of the data into TaxWise.
• Be sure to attach a copy to paper returns or
  include it with the E-file packet.
• 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 dont have records.
  

52
Form 1099-R
53
Pensions - Continued

• Hourly workers at the auto companies do not pay
  into the plans, but salaried do. If the worker
  is hourly, the total distribution is the taxable
  amount.
• Otherwise, advise them to get help, or they may
  be overpaying.
• Even if there is no Federal tax liability, the
  state credits will likely be affected.

54
Self-Employment(Step by Step Item C.4.)

• Some clients do work for which they receive money
  which is not wages.
• If they do, we need to prepare a Schedule C or
  Schedule C-EZ.
• They may or may not receive a Form 1099-MISC.
• They have to pay both the employees and the
  employers Social Security and Medicare taxes.
  This is computed on Schedule SE, Self-Employment
  Tax.
• TaxWise will automatically bring in a Schedule SE
  and calculate this tax.

55
Self-Employment Continued

• We can do simple returns with self-employment
  income. For example, if the client earned
  5,214 providing day care and had expenses of
  553 for care-related expenses.
• The client should have records.
• Be sure to work with a supervisor on these.
• 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.

56
Form 1099-MISC
57
Unemployment(Step by Step Item C.5.)

• Unemployment is reported on a Form 1099-G
• There may or may not be federal and/or state tax
  withholding.
• Enter all of the data directly into TaxWise.
• Unemployment is fully taxable for Federal and
  Michigan purposes, but many clients do not elect
  to have withholding. These people get lower
  refunds or owe. Please encourage your clients to
  have taxes withheld on any future payments.

58
Form 1099-G
59
Gambling Winnings(Step by Step Item C.6.)

• Contrary to what might have been heard at the
  casino, gambling winnings are taxable.
• If they are above a certain level, the taxpayer
  will receive a Form W-2G.
• These are entered in TaxWise on Form W2G and
  treated as Other Income.
• Losses are not deductible unless you itemize and
  are limited to the amount of winnings reported.
• The fair market value of prizes and awards is
  also taxable.

60
Form W2G
61
Interest Income(Step by Step Item C.7.)

• Interest is money paid for the use of money,
  usually by a bank.
• Interest is reported on Form 1099-INT.
• This information is entered onto Schedule B in
  TaxWise.
• Banks dont have to send a 1099-INT if the amount
  is less than 10, but the amount is taxable
  whether a Form 1099-INT was sent or not.

62
Interest Income Continued(Step by Step Item
C.7.)

• Interest is almost always taxable for our
  clients. Exceptions are for interest from
  Municipal Bonds, and under certain conditions, US
  government bonds, if it is used to pay for
  education expenses.

63
Form 1099-INT
64
Dividend Income(Step By Step Item C.7.)

• Dividends are earnings that a company pays to
  shareholders.
• Dividends are reported on Form 1099-DIV.
• Enter all of the data in TaxWise on Schedule B.
• Qualified dividends and capital gain
  distributions are eligible for special tax rates
  and make calculating the tax complicated.
• If the data is entered correctly, TaxWise will
  handle the calculations.

65
Form 1099-DIV
66
Capital Gains

• Capital Gains happen when an investment is sold
  for a profit. Our clients might see this on a
  statement from a mutual fund.
• Like qualified dividends, some Capital Gains are
  eligible for special tax rates.
• We typically do not prepare returns if a taxpayer
  has sales of stock. Consult the site supervisor
  if you encounter this situation.

67
Rental Income

• We generally do not prepare returns for
  landlords.
• There are complicated rules for depreciation and
  expenses.
• Sometimes a client will state that they are
  paying rent to a parent or other relative.
• We need to make them understand that if this is
  reported as rent, their parent needs to show this
  as income on their return.
• They may choose instead to treat their payments
  as helping out with expenses rather than rent.

68
Other Taxable Income

• 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 is included in Household Income
  on the Michigan credits.
• Jury duty is shown as other income.
• Hobby income.

69
Other Non-Taxable Income for Federal Purposes

• Child Support
• Gifts
• Inheritances
• Welfare benefits (Michigan Department of Human
  Services)
• Veterans Benefits
• Important While non-taxable items do not affect
  the Federal return, they will be included in
  Household Income for Michigan credits. This will
  be covered in the Michigan module.

70
Adjusted Gross Income

• The taxable income is totaled, and then some
  adjustments are subtracted to arrive at Adjusted
  Gross Income (AGI).
• Adjustments include, but are not limited to,
• IRA deduction rare for our clients
• Student loan interest deduction with some
  limits See 1098-E
• Tuition and fees deduction Our clients would
  probably be better off using the Hope or Lifetime
  Learning Credits
• One-half of self-employment tax
• Penalty on early withdrawal of savings from
  Form 1099-INT
• Worksheets are available in TaxWise by linking to
  them from the Form 1040 entry.

71
Standard Deduction

• The standard deduction is subtracted from
  Adjusted Gross Income before the taxes are
  figured.
• TaxWise Software automatically calculates the
  standard deduction based upon what you have
  entered for Filing Status, whether a dependent of
  someone else, age and blindness.

72
Standard Deduction Amounts

• Filing Status SD ASD
• Single 5.000 1,250
• Married, Filing Jointly 10,000 1,000
• Surviving Spouse 10,000 1,000
• Head of Household 7,300 1,250
• Married, Filing Separately 5,000
  1,000
• The Additional Standard Deduction is allowed
  for those 65
• and over or blind.
• Note The Standard Deduction for an individual
  who may be claimed by another taxpayer is limited
  to 800 or the sum of 250 and the individuals
  earned income.

73
Itemizing Deductions

• This is not something you should do unless you
  have had more extensive training than this
  session.
• This only helps a client with a tax liability.
  For example, if a client has an AGI of 15,000,
  but is Head of Household with two dependents,
  then they have no tax liability. This is because
  15,000 is less than the Standard Deduction plus
  three times the exemption amount. (7,300 3 X
  3,200 16,900). Itemizing deductions would
  not affect the refund or amount owed.

74
Itemizing Deductions

• If a client does have tax liability, it is in
  their best interest to use the larger of the
  Standard Deduction or Itemized deductions.
• Clients with unusually large mortgage interest,
  property taxes and/or large charitable
  contributions may benefit from itemizing
  deductions.
• Itemized deductions are reported on Schedule A.
• If a taxpayer is filing as MFS and their spouse
  itemizes, they must also itemize.

75
Itemizing Deductions

• Itemized deductions include
• Medical expenses over 7.5 of AGI
• State and local income taxes (or sales tax) paid
• Real property taxes paid
• Personal property tax paid (License Plates)
• Mortgage interest
• Charitable contributions
• Casualty and theft losses over 100 and 10 of
  AGI
• Other miscellaneous items over 2 of AGI.
• Other miscellaneous items not subject to the 2
  limit.

76
Rules For Contributions of Motor Vehicles, Boats,
and Airplanes (New for 2005)

• If the claimed value exceeds 500 and the item is
  sold by the charity, the deduction is limited to
  the gross proceeds from the sale.
• If the charity will significantly use or
  materially improve the item, the deduction will
  be the fair market value.
• If the charity sells at a price significantly
  below fair market value to a needy individual in
  direct furtherance of the organizations
  charitable purpose, the deduction will be the
  market value.
• Form 1098-C is used for notification and is to be
  attached to the tax return.

77
Calculating the Tax

• TaxWise will do the calculations.
• You should be able to check the work using the
  tables.
• Note that the calculations are more complicated
  for people with qualifying dividends and/or
  capital gains distributions.

78
Mini-Quiz 4

• What is the tax for a single person with taxable
  income of 10,149 for 2005?
• What is the tax for a qualifying widower with
  taxable income of 20,350 for 2005?
• Assume that neither taxpayer has Qualifying
  Dividends or Capital Gains.

79
Mini-Quiz 4 Answer

• 1,154 is the tax for a single person with
  taxable income of 10,149 for 2005.
• 2,326 is the tax for a qualifying widower with
  taxable income of 20,350 for 2005.

80
Refundable and Non-Refundable Credits

• Non-refundable credits are used to reduce federal
  tax liability, but if they exceed the tax, the
  taxpayer does not receive the difference.
• Refundable credits can be returned to the
  taxpayer, even if there is no tax.

81
Earned Income Tax Credit (EITC)

• We spend about an hour with most clients and find
  them refunds averaging close to 1,000. The
  Earned Income Tax Credit is responsible for the
  biggest piece of this.
• Congress has authorized this to help low income
  people and encourage them to work.
• It can amount to over 4,000.

82
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83
Earned Income Tax Credit (EITC)

• The credit is not available for Married Filing
  Separately.
• Your investment income must be less than 2,700.
• The taxpayer cannot be the qualifying child of
  another person.
• Its 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.

84
Qualifying Child for Earned Income Tax Credit

• There are three tests
• Relationship,
• Age, and
• Residency.

85
Qualifying Child for Earned Income Tax Credit

• The Relationship Test
• The Child must be a Qualifying Child for
  dependency purposes.

86
Qualifying Child for Earned Income Tax Credit

• The Age Test
• Under 19 at the end of the year, or
• Under 24 and a full-time student, or
• Totally and Permanently Disabled.
• These are the same rules for a Qualifying Child
  for dependency purposes.

87
Qualifying Child for Earned Income Tax Credit

• The Residency Test
• Lived with you in the U.S. for more than half of
  the year.

88
Qualifying Child for Earned Income Credit

• Note that a child can be a qualifying child for
  more than one person.
• 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 use the child as a qualifying
  child.
• They can agree on who claims the child for the
  best benefit.
• They can split-up two or more children.
• If there are four children, mom can take two, and
  grandma can take the other two.

89
Qualifying Child for Earned Income Tax Credit

• There are tiebreaker rules which generally awards
  the child to the parent if they cant agree.
• 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.
• The credit is claimed using Schedule EIC. Answer
  the questions in TaxWise and attach the schedule
  to paper returns.
• 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, and the client will be out a lot of
  money.

90
Earned Income Tax Credit if There is No
Qualifying Child

• The credit and income levels are much lower.
• Must be at least 25, but under age 65.
• You cant be someone elses dependent.
• Must have lived in the US for more than half of
  the year.

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Advanced Earned Tax Income Credit

• Taxpayers can receive this money during the year
  from their employer by filling out Form W-5.
• If they did, it would be reported on the Form W-2
  in Box 9.
• Be sure to enter all of the W-2 data into TaxWise.

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Mini-Quiz 5

• Bill (40) and Hillary (39) have wages of 25,432
  for 2005 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 Sallys son
  Ralph (6) as if he were their own child. How
  much is their Earned Income Tax Credit?

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Mini-Quiz 5 - Answer

• Bill and Hillary can claim the EITC based on one
  Qualifying Child.
• 1,215, from the 2005 Earned Income Tax Credit
  (EITC) Table.
• Note that Ralph qualifies as a Dependent as a
  Qualifying Relative, however, he is not a
  Qualifying Child for purposes of the EITC because
  he was not placed in their home by an authorized
  agency.
• Note that this is a very unusual situation.
  Consult IRS Publication 17 to be sure when you
  encounter something out of the ordinary.

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Mini-Quiz 6

• Harold has no dependents, lives alone and his
  total income was 8,000 wages in 2005.
• If he is 23 years old, how much is his EITC?
• How much is his EITC if hes 26?
• How much is his EITC if hes 67?

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Mini-Quiz 6 - Answer

• If he is 23 years old, how much is his EITC?
• 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.
• How much is his EITC if hes 26?
• 285, from the 2005 Earned Income Tax Credit
  (EITC) Table.
• How much is his EITC if hes 67?
• 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.

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Child Tax Credit

• Up to 1,000 per child, but generally
  non-refundable.
• Children must be under 17 at the end of the year,
  a citizen or U.S. resident, and a dependent.
• Child, adopted child, stepchild, brother, sister,
  or a descendent of any of them. (For example
  grandchild, niece or nephew)
• Foster children must also be placed by an agency.
  This is not required for them to be a dependent
  as a qualifying relative.
• TaxWise will do the calculations. Be sure to
  accurately enter childrens birth-dates.

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Additional Child Tax Credit

• Refundable in certain situations
• TaxWise will add a Form 8812 if they qualify.
• 15 of earned income above 11,000 for 2005.
• 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.
• It doesnt happen often, but trust the software
  to tell you when it does, and then recognize what
  it is.

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Child and Dependent Care Credit

• Credit of up to 35 of day care expenses, but
  non-refundable.
• Note that the provider has to give a receipt with
  their taxpayer number most of our clients dont
  get this.
• Limit on eligible expenses
• Lesser of earned income or 3,000 for one
  qualifying person (6,000 for more than one)
• A qualifying person is a dependent under 13 or a
  disabled dependent or spouse
• Use Form 2441 (for 1040 returns).

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Education Credits

• There are two different non-refundable credits
• The Hope Credit
• The Lifetime Learning Credit
• They cover tuition, mandatory fees and books
  purchased from the school.
• The school must be eligible for student aid from
  the Department of Education. Should send a Form
  1098-T.

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Education Credits - Continued

• Cannot be used in conjunction with the Tuition
  and Fees deduction for the same student or with
  Married Filing Separately.
• Report both credits on Form 8863.

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Hope Credit

• Good for the first two years of post-secondary
  education.
• Covers tuition and mandatory fees.
• Books only covered if required to be purchased
  from the school.
• Student must be enrolled at least half-time.
• Good for taxpayers or dependents.
• 100 of the first 1,000 of qualified expenses
• 50 of the next 1,000 of qualified expenses
• Generally, this is a better deal than the
  Lifetime Learning Credit if expenses are less
  than 7,500.

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Lifetime Learning Credit

• Same requirement for an eligible education
  institute, but no limit on two years.
• Up to 20 of 10,000 of eligible expenses.
• For our clients, 20 is higher than their
  marginal tax rates, so this is probably a better
  deal than the Tuition and Fees deduction.

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Education Credits (IRS Pub. 4012, pg. 22)
104
Retirement Savings Contributions Credit

• Used to encourage low-income people to save.
• Non-refundable credit of up to 1,000 (2,000 on
  a joint return)
• For making eligible contributions to an
  employer-sponsored retirement plan or to an IRA.
• Not available if
• Amount of AGI exceeds certain limits,
• You are under 18 (born after Jan. 1, 1988),
• You are a dependent on another persons return,
  or
• You were a full-time student in 2005

105
Retirement Savings Contributions Credit Cont.

• TaxWise will calculate this on Form 8880 for
  contributions to a 401K if you enter all of the
  W-2 information correctly.

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Retirement Savings Credit (IRS Pub. 4012, pg.
22)
107
Credit for the Elderly or the Disabled

• Taxpayer must be 65 or older, or retired on
  permanent and total disability.
• Filed on Schedule R (1040) or Schedule 3 (1040A)
• Non-refundable.
• Two income limits
• Adjusted Gross Income (AGI)
• Nontaxable Social Security and nontaxable
  pensions
• Must have low Social Security and pensions, yet
  still have a tax liability. This doesnt happen
  often.
• TaxWise will bring in the schedule if appropriate.

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Adoption Credit

• This credit is non-refundable, but can be spread
  over several years.
• A credit of up to 10,630 in 2005 for qualifying
  adoption expenses. (Same credit is allowed for
  the adoption of a child with special needs even
  if there are no qualifying expenses.)
• See the instructions for Form 8839.

109
E-Filing

• E-filing speeds the processing of returns and
  refunds, and improves accuracy.
• The IRS expects us to e-file most of our returns.

110
Finishing the E-File Return

• It is very important that the tax preparer follow
  Accounting Aid Societys E-File Checklist and
  submit all required documents with the E-file
  packet.
• 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.
• Make a copy of Form 8879 (and MI-8453 if
  applicable) for the client to keep with their tax
  records.
• Attach one copy of all Forms W-2, W-2G, and 1099s
  to the E-file packet.
• 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.

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Finishing the Paper Return

• The tax return must be signed and dated by the
  taxpayer (and spouse if filing jointly).
• The return has to be mailed by April 15th unless
  they request an extension (Form 4868).
• Address the envelope for paper filed returns.
• There are different mailing addresses for
  taxpayers who have tax due and those getting a
  refund.
• The sites will have envelopes/labels in the Site
  Box.
• Attach federal copy of Form(s) W-2 to the 1040,
  as well as any other information documents that
  have federal tax withholding (e.g., Form 1099s).
• 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.

112
If There is a Refund

• 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.
• Refunds for E-filed returns should be deposited
  within 3 weeks of the day we prepare it.
• Checks will take about a week longer.
• For Federal paper returns, refunds require 6 8
  weeks to be processed.
• There is a phone number and a website on the
  large client envelope for contacting the IRS to
  determine the status of a refund.

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If There is a Refund

• If the client doesnt have a bank account,
  suggest that they contact the Financial Literacy
  Program at Accounting Aid Society.
• Party store banking is expensive!

114
If There is a Refund

• Past due debts may be subtracted from refunds.
• These include past-due Federal and State income
  taxes, child support and student loans.
• 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.

115
If There is Tax Due

• Most of our clients will be getting money back,
  but a few will owe the IRS money.
• This often happens when there is self-employment
  or unemployment income.
• TaxWise will prepare a Form 1040-V payment
  voucher to be sent with the check or money order.
• 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.
• For paper returns, Form 1040-V and the check or
  money order should be included with the return
  when it is mailed.
• It is possible to request (for a fee) a monthly
  installment agreement to pay any tax that is due
  see Form 9465.

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Recommendations

• We need to ask appropriate probing questions.
• Dont assume that all children live with the
  taxpayer or that any of the other tests for
  dependency, filing status, etc., have been met.
• Its not necessary to memorize all the flowcharts
  and eligibility rules, but you do need to
  recognize unique situations and use the tools
  provided.
• Consult IRS Publication 17 when you encounter
  something out of the ordinary. Dont guess.

117
Thanks for attending this session!

• A special thanks to Rich Odendahl for his work in
  developing this presentation.