Accounting Aid Society 2006 Tax Season Federal Tax Training January, 2006

Accounting Aid Society 2006 Tax Season

Federal Tax Training

January, 2006

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.

Quality

Our number one priority is quality! We are not going to do complicated returns which

exceed our training or capability. Don’t 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.

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

What’s 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)

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.

Who Must File (IRS Pub. 4012, pg. 6)

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

The gross income limits are lower if the taxpayer is someone else’s 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.

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..

Which Form to Use?

Form 1040NR is for Non-Resident Aliens. Don’t prepare these returns without additional training.

Form 1040X is for amending a return that’s already been filed. 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 everything or we’ll end up having to amend the return.

A tax return is a compilation of all relevant information for an entire year. Nothing stands alone!

Entering the SSNStarting a New Return in TaxWise

It is crucial to check the social security numbers on all of the taxpayer’s documents.

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.

Entering the SSNStarting a New Return in TaxWise

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 the tax supervisor before preparing a return in this situation.

Take your time and double-check.

Social Security Numbers

There has been a lot of identity theft lately. Social Security numbers can be a key to this crime. It’s 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.

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.

Main Information Sheet Sections

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

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

Presidential Election Campaign Fund

$3 can go to the fund if the taxpayer (or spouse) checks “Yes”.

The taxpayer’s tax or refund will not change by checking “Yes.”

TaxWise does not carry this election to the state forms.

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

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

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.

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.

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.

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.

Filing Status (IRS Pub. 4012, pg. 9)

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.

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


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.


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 don’t enter an “x” here, the EITC will not calculate.

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)

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

Dependency Exemption Tests For Qualifying Relatives (old rules apply)

Support

Member of Household or Relationship

Gross Income

Support Test

Taxpayer must provide more than 50% of the dependent’s support

An exception to support test requirement: Multiple support agreement

Relationship Test

Dependent 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

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).

Gross Income Test

Dependent’s gross income must be less than the amount allowed for an exemption ($3,200 for 2005)

Dependency Exemptions(IRS Pub. 4012, pg. 16)

Dependency Exemptions(IRS Pub. 4012, pg. 16)

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 Mary’s filing status? What is Jane’s filing status? What is Jane’s filing status if she were married, but did not live

with her husband during the last six months of the tax year?

Mini-Quiz #1 - Answer

Can Mary’s 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,

Mary’s mother could have claimed her as a Qualifying Child. Can Mary take a personal exemption? - Yes What is Mary’s filing status? - Single What is Jane’s (Mary’s mother’s) 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.

Mini-Quiz #1 – Answer (cont.)

What is Jane’s 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.

Jane’s Michigan and local filing status would be Married Filing Separately.

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?


Martha’s 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. She’ll 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.

Mini-Quiz #3

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). What is George’s filing status? Can George claim a dependency exemption for

Sue?


What is George’s 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.

Other Main Info Items

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

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.

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.

Sample W-2 Form

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.

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).

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.

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 don’t have records.

Form 1099-R

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.

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 employee’s and the employer’s

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.

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

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.

Form 1099-MISC

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.

Form 1099-G

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.

Form W2G

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 don’t 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.

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.

Form 1099-INT

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.

Form 1099-DIV

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.

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.

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.

Other Non-Taxable Income for Federal Purposes

Child Support Gifts Inheritances Welfare benefits (Michigan Department of Human Services) Veteran’s 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.

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.

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.

Standard Deduction Amounts

Filing Status SD ASD*

Single $ 5.000 $1,250Married, Filing Jointly $10,000 $1,000 Surviving Spouse $10,000 $1,000 Head of Household $ 7,300 $1,250Married, 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 individual’s earned income.

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.


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.


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.

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 organization’s 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.

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.

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.

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.

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.

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.

Earned Income Credit - 2005

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500

1000

1500

2000

2500

3000

3500

4000

4500

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0 5000 10000 15000 20000 25000 30000 35000 40000

Income

Cre

dit

No Children

One Child

Two Children

One Child - MFJ

Two Children - MFJ

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. 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.

Qualifying Child for Earned Income Tax Credit

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


The Relationship Test: The Child must be a Qualifying Child for

dependency purposes.


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.


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

the year.

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.


There are tiebreaker rules which generally awards the child to the parent if they can’t 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.

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 can’t be someone else’s dependent. Must have lived in the US for more than half

of the year.

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.

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 Sally’s son Ralph (6) as if he were their own child. How much is their Earned Income Tax Credit?


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.

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 he’s 26? How much is his EITC if he’s 67?


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 he’s 26? $285, from the 2005 Earned Income Tax Credit (EITC)

Table. How much is his EITC if he’s 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.

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

children’s birth-dates.

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 doesn’t happen often, but trust the software to tell you when it does, and then recognize what it is.

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 don’t 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).

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.

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.

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.

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.

Education Credits (IRS Pub. 4012, pg. 22)

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 person’s return, or You were a full-time student in 2005

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.

Retirement Savings Credit (IRS Pub. 4012, pg. 22)

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 doesn’t happen often.

TaxWise will bring in the schedule if appropriate.

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.

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.

Finishing the E-File Return

It is very important that the tax preparer follow Accounting Aid Society’s 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.

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.

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.


If the client doesn’t have a bank account, suggest that they contact the Financial Literacy Program at Accounting Aid Society.

Party store banking is expensive!


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.

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.

Recommendations

We need to ask appropriate probing questions. 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.

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.

Consult IRS Publication 17 when you encounter something out of the ordinary. Don’t guess.

Thanks for attending this session!

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

Documents

Accounting Aid Society 2006 Tax Season Federal Tax Training January, 2006