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SaveFirst: A Tax Preparation and Financial Literacy Initiative Intermediate Tax Training Itemized Deductions Self-Employment Income Retirement Plans Adjustments to Income Intermediate Credits Intermediate Tax Training Outline Itemized Deductions Self-Employment Income Retirement Plans

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SaveFirst: A Tax Preparation and Financial Literacy Initiative

Intermediate

Tax Training


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Itemized Deductions Initiative

Self-Employment Income

Retirement Plans

Adjustments to Income

Intermediate Credits

Intermediate Tax Training Outline


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Itemized Deductions Initiative

Self-Employment Income

Retirement Plans

Adjustments to Income

Intermediate Credits

Intermediate Tax Training Outline


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Every taxpayer can take a specific amount for a “standard” deduction, which reduces taxable income.

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

Itemized Deductions


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On the federal level, a taxpayer generally needs to have a home mortgage payment or a large number of medical bills to be better off itemizing.

On the state level, the standard deduction is much lower, and itemizing may be beneficial at the state even when it is not at the federal.

Itemized DeductionsWhen to Itemize


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If a taxpayer has answered “yes” to the itemized deductions questions on the interview sheet, complete the Schedule A to see if it is beneficial to itemize at the state or federal level.

If the Alabama A appears with a green check, complete the Schedule A fully.

Itemized DeductionsWhen to Itemize


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The main expenses that are itemized: deductions questions on the interview sheet, complete the Schedule A to see if it is beneficial to itemize at the state or federal level.

Unreimbursed Medical Expenses

Charitable Contributions

Taxes

Home Mortgage Interest

Miscellaneous Deductions

Itemized Deductions


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A taxpayer can claim unreimbursed medical expenses for deductions questions on the interview sheet, complete the Schedule A to see if it is beneficial to itemize at the state or federal level.

Himself/Herself

Spouse

Dependents

Itemized DeductionsUnreimbursed Medical Expenses


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Taxpayers can only deduct the amount of expenses that exceeds 7.5% of AGI.

At the Alabama level, taxpayers can deduct the amount of expenses that exceeds 4% of AGI.

Itemized DeductionsUnreimbursed Medical Expenses


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Deductible expenses: exceeds 7.5% of AGI.

Prescription drugs

Health insurance premiums

Long-term care insurance premiums (cap on amount based on age)

Co-pays to doctor, dentist, eye doctor

Cost of glasses, hearing aids

Cost of medical equipment

Cost of surgery, operations

Miles to and from doctor

Itemized DeductionsUnreimbursed Medical Expenses


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Nondeductible expenses: exceeds 7.5% of AGI.

Life insurance policy premiums

Nonprescription drugs

Funeral, burial, cremation costs

Unnecessary cosmetic surgery

Itemized DeductionsUnreimbursed Medical Expenses


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Contributions must be made to organizations that are organized for religious, charitable, educational, scientific, or literary purposes.

Nonqualifying organizations include businesses, civic or political organizations, social clubs, foreign organizations, homeowners’ associations.

Itemized DeductionsCharitable Contributions


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Deductible items: organized for religious, charitable, educational, scientific, or literary purposes.

Monetary donations

FMV of clothing, furniture

Uniforms required to be worn during service

Unreimbursed transportation expenses

Must subtract FMV of any good received in exchange for the donation.

Taxpayer must keep receipts!

Itemized DeductionsCharitable Contributions


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Nondeductible expenses: organized for religious, charitable, educational, scientific, or literary purposes.

Raffle, bingo, lottery tickets

Tuition

Value of time of service

Blood

Contributions to individuals

Itemized DeductionsCharitable Contributions


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Deduct taxes imposed on and paid by the taxpayer. organized for religious, charitable, educational, scientific, or literary purposes.

Taxpayers cannot deduct a tax they pay for someone else, their own tax someone else pays, a tax not paid in 2008.

Itemized DeductionsTaxes


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State and local taxes organized for religious, charitable, educational, scientific, or literary purposes.

Real estate taxes (Property Tax)

Sales taxes

Ad valorem tax on car tags

Nondeductible taxes: federal taxes; hunting licenses; water/sewer; taxes on alcohol, tobacco, or gas; utilities

Itemized DeductionsTaxes


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Itemized Deductions organized for religious, charitable, educational, scientific, or literary purposes.Home Mortgage Interest


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

Itemized DeductionsInterest


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Union dues personal loans, car loans, or credit cards).

Uniforms (that cannot be worn in any other circumstance)

Professional books, journals

Employment-related educational expenses

Expenses for looking for a new job

Tax preparation fee from last year

Safe deposit box

Gambling losses up to amount of winnings

Itemized DeductionsMiscellaneous Deductions


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Nondeductible Expenses: personal loans, car loans, or credit cards).

Burial or funeral expenses

Wedding expenses

Fees and licenses

Fines, penalties, traffic tickets

Home repairs and insurance

Rent

Insurance premiums (except health)

Losses from sale of home

Itemized DeductionsMiscellaneous Deductions


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Are the following expenses deductible? personal loans, car loans, or credit cards).

1. Medical insurance premiums

2. Vitamins

3. Federal income tax

4. Interest on car loan

5. Church contribution

6. Tax preparation fee from last year

Itemized DeductionsExercise 1


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Are the following expenses deductible? personal loans, car loans, or credit cards).

1. Medical insurance premiums (YES)

2. Vitamins

3. Federal income tax

4. Interest on car loan

5. Church contribution

6. Tax preparation fee from last year

Itemized DeductionsExercise 1


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Are the following expenses deductible? personal loans, car loans, or credit cards).

1. Medical insurance premiums (YES)

2. Vitamins (NO)

3. Federal income tax

4. Interest on car loan

5. Church contribution

6. Tax preparation fee from last year

Itemized DeductionsExercise 1


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Are the following expenses deductible? personal loans, car loans, or credit cards).

1. Medical insurance premiums (YES)

2. Vitamins (NO)

3. Federal income tax (NO)

4. Interest on car loan

5. Church contribution

6. Tax preparation fee from last year

Itemized DeductionsExercise 1


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Are the following expenses deductible? personal loans, car loans, or credit cards).

1. Medical insurance premiums (YES)

2. Vitamins (NO)

3. Federal income tax (NO)

4. Interest on car loan (NO)

5. Church contribution

6. Tax preparation fee from last year

Itemized DeductionsExercise 1


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Are the following expenses deductible? personal loans, car loans, or credit cards).

1. Medical insurance premiums (YES)

2. Vitamins (NO)

3. Federal income tax (NO)

4. Interest on car loan (NO)

5. Church contribution (YES)

6. Tax preparation fee from last year

Itemized DeductionsExercise 1


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Are the following expenses deductible? personal loans, car loans, or credit cards).

1. Medical insurance premiums (YES)

2. Vitamins (NO)

3. Federal income tax (NO)

4. Interest on car loan (NO)

5. Church contribution (YES)

6. Tax preparation fee from last year (YES)

Itemized DeductionsExercise 1


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TAXWISE EXERCISE personal loans, car loans, or credit cards).

Itemized Deductions


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Itemized Deductions personal loans, car loans, or credit cards).

Self-Employment Income

Retirement Plans

Adjustments to Income

Intermediate Deductions

Intermediate Credits

Intermediate Tax Training Outline


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We can file a Schedule C-EZ if the taxpayer: personal loans, car loans, or credit cards).

Had business expenses of less than $5,000

Cash method of accounting

No inventory

No net loss

Only one business (if taxpayer owns a business)

No employees during the year

Does not want to depreciate

Self-Employment Income


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

Self-Employment Income1099-MISC


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Self-Employment Income self-employment income and should be reported on a Schedule C-EZ.1099-MISC

Box 7

“Nonemployee Compensation”


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Include net profit self-employment income and should be reported on a Schedule C-EZ.

Deductible expenses: advertising, vehicle expenses, insurance, interest, legal and professional services, repairs, 50% of business entertainment, utilities

If deducting car expenses, you will need to provide additional information on the Schedule C-EZ.

Self-Employment IncomeSchedule C-EZ


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Itemized Deductions self-employment income and should be reported on a Schedule C-EZ.

Self-Employment Income

Retirement Plans

Adjustments to Income

Intermediate Credits

Intermediate Tax Training Outline


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Pension: self-employment income and should be reported on a Schedule C-EZ. series of payments for past work

Annuity: series of payments from a contract with company, trust, individual

401(k) Plan: employer contributes part of employee’s cash wages to a retirement plan on a pre-tax basis (not subject to income tax when deferred)

Pensions & Retirement Plans


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Pensions & Retirement Plans self-employment income and should be reported on a Schedule C-EZ.


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A retirement plan is fully or partially taxable depending on whether the employee contributed to the plan.

The cost of the pension is the amount that the employee contributed.

Pensions & Retirement Plans


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If the taxpayer did not contribute to the cost of the pension plan (e.g., all of the contributions came straight from the employer), the plan is fully taxable.

If the taxpayer contributed to the plan with “before-tax” dollars, the plan is fully taxable.

Pensions & Retirement Plans


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If the taxpayer contributed to the plan with “after-tax” dollars, the plan is only partially taxable.

Part of the pension income received has already been taxed. Therefore, only part of the pension plan is taxable.

Roth IRAs are not taxable because all contributions were made with after-tax dollars.

Pensions & Retirement Plans


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If the taxpayer contributed to the pension with “after-tax” dollars (has a “cost to recover”), he can exclude part of each pension payment from income until all of the cost has been recovered.

Tax-free portion remains the same each year.

Pensions & Retirement Plans


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

Pensions & Retirement Plans


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RRB-1099: treat like SSA-1099 (e.g., social security benefits)

RRB-1099-R: treat like 1099-R (e.g., pension)

Pensions & Retirement PlansRailroad Retirement


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Defined Benefits Plan: benefits) Employee receives a specific amount of money based on salary history and years of service. Contributions from employee, employer, both. Employer bears investment risk.

Defined Contributions Plan (e.g., 401(k) or 403(b): Employee chooses to defer part of salary into plan. Employee bears investment risk.

Pensions & Retirement PlansAlabama Tax Rules


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Defined Benefits Plans are not taxable at the Alabama level. benefits)

We have a list that covers most plans that are not taxable, but if your taxpayer’s plan is not listed, you must contact the plan administrator to determine if it is a defined benefits plan.

BE SURE TO CLICK BOX 1 IN TAXWISE IF IT IS A DEFINED BENEFITS PLAN.

Pensions & Retirement PlansAlabama Tax Rules


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Pensions & Retirement Plans benefits)Alabama Tax Rules


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1099-R issues can get complicated when the taxpayer does not have enough information regarding his/her retirement plan.

You may need to call the IRS or the company that administers the retirement plan to find out if it is a defined benefits or defined contributions plan.

Pensions & Retirement PlansAlabama Tax Rules


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Itemized Deductions have enough information regarding his/her retirement plan.

Self-Employment Income

Retirement Plans

Adjustments to Income

Intermediate Credits

Intermediate Tax Training Outline


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Adjustments decrease taxable income. have enough information regarding his/her retirement plan.

Lines 23-37 on Form 1040.

Adjustments to Income


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K-12 teachers, counselors, administrators who work at least 900 hours in the year

Deduct $250 of classroom expenses, including books, supplies, or equipment

Must reduce if reimbursed, had tax-free interest on savings bonds, or non-taxable earnings from QTP, ESA

Adjustments to IncomeEducator Expenses


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

Adjustments to Income½ of self-employment tax


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

Adjustments to IncomePenalty on early withdrawal of savings


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Deduct alimony paid (be sure to calculate for year, not for one month)

Must have recipient’s SSN

Child support is NOT considered alimony

Adjustments to IncomeAlimony Paid


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IRA: one month) Individual Retirement Arrangement

Personal savings plan that offers tax advantages to set aside money for retirement.

Adjustments to IncomeIRA Deduction


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Contributions to a traditional IRA can be deductible or nondeductible.

Earnings and gains on the contributions are not taxed until withdrawn from the IRA account.

Adjustments to IncomeIRA Deduction


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Anyone under 70 ½ years of age who has taxable compensation can contribute to a traditional IRA.

Contribution limit is the lesser of

$4,000 ($5,000 if >age 50)

Taxable compensation

Adjustments to IncomeIRA Deduction


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If the taxpayers file a joint return and one spouse’s compensation is greater than the other’s:

Married taxpayers’ combined contributions cannot exceed combined compensation

Neither spouse can contribute more than $4,000 ($5,000 if > age 50)

Adjustments to IncomeIRA Deduction


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Contributions for 2008 can be made up until the due date of the return (e.g., April 15, 2009).

An excess contribution above these limits and any earnings on it will be taxed.

Nondeductible IRA contributions should still be reported on Form 8606.

If the taxpayer has made excess contributions, refer them to a paid preparer.

Adjustments to IncomeIRA Deduction


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

Adjustments to IncomeIRA Deduction


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Taxpayers may incur penalties for status, whether or not the taxpayer/spouse is covered by an employer retirement plan, and income.

Excess contributions

Early withdrawals

Too little withdrawals

Adjustments to IncomeIRA Deduction


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Can deduct up to $2,500 of interest paid status, whether or not the taxpayer/spouse is covered by an employer retirement plan, and income.

Taxpayer

Spouse

Dependent (when the loan was obtained)

Student must have been enrolled at least half-time in a program leading to a degree, certificate, or other credential.

Adjustments to IncomeStudent Loan Interest


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Filing status cannot be MFS. status, whether or not the taxpayer/spouse is covered by an employer retirement plan, and income.

Taxpayer cannot be claimed as dependent.

Qualified expenses include tuition and fees, room and board, books, supplies, and other necessary expenses.

Must be reduced by scholarships, employer-provided benefits, or tax-free educational assistance.

Adjustments to IncomeStudent Loan Interest


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

Must be accredited.

Adjustments to IncomeStudent Loan Interest


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Deduct up to $4,000 of higher education expenses for taxpayer, spouse, or dependent whom taxpayer claims.

Cannot be MFS

Cannot be a dependent

Cannot also claim Hope and Lifetime Learning on same student

Adjustments to IncomeTuition & Fees Deduction


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Eligible expenses include tuition, fees, and other expenses required for enrollment

Non-eligible expenses include transportation, room & board, insurance, medical expenses, living expenses

Adjustments to IncomeTuition & Fees Deduction


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Institution must be able to participate in student aid programs administered by Dept of Education (almost all accredited schools)

Must reduce if receive tax-free scholarship

Can claim if paid with loan

Adjustments to IncomeTuition & Fees Deduction


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Jury duty pay is taxable income. programs administered by Dept of Education (almost all accredited schools)

But, if that pay were given to employer, it can be deducted as an adjustment.

On TW, find the line for “Other” under line 35.

Adjustments to IncomeJury duty pay given to employer


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Itemized Deductions programs administered by Dept of Education (almost all accredited schools)

Self-Employment Income

Retirement Plans

Adjustments to Income

Intermediate Credits

Intermediate Tax Training Outline


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Take if a taxpayer paid income to a foreign country; U.S. possession; or political subdivision, agency, or instrumentality of a foreign country.

We may see some foreign tax reported on a 1099-DIV. See the student training guide for requirements for reporting directly on Form 1040.

Intermediate CreditsForeign Tax Credit


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