Accounting Aid Society2006 Tax Season

Michigan Tax Training

January 2006

Overview

Our training is designed to provide you with the 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 the state publications 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 and/or your tax supervisor

for help. All returns should be reviewed by a tax supervisor.

What’s New for Tax Year 2005?

New tax rate amount: 3.90% New exemption amounts: $3,200/$2,000. Car donation credit (nonrefundable).

Donation must be to a charity (other than a church) Car is to be provided to an individual to allow them to

work. Donor must have a “Donor Tax Credit Certificate for

Donated Vehicle” form from the charity. Limitation: smaller of 50% of the donation or

$100/$200(MFJ)

Who Must File?

Many low-income people do not have to file federal returns, but may need 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.

People should file if their Adjusted Gross Income (AGI) exceeds their exemption allowance.

Starting the Forms

TaxWise carries most information from the federal return directly to the Michigan return.

You’ll need to add the school district code. School district codes are listed in a table at the back of the MI-1040 instructions booklet.TaxWise: Press F1 when you are on Form MI-1040 and select MI Codes for a list of school district codes.

TaxWise Help – MI Codes

State Campaign Fund

This is similar to the Federal 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 assume that the taxpayer will make the same choice on Federal and State forms.

Mini-Quiz 1

What is the School District Code for Detroit? What is the School District Code for Warren

Consolidated?

Mini-Quiz 1 – Answer

The School District Code for Detroit is 82010.

The School District Code for Warren Consolidated is 50230.

TaxWise Hint: Pressing F1 when on Form MI-1040 and selecting MI Codes will bring up a list of School District Codes.

Filing Status

Michigan has three filing statuses: Single, Married Filing Jointly, and Married Filing Separately.

If you filed your federal return as Head of Household or Qualifying Widow(er), you must file the Michigan return as Single.

Residency

Most of our clients are full-time Michigan residents. Part-year and non-residents must complete Schedule NR which

apportions income and adjustments between Michigan and other states.

Reciprocal States: Residents of Illinois, Indiana, Kentucky, Ohio, Minnesota and Wisconsin do not have to pay Michigan income tax on salaries and wages earned in Michigan. Michigan residents pay only Michigan income tax on their salaries and wages earned in any of these states. See the instructions for further details.

TaxWise: Full-year residency of MI will be defaulted on the Main Information Sheet. This section should be changed by the preparer if taxpayer is a part-year or non-resident.

TaxWise State Designation

Exemptions and Dependents

The Michigan definition of a dependent is identical to that of the federal law. Personal and dependency exemptions carry over from the federal return in TaxWise.

The personal exemption amount is $3,200 for 2005.

If someone else claims the taxpayer, the personal exemption maximum is $1,500.

Special Exemptions

An extra $2,000 for taxpayers and dependents age 65 or older as of 12/31/2005.

An extra $2,000 for taxpayers and dependents who are deaf, blind, hemiplegic, paraplegic, quadriplegic, or totally and permanently disabled.

If you claim a 65 or older exemption, you may not claim an exemption for totally and permanently disabled.

An extra $600 for dependent children ages 18 and under as of 12/31/2005.

An extra $2,000 if unemployment compensation is 50% or more of your Adjusted Gross Income (AGI).

Special Exemptions – Deaf, Blind or Disabled

See the MI-1040 instructions for the criteria of meeting the definitions for the deaf and blind exemptions. Totally and permanently disabled means disabled as defined under Social Security Guidelines.

TaxWise: In the Taxpayer Information section of the Main Information Sheet there are fields to check for Blind, and Totally and Permanently Disabled.

The exemption for Blind will carry forward to the federal, state and city returns.

The exemption for Disabled will carry forward to the city return, and prompt red fields on the MI-1040 and MI-1040CR. It is important to capture the disability exemption on the return – not doing so will reduce the refund or increase the tax due for clients who do qualify for this special exemption.

TaxWise – Main Information Sheet Blind/Disabled

TaxWiseMI-1040 Exemptions

TaxWiseMI-1040CR Exemptions

Mini-Quiz 2

John and Mary are married. They have two dependent children: Ralph, aged 22, and Sara, aged 17. John is 66 and totally and permanently disabled. Mary (52) works at a pharmacy. What are their total exemptions?

Mini-Quiz 2 – Answer

Their total exemptions, personal and special, is 6: Four personal exemptions at $3,200 each equals

$12,800. Two special exemptions:

A special exemption for John of $2,000 because he is 65 or older. (Note: Because he is 65 or older, he cannot also get the special exemption for totally and permanently disabled.)

A special exemption of $600 because their daughter Sara is 18 or under as of 12/31/05.

Their total exemption allowance is $15,400, which is subtracted from their AGI.

Income

Michigan starts with the federal Adjusted Gross Income (AGI) and then makes several Additions and Subtractions to AGI to determine Taxable Income.

Additions and Subtractions are shown on MI-1040 Schedule 1.

TaxWise: Adjusted Gross Income and most Additions and Subtractions to income carry over from the federal return.

Additions to Income

Interest from municipal bonds issued outside of Michigan. This is rare for our clients.

Self-employed taxpayers subtract one-half of their self-employment tax on the federal 1040. This is added back into income for Michigan.

Other additions are not common to our clients – see the MI-1040 instructions for the complete list.

TaxWise – MI-1040 Schedule 1 Additions to Income

Subtractions from Income

Income from U.S. Government bonds. Military pay. Pension benefits up to certain limits. Interest, dividends, and capital gains for senior citizens up to

certain limits. Social Security benefits which were taxable on the federal return. Miscellaneous subtractions: Bingo winnings (from a State of

Michigan regulated game), political contributions (deduction is limited), and the amount used to determine the credit for elderly or totally and permanently disabled from the federal return (TaxWise will calculate).

See the MI-1040 instructions for a complete list of subtractions.

TaxWise – MI-1040 Schedule 1 Subtractions from Income

Mini-Quiz 3

Which of the following are taxable in Michigan? Wages Unemployment compensation Gifts received Series E Bond Interest Bingo Winnings Casino Winnings Lottery Winnings Self-employment income

Mini-Quiz 3 – Answer

Wages are taxable Unemployment is taxable Gifts received are not taxable Series E Bond Interest is not taxable. Bingo Winnings are not taxable, if won in a state

regulated game. Casino Winnings are taxable. Lottery Winnings are taxable. Self-employment income is taxable.

Taxable Income and Tax Rate

Adjusted Gross Income (AGI) plus Additions and less Subtractions to AGI determine income subject to tax.

Exemption allowance is subtracted from this to determine Taxable Income.

The 2005 tax rate is 3.90%.

Nonrefundable Credits

Some of the Michigan nonrefundable credits include: Income tax paid to Michigan cities. The MI-1040 instructions has

a worksheet to calculate this. See the next slides for TaxWise instruction.

Contributions to certain community foundations, homeless shelters, food banks and other public institutions.

College Tuition and Fees Credit: Only tuition paid to certain schools qualifies for this credit -- see the list on the back of Schedule CT which is located in the MI-1040 instruction booklet.

Vehicle Donation Credit (new in 2005): Credit is received if donated vehicle was subsequently transferred to an individual for employment purposes.

Nonrefundable CreditsIncome Tax Paid to Mich. Cities

TaxWise will calculate the credit from city withholding information on the W-2.

TaxWise: There are fields on Page 2 of the MI-1040 to enter city tax paid or city refund received during 2005.

TaxWise – MI-1040 Page 2Credit for Income Tax Paid to MI Cities

Use Tax

Taxpayers who purchase items from out of state sellers or from catalogues or the internet must pay a 6% use tax if sales tax of that amount was not collected by the seller.

This is entered on Line 31 on Page 2 of Form MI-1040.

Note: Due to our clients’ low income this is almost never an issue, but should be part of the interview process.

Refundable Credits and Payments

The most common of these payments and credits for our clients is: Michigan Tax Withheld (from Schedule

W) Homestead Property Tax Credit (from

Form MI-1040CR or Form MI-1040CR-2)

TaxWise – MI-1040 Page 2 Refundable Credits and Payments

Schedule W – Michigan Withholding Tax Schedule

If there is state income tax withholding on Form W-2, 1099-R, 1099-G, and/or 1099-MISC, a Schedule W must be completed and attached to the return. W-2 and 1099 forms are not attached to paper copies of MI-1040 returns.

TaxWise: If there is Michigan withholding on a Form 1099, Sch. W will remain red until the bottom of the schedule is completed by checking the appropriate column of R, G, or M – indicating if it was a Form 1099-R, 1099-G, or 1099-MISC. Once the appropriate column is marked, TaxWise will fill-in the rest of the information.

TaxWise – Michigan Schedule W 1099 Withholding

Homestead Property Tax CreditForm MI-1040CR

This credit is available to homeowners AND renters.

Residency: You have to have been a Michigan resident at least six months of 2005.

The credit is available only to those owning the homestead or to those listed on the lease. If there are multiple owners there are special rules.

TaxWise: Identifying information, school district code and residency status will carry over from the Main Information Sheet and the MI-1040.

Property Tax Credit – Age 65 or Blind/Deaf/Disabled

Form MI-1040CR, Line 6 – check one of these boxes if the taxpayer or spouse was: 65 or older at 12/31/05; or an unremarried spouse of

a person who was 65 or older at the time of death Blind, deaf, hemiplegic, paraplegic, quadriplegic, or

totally and permanently disabledTaxWise: 65 or older will carry over from Main InfoBlind or disabled will also carry over from Main Info.Unremarried spouse and deaf or plegic must be

marked directly on the credit form.

MI-1040CR Line 6

Property Tax Credit – Homeowners

Clients should bring all of their 2005 property tax statements – winter and summer bills – indicating the taxes levied for the year and the Taxable Value.

The Homestead Property Tax Credit is based on the taxes levied/billed. They do not have to have been paid.

Vacant lots can be included if they are adjacent to the home. Vacation property and other houses do not qualify.

Do not include penalties, interest or special assessments. You can include the city’s administration fee.

Property Tax Credit – Homeowners – Taxable Value

The Taxable Value of the homestead is listed on the property tax statements.

Be sure to use this figure on Form MI-1040CR and not the Assessed Value or State Equalized Value (SEV). The state will compare the Taxable Value and property taxes entered on the form to the School District Code entered. The credit will be delayed or denied if it is sent in without the proper Taxable Value.

Some clients have their property taxes paid by their mortgage company. They should have a year end statement showing property taxes paid. They need to contact the City Assessor’s office to learn the Taxable Value. It is also listed on the annual city assessment.

Mini-Quiz 4

After reviewing the Property Tax Statement slides:

What is the Taxable Value? How much are the property taxes levied?

Property Tax Statement

Property Tax Statement

Mini-Quiz 4 – Answer

The Taxable Value is $ 8,230. The property taxes levied are $ 349.

Property Tax Credit – Renters

20% of rent paid is treated as “property tax” paid indirectly through the landlord. Complete Part 2 of Form MI-1040CR.

Mobile home residents should use 20% of lot rent, but $3 per month of the rent is considered property tax and is entered on the line for property taxes levied.

It’s important to check that rent does not exceed or approach Household Income. If it does, probe for additional income such as assistance from family or friends (nontaxable – but must be included in Household Income.) Also, verify that the rent listed is only the taxpayer’s share of rent paid.

The client should have documentation such as a lease and/or rent receipts, and will need the landlord’s name and address.

TaxWise – MI-1040CR Page 2Renters Section

Property Tax Credit – Service Fee Housing and Co-Op Housing

Service Fee Housing: If a taxpayer lived in housing on which service fees are paid instead of

taxes, 10% of rent can be claimed for credit. Complete Part 3 on the back of Form MI-1040CR.

If not sure, a client needs to ask his landlord.

Cooperative Housing Residents: These residents claim their share of the property taxes on the building

and should receive a statement from management stating their share. They cannot take 20% of their monthly payment or carrying charges.

Other: No credit is available for tax-exempt housing. See instructions for other types of housing.

Property Tax Credit – Nursing and Other Adult Care Homes

As a general rule, residents in nursing homes, homes for the aged, and adult foster care homes must claim a credit based on their share of the facility’s property tax. They may not claim rent. This also applies to residents of assisted living centers.

Complete Part 4 on the back of Form MI-1040CR. Please consult your Taxpayer Assistance Manual

and the MI-1040 instructions for special housing situations.

TaxWise – MI-1040CR, Page 2 Other Housing

Mini-Quiz 5

Anne lived in a mobile home for 10 months and as the guest of friends for 2 months. Her monthly payments for the mobile home to the bank are $200 including principle and interest. Her monthly lot rent is $123. How much is her property tax for the purposes of the Homestead Property Tax Credit?

Mini-Quiz 5 – Answer

Anne’s principle and interest payments do not affect the calculation.

Of the $123, $3 is considered property tax and $120 is considered rent.

Lot rent of $120/month x 10 months x 20% = $240. Add $3/month x 10 months property tax = $30. Total figure used to calculate property tax credit is

$270.

Household Income

Household Income (HHI) is used to calculate the Homestead Property Tax Credit and the Home Heating Credit, and includes both taxable and nontaxable income of both spouses, or of a single person maintaining a household.

See Page 17 of the MI-1040 instructions for a list of items not included in Household Income, and Pages 20 and 21 for Line-by-Line instructions of Household Income.

Household IncomeTaxable Income & Nontaxable Income

TaxWise: Most taxable income carries over from information entered on Forms W-2, 1099, W-2G, etc., and other TaxWise forms, schedules and worksheets. (Note that for awards, prizes, lottery and other gambling winnings, only the value over $300 has to be included in Household Income.)

Nontaxable income generally has to be entered by the preparer directly on Form MI-1040CR. These items can include SSI, child support, workers’ comp., veterans’ benefits, DHS (was FIA) benefits, and gifts.

TaxWise – Household Income

Household IncomeSocial Security Benefits

There are three types of Social Security benefits: retirement, survivor and disability (SSDI) benefits. These benefits are reported on Form SSA-1099, Social Security Benefit Statement. The amount actually received is included in Household Income, do not include the amount deducted for Medicare. Death benefits are also included in HHI.

TaxWise: The amounts entered on Worksheet 1 for the taxpayer and/or spouse’s benefits will carry over to Form MI-1040CR.

Household IncomeSocial Security Benefits

A minor child can receive benefits as a survivor or because a parent is disabled. Benefits received for minor children or dependent adults who live with the client must be included in Household Income.

TaxWise: There is a field on TaxWise’s MI-1040CR where the preparer can enter death benefits and amounts received for minor children or dependent adults.

Household IncomeSupplemental Security Income (SSI)

Supplemental Security Income (SSI) is paid by the Social Security Administration (SSA) to people who have low income and limited financial resources, and are: age 65 or older; blind; or disabled. SSI received by minor children or dependent adults must be included in Household Income also.

Individuals can receive both Social Security benefits and SSI if their Social Security benefit is low.

Household IncomeSupplemental Security Income (SSI)

SSI recipients do not receive a year-end statement, as SSI is never taxable. They do receive a letter during the year stating what their monthly benefits will be for the next tax year. (Note: The maximum SSI payment for an eligible individual in 2005 was $579 per month. Make sure that clients are not reporting current year payments.)

TaxWise: SSI is entered as an override entry on Form MI-1040CR and is included on the line with Social Security benefits and Railroad Retirement benefits. SSI is never entered on 1040 Wkt 1. See the TaxWise Step by Step Instructions.

Household IncomeChild Support

Child support and all payments received as a foster parent are included in Household Income.

Add the amounts paid (including back-due support paid for prior years).

Important: If client received both child support from Friend of the Court and FIP benefits from DHS (was FIA), see the Michigan Taxpayer Assistance Manual for instruction on how to report these amounts on Form MI-1040CR.

Sample Child Support Statement(From DHS)

Household IncomeWorkers’ Comp. and Veterans’ Benefits

Workers’ compensation: The client should be able to tell you how much he/she received a month for workers’ comp.

Veterans’ disability compensation and pension benefits: Clients do not receive a year-end statement for veterans’ benefits. Ideally they will have a letter from the Veterans’ Administration (VA) stating their monthly benefit for the tax year.

Household IncomeFIP and other DHS (was FIA) Benefits

Assistance provided by the Michigan Department of Human Services (formerly Family Independence Agency (FIA)) common to our clients include: Family Independence Program (FIP) benefits –

customers should receive an Annual Statement. State Disability Assistance (SDA) – customers should

receive an Annual Statement. State SSI Payment – A year-end statement is not issued.

Our clients typically receive $14/month or $42 every three months, amounting to an annual payment of $168.

Household IncomeFIP and other DHS (was FIA) Benefits

The value of food stamps is not included in Household Income.

If a client’s only source of income is from DHS, they are not eligible for the Property Tax Credit.

If a client received both FIP benefits from DHS and child support from Friend of the Court, see the Michigan Taxpayer Assistance Manual for instruction on how to report these amounts on Form MI-1040CR.

Sample DHS Statement

Household IncomeOther Nontaxable Income

Gifts of cash or merchandise over $300 from parents, relatives or friends.

The value over $300 of expenses paid on the client’s behalf (rent, taxes, utilities, food, medical care, etc.)

We generally only ask questions about gifts or expenses paid if a client is claiming to have paid more rent than their HHI can support. For example, if rent is $400/month, or $4,800, and HHI is $5,000, we need to ask appropriate probing questions.

See the MI-1040 instructions for other nontaxable income.

Adjustments to Household Income

Certain items can be deducted to reduce Household Income. These adjustments can include:

One-half of self-employment tax. Student loan interest. All other adjustments from the federal Form 1040 or Form

1040A. Premiums paid for medical insurance (not including long-term

care.)TaxWise: Adjustments carry over from the federal return with

the possible exception of medical insurance premiums. These may need to be entered by the preparer on Form MI-1040CR, Line 27 (Line number may change.)

Calculating the Property Tax Credit

Most people have the credit reduced by 40%. Exceptions are seniors, unremarried spouses of deceased

seniors, deaf, blind, paraplegic, quadriplegic, hemiplegic, and totally and permanently disabled clients.

Seniors who pay rent may benefit from the Alternate Credit on Worksheet 5 on Pg. 22 of the MI-1040 instructions.

People who receive DHS benefits will have their credit prorated. There is a worksheet in the MI-1040 instructions for this calculation.

TaxWise: All of the above calculations to determine the credit are done by TaxWise from information previously entered.

Veterans and Blind Homestead Property Tax CreditForm MI-1040CR-2

This is an alternate calculation which is available to blind homeowners and certain veterans – see the instructions for Form MI-1040CR-2 for details of which type of veteran qualifies to use this form.

There are Household Income limits for some military personnel.

Calculate the credit using both the MI-1040CR and the MI-1040CR-2, and use the larger credit.

Home Heating CreditForm MI-1040CR-7

This credit helps low income people pay their heating bills. It is generally available to anyone who owns or rents and whose income is within the income limits listed in the instructions.

It is not available to students claimed by their parents, and residents of nursing homes, homes for the aged, adult foster care homes, and substance abuse centers.

The deadline for filing the 2005 Home Heating Credit Claim is September 30, 2006. There is no extension.

Home Heating Credit

Clients with the heating bill in their name should contact the gas company to get the amount they were billed for heat from November 1, 2004 until October 31, 2005.

Clients who have the heat included in the rent or in someone else’s name also qualify for the credit.

Home Heating Credit

Form MI-1040CR-7, Line 4, requires a county code. The county codes are listed on the back of the paper form. TaxWise: Press F1 on Form MI-1040CR-7 and select MI Codes for a list of county codes.

Exemptions for the Home Heating Credit Claim are basically the same as on the MI-1040, Michigan Income Tax Return. Note: You can claim an exemption for children who live with you, even if their support comes from someone else.TaxWise: Exemptions will carry over from the entries made on Main Info and on the MI-1040. It is critical to enter all of the exemptions the taxpayer is entitled to.

Home Heating Credit

Household Income reported on the Home Heating Credit Claim is the same as on the Homestead Property Tax Credit Claim – see previous slides for instruction on types of income.

TaxWise: Important: No income is entered directly on the MI CR-7 (Home Heating Credit) in TaxWise. All income carries over from the federal return and from entries made on the MI CR Pg 1 (Property Tax Credit Claim.)

There are two ways to calculate the credit, using the Standard Credit and the Alternate Credit.

TaxWise calculates the credit both ways and awards the larger of the two.

Home Heating Credit

For clients with the heat in their name, they will receive an energy draft. This is a voucher which the client subsequently sends to the gas company who will credit their account. DHS (was FIA) clients who receive their heat from DTE

Energy, Consumers Energy or SEMCO Gas will have their home heating credit sent directly to their heat provider. (Note: This provision is subject to change on the 2005 Home Heating Credit Claim.)

For clients whose heat is included in the rent or in someone else’s name, they will receive a check.

Mini-Quiz 6

Bob (65) has two exemptions for the Home Heating Credit. His Household Income is $10,000. He is on the budget plan and paid $100 for each month’s heat last year.

How much is his credit?

Mini-Quiz 6 – Answer (needs update with 2005 allowances)

For the Standard Credit: Standard Allowance = $495 less ($10,000 HHI x .035) = $145

For the Alternate Credit: Heating costs = $1,200. Subtract ($10,000 HHI x .11= $1,100) leaving $100. $100 x 0.70 = $70.

$145 is greater than $70, so the Home Heating Credit will be based on the Standard Credit.

Note that the credit is reduced to based on funding available, so multiply $145 by 76% to find that Bob will receive an energy draft for $110.

Completing the Return

TaxWise will generate an MI-1040V if taxes are owed. The taxpayer mails this with a check or money order.

Taxes can also be withdrawn directly from a bank account.

Refund checks are mailed, or the money can be directly deposited.

Energy Drafts for the Home Heating Credit are mailed separately.

Paper returns take much longer to process.

E-File

The paperwork that Accounting Aid Society requires for State E-File is similar to that of the Federal.

Note that the state requires that a federal return also be E-filed, unless the state return is just for the Homestead Property Tax and/or Home Heating Credits.

TaxWise: To e-file credit only returns, it is imperative that the box at the top of TaxWise’s MI-1040 be checked designating credit-only e-filing. This will be discussed more in the TaxWise lab session.

TaxWise – MI-1040 Page 1Credit-Only Indicator

Finishing the Paper Return

There are two separate addresses to file Michigan returns, one with payments, one for refunds. Please make sure that you are using the correct label.

Do not staple the Home Heating Credit to the other forms. It may be sent in the same envelope.

Thanks for attending this session!

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